How to tell if it’s just a bad patch, or if it’s just some bad advice
Globe and Mail, February 12, 2008
Rob Carrick
Your January investment account statement could make for some alarming reading.
The stock markets are wildly volatile and some of the largest Canadian equity funds are down 6 to almost 9 per cent for the year to date. It’s safe to say that a lot of investors’ portfolios are falling in value, and that the trend may have a lot longer to run if the stock markets move lower in the months ahead.
Savvy investors shrug this off because they know that markets go down as well as up from time to time. Others get agitated, some of them enough to start wondering if the problem is with the financial advice they received.
If you’re starting to question your adviser’s advice in this stock market downturn, keep in mind that a decline in the value of your portfolio could be due entirely to falling stock prices. Your adviser may well have constructed exactly the kind of portfolio you asked for.
“At times when the market is going up, people say, ‘I can take risk, I’m in for the long term,’” said Warren MacKenzie, CEO of Second Opinion Investor Services. “Then, when they do hit the rocky patches, they totally forget what they said.
“People may have encouraged the adviser to take more risk,” Mr. MacKenzie continued. “Investors have to ask themselves, what has been their role. Have they encouraged the adviser to go for the higher return, or have they expressed a desire for a balanced, safe portfolio?”
The key question you have to ask yourself as an investor, then, is whether you have the portfolio you were supposed to have and it’s simply being hurt by a market downturn, or whether your adviser gave you bad advice or negligent service.
Mr. MacKenzie, a certified financial planner (CFP) and chartered accountant, said the way to settle this matter is not to focus on the overall gain or loss in your portfolio. Instead, compare your returns with the proper benchmark stock and bond indexes. Let’s say for the sake of simplicity that your portfolio is evenly split between bonds and stocks, and that your stocks are 50-percent Canadian and 50-percent U.S. and global. Your ideal benchmark would comprise a 50-per-cent weighting in the Dex Universe Bond Index (formerly the Scotia Capital universe bond index), a 25-percent weighting in the S&P/TSX composite index and another 25-percent in the Morgan Stanley Capital International World Index.
You’d think a standup investment firm would supply you with account statements comparing your account returns to the appropriate mix of benchmarks, but this is a rarity. An easy alternative is to use the Show Me the Benchmark website maintained by Mr. MacKenzie at showmethebenchmark.com. Just tell the site how much of your portfolio corresponds to major benchmark indexes and it will give you an overall return you can use to assess your own results.
While you’re breaking down your portfolio, Mr. MacKenzie suggests you check to see how your current asset mix compares to the one that you and your adviser settled on when you set up your account. This information should be on your investment policy statement, which was completed when you signed on with your adviser and outlines client goals and how they’ll be met.
Big declines in a portfolio can sometimes be a result of the mix of investments tilting more toward stocks than the client wanted initially, Mr. MacKenzie said. Unless an adviser rebalances a portfolio annually, this can easily happen after the sort of bull market we’ve seen in recent years.
If your asset mix is in line, then compare any declines in your portfolio to those of the right package of benchmarks. “It may be evident just from doing this that it’s all to do
with the market,” Mr. MacKenzie said. “Or, unfortunately, in a lot of cases I’ve looked at recently, it’s not to do with the market. It’s the stock and fund picks that the investment advisers have made.”
Have reason to believe your adviser’s advice is costing you money? Schedule a meeting, lay out your concerns and listen to what your adviser has to say. You may simply be in good stocks or funds that are temporarily out of sync with the market. Understand that underperforming the benchmarks over the past year doesn’t mean much at all. Over the past three to five years or more - now, that’s worrisome.
Above all, remember that investing in the stock markets inevitably exposes you to risks that you’ll lose money over periods of time that can range from months to years. The question you have to ask about your adviser is whether he or she is making things worse.
How to benchmark your portfolio
To properly gauge whether your investments are performing well, you need to compare them to the appropriate mix of benchmark stock and bond indexes. Here’s an example of how this might work using the benchmark calculator on a website called Show Me The Benchmark (showmethebenchmark.com)
STEP ONE: Find your asset mix
For example:
5% Cash
25% Bonds
35% Canadian stocks
17.5%.U.S. stocks
17.5% International stocks
STEP TWO: Find the applicable benchmark indexes and enter your portfolio data
For example:
5% Dex 91-day T-Bill index
25% Dex Universe Bond index
35% S&P/TSX composite index
17.5% S&P 500
17.5% MSCI EAFE index
STEP THREE: Have the website calculate your benchmark returns
For example:
(using the portfolio provided here):
Quarter ending Dec. 31 -0.77%
Year to Dec. 31 +1.71%
Annualized 3-year return +9.42%
Annualized 5-year return +10.47%
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