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Investing For Success- How Did You (And Your Advisor) Do?

January 14, 2014

It was a pretty good year in the stock markets. Most people with stock portfolios should be feeling cheery.  sailboat-1

No question, there is still recovery going on from the 2008-09 financial crisis so the celebrations may be on hold?

Here’s a performance recap of 3 major stock markets in 2013;

Canada (TSX) +10%, (+13% with dividends)

US (S&P 500) +30%, (+32% with dividends)

International (MSCI EAFE, developed countries) +23%

It sure would be nice to see this kind of performance every year. But, we all know that doesn’t happen. So take it when you can and feel great!

How did your investments compare with these results?

A great financial advisor will be happy to help. After all, isn’t that what you’re paying him/her for?  Full disclosure is a hot topic in the world of investments today and every investor deserves to know where they stand. A good advisor will take time to prepare a performance report and explain what it means in plain english. More importantly, your advisor should discuss lessons learned and possible changes to your investment strategy going forward. For me, my own investments are really a means to an end- a way to achieve financial security and happiness for many years to come.  My goal is to create enough passive income to live life the way I want to in retirement.

One year is much too short a time frame in the world of investing. Once you review 2013, remember to track your performance over the long term; 3, 5, 10 and even 20+ years. That’s what matters to your future financial health and security. Be realistic with your expectations for growth and don’t forget to reduce them by fees. Over the VERY long run (50 years ending in 2010), the same stock markets above had annual returns including dividends of 10.1%(Canada), 9.7%(US), and 10.6% (International) source; BMO Investing Handbook.  In the forecasts that I prepare, I generally use a conservative 5-6% target return on equity investments over the long term.

Investing can be a wild ride in any given year but there are ways you can smooth the waters.

Here are 4 things your investment advisor should do with you each year;

1) Compare your investment performance to appropriate benchmarks– Comparing stocks with bonds is like comparing apples with oranges; not very meaningful. Often, when stocks do well, bonds don’t and vice versa. Look at the components of your portfolio and compare accordingly. For example, if a large portion of your portfolio was in cash this past year, you would be lucky to have earned over 1%.

2) Update your risk tolerance-  How wild do you want your ride to be? Greater risk can mean putting up with greater price fluctuations. Beware that large price changes can cause people to buy and sell at exactly the WRONG time. Some people love a wild ride and others want the water to be as calm as possible. As I get closer to retirement, I am definitely looking for a smoother ride!  If you haven’t completed a risk tolerance questionnaire, ask your advisor to provide one and explain the results. My own favourite investment strategy is to focus more on dividend paying stocks as a way to improve the predictability and certainty of my income.

3) Show you how diversified your investments are– The best way to do this is to breakdown your investments by type (i.e. stocks, bonds etc.), industry sectors and geographies.  Compare these breakdowns to your targets, given your risk tolerance. If you don’t have any targets in place, ask your advisor to make recommendations for your review. The Canadian stock market is much less diversified than that of the US or the world, with over 75% coming from financials, energy and materials. Spreading your investments among industries and geographies can reduce volatility and risk.

4) Show you how much you paid for investment management services – This is a tough one. Fees are not always transparent or easily determined. If you don’t know your fees, how do you know if you received value for money? Ask your advisor for a statement of all fees paid on your accounts and compare it to income earned.  Be aware that annual expenses (MER’s) on mutual funds can reduce a significant portion of your gain over time. If you pay commissions, make an attempt to estimate them based on your number of trades for the year.

Just like an annual performance review at work, your advisor should do the same for your investments. You might not get this unless you ask, so speak up! A good advisor will understand your goals and take time to educate you about successful investing. Good luck and happy investing!

An investment in knowledge pays the best interest…Benjamin Franklin

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