Investment performance is the fastest way to achieve optimum financial health. For example, you earn $100,000 per year and you have a 10% savings rate ($10,000). Plus, you have accumulated $500,000 of retirement assets and your investment performance is 10% ($50,000). In this example, your investment performance had five times more impact than savings. Financial health occurs when your savings plus investment performance produces the assets you need to live the way you want to for the rest of your life with no compromises. Continue reading
Investment performance measurement is a service that has been used by institutional investors since the 1960’s. It refers to the process of measuring the investment performance of institutional assets. Since the 1970’s this data has helped the trustees of pension plans meet their post ERISA obligations for monitoring the performance of their plans’ investments.
However, trustees did not manage institutional assets. They hired money managers to invest the assets for them. This brought another fiduciary requirement into play. Trustees were responsible for monitoring the performance of the managers they selected. This made sense. It would have been imprudent to select managers and ignore their investment performance. Continue reading
There are two reasons why investors must be very cautious when they select financial advisors based on investment track records. First, advisors know most investors will select the financial advisor with the best track record. Second, unscrupulous advisors will provide fake track records or they will manipulate track record data to make themselves look better than they really are.
Track records are one way investors can evaluate competence. Reviewing advisors’ education, experience, and certifications is the other way. Given a choice, most investors are biased towards track records because advisor comparisons are easy – just select the one with the highest track record. Continue reading
Most investors assume the measurement of investment performance is based on a universal formula that determines their rate of return for a specific period of time – for example, the rate of return they earned for 2011 or their return for the first quarter of 2012. In fact, there are numerous ways to calculate investment performance. A few of the methods benefit investors. Others are designed to obscure the facts.
Why is it important for investors to have a basic understanding of investment performance? The rate of return on investor assets is their main source of accumulating assets for retirement. Let’s assume Bill & Linda Smith have $150,000 of income and a 10% savings rate. This source produces $15,000 of new assets each year. Let’s also assume the Smiths have accumulated $500,000 of retirement assets in their 401k plans and IRAs. They average a 10% rate of return on these investments, or $50,000. Performance has 3.3 times the impact of savings and this number goes up as the asset amount increases in size. Continue reading
People use Investor Watchdog’s free Performance Benchmark service to measure the relative results of their advisors and assets.
- Investor Watchdog publishes performance data for five Benchmarks that vary by risk exposure ranging from Very High to Very Low.
- Watchdog’s Very High Risk (VHR) Benchmark is the source for all performance data in this article.
- Younger investors (25 to 40 years of age), who are willing to take substantial risk to achieve higher returns, select the VHR Benchmark.
- The VHR Benchmark is allocated 100% to common stocks: Large Capitalization, Mid-Capitalization, Small Capitalization, Domestic, Foreign, and Emerging Markets.
- Watchdog publishes Benchmark performance on its home page. Some Benchmark functions require sign-up as a Watchdog User. Continue reading
Two years ago the most important concern investors had about financial advisors was their ethics. Could investors trust advisors to provide complete and accurate information that was free of any potential conflicts of interest? Major losses in 2008 and continuous headlines documenting scams and deceptive sales practices fueled their concerns.
Now, the biggest concern is the advisors’ ability to produce competitive performance for reasonable amounts of risk and expense. This new #1 concern is also not surprising. Four years after the 2008 stock market crash, investors are still trying to win back their losses. And, performance is their principal way of getting their assets back. Continue reading
There are three performance numbers that should matter to you.
First, is your performance goal. Let’s assume you have to average a 10% rate of return to achieve your financial goals.
Second, is your absolute performance. What return did your investments deliver? If your performance was 10% then you achieved your financial goal for that year. You should also differentiate between gross and net returns (after expenses are deducted). You may find your 10% return became 8% in which case you lagged your goal.
Third, is your relative performance. This is the number that really matters. How did your investments perform compared to a benchmark. For example, your absolute return was 10%, but your benchmark was up 20%. On a relative basis you lagged your benchmark by 50% – not so good.
Relative return benchmarks also tell you how you performed during negative years. For example, your benchmark is down 10%, but your portfolio’s performance is only down 5%. On a relative basis you win because you lost less.
Investor Watchdog is launching a new website in the next few weeks that contains five sophisticated performance benchmarks. Some of the benchmarks have up to 12 asset classes and they use varying asset allocations to reflect different tolerances for risk. You select the benchmark and we monitor your results for you.
Let’s say you raised chickens for a living. Would you hire a fox to guard your chickens?
Financial advisors have conflicts of interest just like the fox. You may have a big problem when you hire an advisor to produce performance and the advisor produces performance reports, and the advisor explains the performance reports to you.
Advisors have two primary motives. First, they want to sell you investment products and services. Second, if they are compensated with fees, they want to retain you as a client for as long as possible to keep the fees flowing.
Consequently, advisors have a major conflict of interest.
Prudent investors use the services of independent third parties to monitor their advisors performance, expense, compliance record, and other important information.
Investor Watchdog is launching an advisor monitoring service in February 2012.
Money managers have track records. That is because they provide the same service to multiple investors. Examples of money managers are mutual funds, separate account managers, and hedge funds. These managers are firms of professionals who select investments (securities) for your assets.
Financial advisors do not have track records. They say it is because they provide different services to their clients. For example, the services they provide their younger clients are very different compared to the services they provide their retired clients. Financial advisors recommend money managers, but do not make securities selection decisions themselves.
I can accept their argument, but I also take it with a grain of salt. It is possible to divide their clients into categories and develop track records for each category. Their advice does not vary much within a category. However, this would be an expensive, time consuming process to do it right.
Just because advisors do not have track records does not mean they are not accountable for your performance. Their advice helps you allocate assets between investment classes and they recommend the money managers who actually invest your assets in securities.
Two reasons are pretty obvious. There are no online services that monitor financial advisors and most investors are not inclined to develop their own monitoring systems.
Monitoring advisors is common sense. You don’t turn your assets over to a third party and not monitor his or her results. Where is the accountability if there is no monitoring?
And, you certainly don’t let advisors who are responsible for producing performance monitor themselves. That is like the fox guarding the henhouse.
A solution is coming. A new version of the InvestorWatchdog.com website will launch at the end of this month. The site will provide a FREE monitoring system investors can use with any advisor at any firm in America.
And, you get to select what information is monitored: Performance, exposure to risk, investment expenses, your advisor’s compliance record, and other information that impacts your results and your relationship with your advisor.