Unless you play the stock market, chances are you don't find your portfolio all that interesting. And financial experts say that's a good thing: rather than get excited about your investments themselves, they suggest being enthusiastic about what those investments can do for you.
Keeping your goals and dreams top of mind, and not the day-to-day fluctuations of your investments, is a way to keep your finances on track.
"I think investments and the whole process of investing are, to most people, pretty boring," says John Robertson, science writer, DIY investor, and author of The Value of Simple: A Practical Guide to Taking the Complexity out of Investing.
"Investing should be boring. No one's going to text their friends about putting their money in a diversified, balanced portfolio with reasonable fees.
"Watching your child graduate from university, that's exciting, and having the resources to help pay for your child's post-secondary education helps make that happen," he adds. "Clocking out at your job for the last time and knowing you'll have the money to enjoy a comfortable, stress-free retirement, that's exciting. And that's ultimately what the point of investing is: to help you meet your goals."
Those goals need to be specific. Ask any personal trainer and they'll tell you that clients have far more success when they say "I want to lose 10 pounds in the next six months" rather than simply saying "I want to lose weight." The same goes for finances.
"People do much better staying on track by putting a more defined vision on their dreams and goals and ensuring that their plans fit those goals," Mr. Robertson says. "Instead of just thinking that you need to save for retirement, you instead break down what kind of retirement you want to have – say, on a cruise ship – and when you want to have it – at 60 – then you can do some planning to see what it will take to get there.
"Stick to that plan by keeping your vision in mind: pasting a picture of a cruise ship on your fridge or credit card might help you stick to the critical 'save money' part so that you can follow through with the 'invest and wait' part," he adds.
Once you've determined what your retirement will look like, it could be time to rethink your investment plan. Do you know how your investments are performing? And if so, are they on the right track?
If those queries seem overwhelming, rest assured you're not alone. Fifty-nine per cent of Canadian investors cite saving for retirement as their primary motivation for investing, yet 79 per cent admit that they find investing complicated and 59 per cent do not believe they know enough to be a good investor, according to the Environics Research Group.
There are ways to answer those questions without taking a crash course in investing. Several online tools can help you get a good sense of your investments' track record and give you the information you need to fine-tune your plan with your adviser.
Before you get down to the numbers, though, financial experts say you must first get to the heart of your investment plan: your risk tolerance.
"Everything in investing is geared to tolerance for risk," says Larry Berman, chief investment officer with ETF Capital Management in Toronto. "For someone who's extremely risk-averse and who tells me that, if their portfolio goes down by more than 10 per cent in a given year they're not going to be able to sleep at night, then we've got to make sure they're in a very conservative portfolio that's very well diversified."
An Investment Policy Statement (IPS) can help people clarify their overall investment direction, says Rhonda Goldberg, director of investment funds and structured products and acting director of the office of investor policy, education and outreach at the Ontario Securities Commission (OSC). It helps investors make sure that their choices align with their goals, values, time horizon and risk tolerance.
Although an IPS isn't in itself a detailed financial plan, it provides guidance to ensure your plan stays on track over the long term. Most importantly, it helps people avoid making fear-based financial decisions. To help investors keep their investments on the right track, the OSC's website, GetSmarterAboutMoney.ca, has launched a new tool called Your Investment Policy Statement Blueprint.
"To engage with their advisers, investors first have to be open and honest about your finances," Ms. Goldberg says. "You need to understand your own personality, your willingness to take on risk, and your need, and then understand what you're investing in. It's always important to ask your advisor: 'What is the risk of these products, what do they cost, and how are they going to help me reach my goals?' From there, you can take several simple, key steps to track your investments.
Start by asking your adviser for some basic information, such as your rate of return. Your advisor can calculate this for you; remember that management fees or other costs you pay on your investments will reduce your rate of return, and so will any taxes you earn on investments outside a registered plan. Your adviser should take all of these into account when determining your return.
Next, assess your progress by looking at how much you've invested and what your investment is worth today. This should give you an idea whether your investments are headed in the right direction at the right pace.
You can also measure your results against other investments by using a benchmark index. There are dozens of benchmark indexes out there. If you've invested in Canadian equities, for instance, you can compare your returns with the S&P/TSX Composite Index. A mutual fund with larger American and international technology companies would likely use the NASDAQ 100 Index as a benchmark. You might consider a blended index as your benchmark if you have a mix of equities and fixed-income investments.
GetSmarterAboutMoney.ca, meanwhile, has a portfolio benchmark calculator that takes into account factors such as the length of time investments are held for, whether the portfolio is rebalanced annually to the original asset mix, and annual contributions or withdrawals that may affect portfolio performance over time.
Keep in mind, however, that benchmarks are just that and may not give you a complete sense of your overall financial plan.
"What an appropriate benchmark is for individuals is going to depend on their risk tolerance, what type of account it is, and what their goal is," Mr. Berman says, noting that his firm offers clients a customized benchmark IPS. "Comparing your portfolio to the TSX may not be the right thing to do. … What's realistic in the long run and how you measure that has everything to do with an individual's ability to assume volatility in their portfolio."
Mr. Berman adds that being involved in your portfolio management is one thing; becoming overly caught up in it is another.
"You want to be unemotional about it," he says of investing. "You need a long-term plan and need to find someone you trust to execute that, or, if you're doing it on your own, you've got to be educated about it. The moment you get emotional is the moment you're going to start to fail."