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ARe my returns good?

What’s a good return, anyway?

 

The most important piece of information about your investment portfolio is how it has performed. And yet, it can be really hard to judge whether it’s doing well or not.  When your financial advisor meets with you, circles some numbers and says “You’ve done well!", you might smile and nod. But inside you’re thinking “That sounds great – but is it true?” Was 13% a good return in 2023? Was negative 5% good in 2022? It’s all meaningless without context.

 

Thankfully, there is a pretty easy way to figure out whether the performance is good or not.

All you need to do is compare your returns to a benchmark. A benchmark is an index that is used to measure the performance of an investment, whether that’s a mutual fund, an ETF or a portfolio of stocks. The benchmark has to have a similar make-up as the fund in order to make the comparison fair. 

 

Although there are all kinds of benchmarks out there, the easiest benchmarks are those that track the broad market. Remember, as an investor, you have a choice between investing in actively-managed mutual funds or a passively-managed fund that tracks the market index.  Therefore the question is “Did my investments do better than the alternative of investing in a passive fund that tracks the market?”

 

In order to compare performance you need to compares apples to apples – or at least Pink Lady apples to Honeycrisp apples. What this means is a Canadian equity mutual fund – a fund that invests in Canadian stocks – should be compared to the Canadian market index. The fund might have a special angle - like a Canadian dividend fund - but you can still compare it to the broad market. (Mutual fund managers would disagree - vehemently.) A U.S. equity fund can be compared to the S&P 500.

 

You can also compare your entire portfolio to an appropriate benchmark. More on this below.

 

To analyze your returns, use this three-stop process.

 

Step one: Figure out what kind of investments you own in your portfolio. Sometimes you’ll get a pie chart in your statement that shows the breakdown between different asset classes. It might be a broad breakdown like equities, fixed income and cash, and sometimes it will be more detailed, showing you a breakdown by geographic region like Canada, US and international. Alternately, figure out what kinds of mutual funds you own if you want to see how your individual funds are doing.

 

Step two: Looks at your returns. You will probably see returns over various time periods like one year, three years, five years, ten years and since inception. The number to look at is the longest one available – the 10-year is best.

 

Step three: Compare the returns to the benchmark. It can be hard to find market returns for the same time period as your investments. An easy way around this is to look at the performance of passively-managed ETFs and its benchmark. These returns are always available. Using the performance of XIC, for example, which tracks the Canadian market, is a good proxy for Canadian returns. Or you can look at XIC’s benchmark performance. Here is the performance of XIC and its benchmark, the S&P/TSX Composite Index.  


If your Canadian equity fund returned less than 7.5% over the past 10 years, then it has underperformed. Remember that all mutual fund and ETF performance numbers are shown after fees have been deducted and that's the number you care about because that's what you, the investor, gets.

 

Let’s look at an example. Let's say your advisor has put your money in the Mackenzie Canadian Equity Fund. I like to look at the Morningstar website – it’s consistent and presents performance in the same way for every fund. If you scroll down to Portfolio, you will see the fund is 99.2% invested in Canadian equities. It’s pretty clear what kind of fund it is. To double check, have a look at its benchmark: it’s the S&P/TSX Composite Index. Clearly we can compare this fund to the broad Canadian market. Over a 10-year period, the A series of this fund has returned 5.97% per year on average. Now flip over to XIC – the 10-year performance is 7.14%, better than the mutual fund.^ For a more complex example, see the end of this blog post.

 

If you want to see how your entire portfolio has done, you need to do a tiny bit of math. Take percentage allocation to each asset class in your portfolio and multiply that by the return of the relevant benchmark. Then add up the numbers. Here’s what it looks like:

This return of about 8%is the return that your portfolio should be compared to. If your investments have returned less than this, they have underperformed.

 

You can also take a shortcut by simply looking at the historic returns of stocks generally. If you invest in stocks in the Canadian and US market, you can expect to return about 8-9% per year on average over a long time period.  That’s because Canadian stocks have risen by 7.8% per year over the last 20 years and U.S. stocks by 9.4%*. If you own a mix of stocks and bonds you need to factor in the lower returns of bonds, which have performed roughly 3% per year**. So a good long-term return is about 6.5%. You can see these numbers and the returns of other types of investments here.  (And for a fascinating look a returns in the U.S. year by year, check this out.)


If you want help with the performance of your portfolio because you aren’t sure what benchmark to look at, feel free to email me and I’ll see if I can help you. (This isn’t a sales job – just a genuine offer to help you out for free.) If you want a more fulsome review of your investments, have a look at my portfolio review service.


 

 

*In Canadian dollars

** Canadian 10-year government bonds.

^ Of course, in this case, you can also just look at the fund's benchmark because the benchmark is the S&P/TSX Composite Index. However, just be careful - sometimes the benchmark is something else, perhaps a "blended benchmark" made up of a few indices.

 

Another example. The TD Monthly Income Fund is a fund that is made up of 35% fixed income and 65% equities. Have a look at the benchmark that TD uses - it's a bit complex. So in this case, you shouldn't look at the benchmark provided by the fund company, even though they have their reasons for choosing it (namely that the fund's objective is to provide a high monthly income for investors). This is why I like to use Morningstar - they choose indices that are more broad-based. You could compare this TD fund to the return calculated in the table above, since it's pretty close to a 70/30 fund. Also note that TD doesn't show the performance of the fund relative to any benchmark on its website - you have to dig deep and look a the MRFP - and who ever does that? The fund has underperformed its benchmark, which you will on page 8.



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