“Nancy, how is my portfolio performing?” I get this question a lot! And one way we help answer it is by providing a semi-annual Portfolio Performance Report that I covered in my last “No Dumb Questions.”

But as I wrapped with then, “How am I doing?” as a trick question, it needs to be asked with: Compared to what??? There are appropriate answers … and then there are the answers most people come up with on the fly by comparing their returns to generic data.

What’s up with that? Well, let me tell you all about it in today’s “No Dumb Questions.”

Naturally, if you’re going to invest your hard-earned money, you want to know how it’s doing for you over time. The challenge is, I see investors’ do-it-yourself comparisons morph into apples-to-oranges assessments that can cause all sorts of trouble. Perhaps the most readily available resource people tend to turn to are popular market benchmarks, or indices, like the S&P/TSX Composite, really that’s the Canadian broad market index. Let’s talk about when that comparison does and doesn’t work so well.
ON THE ONE HAND, it’s easy, and that’s tempting, to glance at the popular press headlines celebrating or bemoaning recent S&P/TSX returns, see that “the market” has been delivering “X%” over “Y” time, and assume your portfolio should be doing exactly the same.

The problem here is, for several valid reasons, your own distinct mix of investments – and the overall returns that mixture is producing for you – may differ widely from this particular index and its returns.

For example, it’s highly unlikely your entire portfolio consists of only of Canadian large-company stocks that this index tracks. More typically, you might hold a broad mix of stock and bond holdings, which may then be further fine-tuned to capture expected returns from different types of stocks – such as small and value company stocks, from Canadian and non-Canadian companies alike.

Besides the fact that your own portfolio probably doesn’t precisely copycat “the market” to begin with, your own portfolio – and its expected total returns – also changes over time as you add money in, take money out, or shift around your precise mix of investments based on your evolving investment objectives.

All of this is to say, if you’re comparing your portfolio’s OVERALL returns to a standard index, the comparison is useful but may be a bit of a blunt instrument.
ON THE OTHER HAND popular indexes or benchmarks do play a role in assessing the quality of your investments … IF you use them to make appropriate comparisons.

Keeping track through reporting

At PWL, we encourage investors to keep a periodic eye on the broad industry benchmarks that are available. We even share handy monthly summaries of them on our website. These complement our client reports by providing one-month to 30-year performance numbers for the broad Canadian, U.S. and international stock and bond markets. Our reports provide ‘asset class’ performance for the same categories or one of the reports themselves, such as this one.

Now, by definition, an index’s theoretical returns are going to be a little higher than any real-life investment can deliver – even if you happen to have invested in the exact same securities that index is tracking. But if you’re making valid, apples-to-apples, asset-class-to-asset-class comparisons with those benchmarks and that comparison varies significantly, it would be appropriate to wonder why and ask why.

What if, say, your allocation to Canadian equities in a particular period has significantly under-performed the broad, S&P/TSX Composite? If you never compared your holding’s performance to its closest appropriate index, you may never notice if, its hyperactive trading costs are eating into the otherwise available returns from the asset class. Trading costs don’t show up as a line item on any report; they only show up in ghost-like fashion as lower returns compared to their targets. Again, every fund has trading costs, but you’d want to know if they become excessive, right? (Link to my video on indirect costs of investing.)

Or, what if a fund is supposed to be tracking a particular asset class, but it’s not doing a very good job of it? An actively managed fund may have too much leeway to sit on the sidelines in cash or shift to other, inappropriate holdings instead of staying true to the reason you’ve invested in it to begin with. This is another reason that the numbers may not line up the way they should.

As I wrap up this three-part series of videos exploring those key investor questions of– “What’ve I got?” and “How am I doing?” – what other “No Dumb Questions” can I answer for you about your money? I’m Nancy Graham, if you’re watching this on YouTube- I hope you’ll subscribe to my channel and ring the bell. Or if you’re on LinkedIn, follow me today to stay in touch!