If you’re anything like me you started investing because you wanted to make money and the stock market just happens to be the best place to achieve inflation-beating returns over the long term.

Investors must accept, however, that greater returns come with greater risk, along with the possibility that your portfolio might suffer losses of up to 40 percent or more in the short term.

And if you also accept the idea that an investor, even an active one, has very little chance of avoiding such losses then you’d have to wonder if you’re just along for whatever crazy ride Mr. Market has in-store.

Related: Starting your investing journey

Indeed, since none of us has a crystal ball or the ability to forecast, with any accuracy, future market outcomes, the best we can hope for is to set up a diversified portfolio of equities and fixed income, contribute to it often, rebalance whenever it drifts off course, avoid trading on noise from the media, and keep investment costs ultra low.

In a nutshell, we can give ourselves the best chance to succeed by doing all of the above, but at the end of the day we’re still at the mercy of the market and we have to accept what it gives us.

Asking The Wrong Questions About Your Investing Strategy

Investors asking the wrong questions

That’s why it’s surprising to hear investors talk about wanting to make money investing in a short period of one-to-two years.

Aman Raina blogs at Sage Investors and two years ago he set up an account at one of Canada’s robo-advisors and invested $5,000 of his own money to see how his portfolio would perform.

I found the question he wanted answered to be a bit strange, however, which was, “do these things make money for investors?

A robo-advisor is billed as an online investing and portfolio management solution, but in the most basic terms it’s an automated asset allocator.

Related: Nest Wealth robo-advisor review

Robo-advisors offer portfolios of low cost ETFs tailored to your risk profile. Once you choose a model portfolio to follow, any new money added to the account gets automatically invested into the funds according to your desired asset mix and allocation. Robo accounts are rebalanced when portfolios drift 10 percent or so outside that allocation.

There’s no magic involved. Portfolio returns will depend not just on the performance of the underlying ETFs, but on the timing of contributions and any rebalancing that occurred.

Mr. Raina was not happy in year one when his robo-portfolio lost 2.15 percent, but he perked up in year two when the portfolio returned 13.2 percent:

“After the first year, the ROBO had lost 2.15 percent. It had a rough year, but in year 2, ROBO picked up its game. The portfolio generated a 13.2 percent return for the year. Much better job.”

Huh? Did the robo-advisor really do a better job in 2016 than it did in 2015? I’d argue it was the portfolio’s exposure to U.S. stocks and Canadian dividend payers that led to better returns. The robo didn’t do much of anything except stick to the investor’s initial allocation.

Related: A Review of Wealthsimple

What exactly is the robo-advisor’s job supposed to be? In my mind, a robo-advisor’s role is to give investors inexpensive access to market returns via a diversified portfolio of ETFs that get rebalanced automatically whenever appropriate.

Final thoughts

I track my portfolio rate of return annually and expect to achieve returns of eight percent per year over the very long term. But even though we’re in the midst of an eight-or-nine year bull market, I full expect my portfolio to lose money in some years. That’s just how the markets are supposed to work.

Asking, “did my portfolio make money” is not an appropriate way to evaluate your investing strategy. The only meaningful way to measure your portfolio returns is against a similar benchmark.

Say your portfolio is down 2 percent in a year. Is that cause for panic? Disappointment? Maybe. But what if you learned that the overall market was down 10 percent? In that case you should be thrilled to only lose 2 percent!

Mr. Raina says, “the key fundamental questions that don’t seem to be asked is whether robo-advisors are more effective in generating positive returns compared to a traditional portfolio management model. Can you make money?

I think he’s asking the wrong questions.

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9 Comments

  1. Mrmoneybanks on February 27, 2017 at 1:54 am

    Great article. You’re completely right on all accounts. Investors should be looking to investing now over the long term. They should be making comparisons to the average market return in that same year and not making comparisons to any other year. They should not be using paid for advisors or money managers. Instead use cheap index funds, robo advisors or DIY investments. Thank you

    • One Dad on March 1, 2017 at 6:30 pm

      Agree on all counts.
      If more investors looked to long term returns, our collective retirements would be looking much better.

      Cheers

  2. Grant on February 27, 2017 at 5:42 am

    I often get this, too. Friends will sometimes ask me how I “did” last year, as though I have an “investment” that needs to be compared to another “investment” for that year. Sometimes their eyes just glaze over when I explain how the strategy of indexing works.

  3. CanadianDaniel on February 27, 2017 at 7:30 am

    “Bull markets last on average about 97 months each and gain an average of 440 points in the Standard & Poor’s 500 stock index. By comparison bear markets since the 1930s have an average duration of only 18 months and an average loss in value of about 40 percent.” … Forbes
    I’ve learned NOT to try and time the market especially over the short-term and in the process discarded my crystal ball. Based on historical data it does look like stock indices are due for a pullback. Dollar cost averaging over the long-term is my strategy.

  4. Kathy Waite on February 27, 2017 at 7:45 am

    Well said Rob! Comparing yourself to an appropriate index over the long run is way more realistic than one off good or ” bad ” years. Also a lot less stressful as you see returns in context

  5. APF Blogger on February 27, 2017 at 9:26 pm

    Re: “Asking, ‘did my portfolio make money’ is not an appropriate way to evaluate your investing strategy. The only meaningful way to measure your portfolio returns is against a similar benchmark.” Agreed. And for those of you looking for a helpful example of how this might be done see Rob Carrick’s recent article on the topic: http://www.theglobeandmail.com/globe-investor/inside-the-market/what-would-be-considered-a-reasonable-return-for-a-balanced-portfolio/article33614696/

  6. Aman Raina on February 27, 2017 at 9:49 pm

    Dear Boomer and Echo,

    You are correct.

    I can indeed set up my portfolio to allocate my savings to specific asset classes.
    I can absolutely invest my savings in low cost investment products like ETF’s and index funds or DRIPS.
    I can rebalance my portfolio to retain an optimal asset mix that is conducive to my risk profile and generating returns to achieving my long term financial goals.
    I can remain steadfastly detached from market gyrations.
    I can undertake a variety of proactive initiatives that form well-intentioned building blocks of a cohesive investment strategy and ideology.

    I can do this. Anyone can do this. Robots can do this. At the end of the day, week, year, decade…whatever time period…

    ..if I don’t have more money than when I started with or if I’m not protecting my purchasing power, then I have a problem.

    Because…

    When I go to pay my kid’s tuition, the university isn’t going to care what the asset mix is in the portfolio where the money came from. They care if I have the money.
    When I go to pay my rent or my mortgage, the bank isn’t going to care whether I used dividend income or interest income or withdrew money from my TFSA. They care if I have the money.
    When I go to buy groceries, the cashier isn’t’ going to care whether I paid 5 bps or 30 bps on my S&P500 ETF. They care if I have the money.

    If I don’t have the money or if I have less money, I’m going to have problems achieving whatever goals I’ve set out.

    As investors, we should always be asking this question whether we choose to go down a passive investing path or an actively managed path because we are entrusting our savings in vehicles like stocks, bonds, ETF’s, or any investment vehicle to stewards with a premise that they will be making investment decisions to create more wealth which as investors will hopefully allow us to participate in their wealth creation. Why should we stop asking this question as you suggest it is wrong?

    I don’t ask this question with the intention of doing something immediately reactive or emotional in order to right the ship. I didn’t cash out of my robo portfolio because it was down 2 percent in one year. That just plays into loss aversion which adds fuel to the fire. I ask this question because it provides a flag, a wake-up call to further investigate, question and take action when deemed necessary. When companies lose money, are they not held accountable by their owners and investors alike? Asking this question to our stewards of capital is a critical question we need to be always asking in a capitalist society.

    There are many people who have just received their annual investment statements that will show they are losing money either by bad decision making, market circumstance, or an erosion of savings via fees/commissions. Do you not think it is appropriate for these people to ask why they are not making money?

    As a business owner who is investing and risking my own capital, should I not ask if my practice is making money? I want to grow my practice to be viable and self-sustaining and I need more capital to do that. I need to know if the decisions I’m making are enabling me to achieve my long term goal. I need to ask this question.

    If I stop asking this question then I am absolving the financial services industry who act for most people as stewards of capital the fiduciary responsibility of working in my best interest. If I don’t ask this question, I am telling these institutions that I don’t care and if they know I don’t care why should they care as long as my money is in their institution?

    So I will continue to ask this question. It is the one question that motivates us, energizes us and makes us more engaged in the investing process. It doesn’t favour passive investors or actively managed investing. It is the constant in business, in finance, and in our capitalist society.

    I will continue to ask this question and I will continue to hold institutions accountable when they demonstrate they cannot make money (and vice versa) and I will continue to teach and mentor people who choose to work with me to ask the same question.

    I know asking a question like this doesn’t rank high in terms of sophistication. It’s not going to win any Nobel prizes. Maybe that’s the problem. Maybe throwing terms like market weighted returns and fee-based and fee-for-service cost structures that resonate on Bay Street or in a PF blogosphere may have traction, but it’s not hitting it with average folks, who just want to know if they are going in the right direction. Maybe in its blunt, crude, stature that is where the beauty of this question and its variants lies. Why do we invest? We invest not to prop up a robo adviser’s back office nor do we invest necessarily out of civic or patriotic duty. At the very core, we invest to make money for ourselves, our kids, and the people we care most about so we can take a step closer to being more independent and free in exploring all that life offers.

    Respectfully.

    • Echo on February 27, 2017 at 10:32 pm

      Hi Aman, thanks for stopping by and leaving a comment. I think you’re still missing the point. Of course we invest to make money – that was the first line in my post. But you said, “When companies lose money, are they not held accountable by their owners and investors alike?”

      You’re still arguing that the robo should be making money for you when that’s not its job. Its job is to passively track the market for a small fee. The market is where you make money.

      This is taken straight from your robo’s website:

      “Nobody beats the market. Instead of trying to pick winning stocks, we track the market as a whole. We use low-fee index funds and smart technology to reduce the human costs of actively managed accounts.”

      The point I was trying to make here is that if you invest in passive strategies (i.e. with a robo or a DIY indexing approach), your portfolio returns are now at the mercy of the market. The robo is doing its job – sticking to an asset allocation. Its job isn’t to actively trade and respond to market forecasts or fluctuations in hopes to “make money”. Its job is to stay the course and hopefully convince you to do the same because the research says that’s your best shot at making money over the very long term.

    • R on March 13, 2017 at 12:53 pm

      Aman,

      You missed the point entirely. You can hope and pray that the money is there when you need it, but if you are looking for a quick short-term turnaround then you shouldn’t be playing with stocks to begin with.

      Just to repeat and make it clear: if your time horizon is under 5 years, you shouldn’t have any money in stocks.

      Good luck

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