Are you investing and considering doing so successfully? However, how do you know if this is the case? Ways of thinking to find out
Are you satisfied with the returns generated by your assets? After all, an average annual return of 5% can be attractive for one investor and disastrous for another. So, do you believe you are investing successfully?
You want to compare your performance to that of a benchmark. It is still necessary to choose the latter adequately. “Remember that a market index does not reflect the fees associated with managing and operating a mutual fund. To compare the return of the latter to a benchmark index, you have to subtract the service fees and other applicable fees from the overall return of the chosen index,” explains Carine Monge, financial planner. This game of comparisons can, however, cause inevitable disappointments. Watchword? “You have to put this constant need to compare your performance to that of an index into perspective,” she says.
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If you like the idea of comparing your performance to that of the brother-in-law, revise your plans! His asset allocation is undoubtedly not the same as yours since each investor has risk tolerance and a different investment horizon. Therefore, the overall return from your investments cannot be compared to that of any other investor.
Other investors instead attach importance to specific ratios, such as Sharpe’s, which measures the performance of a portfolio based on the risk assumed by the holder. To do this, a mathematical formula compares the return obtained with the return on a risk-free investment. “This data, isolated, does not shed much light if it is not part of a more global analysis,” says Ms Monge. Therefore, this ratio is only one of the risk management components used in any asset allocation.
Here are some other ways to determine if you are investing successfully.
1. The Quebec Institute for Financial Planning (IQPF) to the rescue
The Projection Assumption Standards provided by the IQPF are helpful in more than one respect. Based on these, as of April 30, 2018, the experts predict that exposure to Canadian equities, foreign equities from developed countries and equities from emerging countries will culminate respectively in returns of 6.40%, 6 .70%, and 7.40%. Thus, for a projection prepared in 2017 of a balanced portfolio with a fee of 1.25%, the investor can expect to generate a net return of 3.9% for this period. This is the first point of reference to compare the performance obtained!
2. Achievement of your goals
What should you expect from your portfolio? This should generate a return that will allow you to achieve your investment objectives in the short, medium or long term. For this reason, the advisor asks several questions to the client. “A successful professional associates a specific and measurable objective with each investment,” confirms Daniel Plouffe, Director, Wealth Management Solutions for Sun Life Financial, using two examples:
I invest $400 per month in a Tax-Free Savings Account (TFSA) to build a down payment to purchase my first property within the next four years, without having recourse to the homeownership (RAP).
I contribute $500 a month to my Registered Retirement Savings Plan (RRSP) to fund my retirement at age 65. This first annual contribution of $6,000 provides me with a tax refund of approximately $2,500 which will form the basis of my emergency fund.
Like a coach, the advisor guides investors towards an optimal asset allocation while respecting their risk tolerance. “If you can say you’ve gone through with your plan – buying your house with a 15% down payment, for example – that’s another potential indicator of your ability to invest successfully. “, he concludes.
Tips that are worth their weight in gold!
Isn’t there a way to boost the return you get from your investments a little? What if the secret lay in the support you could benefit from? The contribution of an advisor is now quantifiable!
“Morningstar considers that the added value associated with the support of an advisor is equivalent to an additional annual return of 1.82% for the saver,” recalls Carine Monge. However, in the long term, this additional return has a snowball effect. “It’s the compounding return effect that will do its job,” she says.
According to the Center interuniversitaire de recherche en analyze des organizations, “households using an advisor accumulated 69% more assets on average.
