Weekend Reading: Benchmarking Your Returns Edition

How well did your investments perform in 2019? Investment performance is critical to achieving your retirement goals, yet it’s one of the most misunderstood concepts in personal finance. Why? Because we need to put our performance into proper context. In other words, we need to compare our returns to an appropriate benchmark.

Investment managers are quick to celebrate strong returns during bull markets, and just as quick to come up with excuses for poor returns when markets fall. What’s important, particularly for those investing in stocks or actively managed mutual funds, is how your returns fared against “the market”.

The easiest way to see how well your portfolio performed is ‘benchmark it’ against an appropriate index, such as the TSX or S&P 500, or some combination of stock markets. You can’t actually invest in the index, so you need to compare your portfolio to an index fund.

Blackrock’s iShares has a robust list of index-tracking products and does a great job keeping its performance up-to-date.

Select the fund or funds that best matches your portfolio. For example, if you wanted to compare to the S&P 500 then select the fund XUS, click on the ‘performance’ tab, and find the YTD or calendar year performance (depending on when you do the calculation).

Now let’s say you’re invested in one of Canada’s largest mutual funds – RBC’s Balanced Fund. As of Nov 30, this fund has returned 13.3 percent. An appropriate comparison for this fund would be XBAL – the iShares asset allocation ETF representing the classic 60/40 balanced portfolio.

XBAL returned 15 percent over the same period, meaning the RBC fund has underperformed by 1.7 percent. That shouldn’t come as a surprise – since we know by now that fees are a large driver of future returns. The RBC Balanced Fund comes with a MER of 2.16 percent, while iShares XBAL comes with a MER of just 0.20 percent.

Asset allocation ETFs make it easy for investors to compare their managed investment portfolios and determine whether they’d be better off investing in index ETFs.

So while your stock picks or mutual funds might have returned a healthy 15 percent this year, you might be surprised to learn the Canadian market is up 21.4 percent (FTSE Canadian All Cap Index) and the S&P 500 is up 29 percent. It’s all about context.

Here’s how my own investments performed in 2019 (personal rate of return):

I used to be a stock picker, more specifically Canadian dividend paying stocks. Even though I switched to indexing in 2015 I still like to compare my portfolio against my former strategy. That’s best represented by iShares CDZ – the Canadian Dividend Aristocrats ETF.

Since 2014, CDZ has a compound annual growth rate of 7.04 percent, compared to my portfolio’s compound annual growth rate of 9.29 percent over the same period. To be fair, CDZ will most likely outperform my portfolio this year (it’s up 26.61 percent as of this writing).

Do you compare use benchmarking to compare your investment returns? How did your portfolio perform this year?

This Week’s Recap:

I hope you enjoyed the Christmas break. We’re still in that vortex known as the week between Christmas and New Years – when nobody knows what day it is and nobody cares!

I did manage one post this week – how to make saving a priority.

From the archives: Past performance and your investing returns.

I’m currently reading Superfans by Smart Passive Income blogger Pat Flynn. In the book he suggests coming up with a name for your followers. Which one do you prefer:

• The Financially Ok Boomers
• Echo and the Moneymen
• Echomaniacs

Promo of the Week:

Did you know that 56 percent of Canadian adults don’t have a legal will?

Now you can create a legal online will in 20 minutes for as little as $99 with Willful Wills. Read my full Willful Wills review here.

Weekend Reading:

There’s still time to check out these awesome credit card offers, sign-up bonuses, and deals for December.

Travel expert Barry Choi reviews the best credit cards with travel insurance. One of interest for those over the age of 65 is National Bank’s World Elite MasterCard, which provides 15 days of coverage.

Dale Roberts looks into Canada’s largest mutual fund from RBC and says it’s not so bad.

I love reading personal finance updates and the end of the decade brought us plenty of ‘decade in review’ recaps. Here’s an interesting one from Maria at Handful of Thoughts.

Mark Seed at My Own Advisor updated his 2019 financial goals.

She taught more than 2,000 women how to invest, and always gives beginners the same 5 steps.

Millionnaire Teacher Andrew Hallam compares value and growth stocks in a piece called, Why your fast & furious stocks might be putting you at risk:

“Too many investors, unfortunately, chase past performance. In many cases, they’re breaking sound investment rules to stockpile money in America’s fastest growing stocks. But when their racetrack turns to ice or those tires decide to burst, these are the drivers who will pay the highest price.”

And here’s PWL Capital’s Ben Felix with another Common Sense Investing video, this one looking at investing with leverage:

The Globe and Mail’s Tim Cestnick explains how to get the most out of 2019’s tax changes.

Michael James on Money reviews a book by former U.S. Secretary of the Treasury, Timothy F. Geithner called Stress Test.

Dumbwealth, a recent new find, published some incredible tales of the working poor in Canada.

According to the Wall Street Journal, some dealerships are dressing up borrowers’ car-loan applications with fake, inflated incomes (might need a subscription to read, but try incognito mode).

Also in the WSJ, why concert tickets are so expensive – with average ticket prices increasing 55 percent in the past decade (subscription).

Finally, why nearly all accused money launderers in Canada get their charges dropped. 

Have a great weekend, everyone!