How Do I Know if My Investments Are Doing Well?

Everyone wants to make the most of their money and their investments, but knowing what you should expect as far as returns goes, isn’t a straight forward thing to figure out.

When we are looking at two different portfolios, there are a lot of factors to consider when we are comparing the performance. We need to look at things like asset allocation, what stocks and bonds are we invested in (localized, global, etc), what is the timing, have there been contributions or withdrawals, is there rebalancing, are there any additional strategies that are implemented, and what fees are associated with the account? When we compare two portfolios, we need to make sure we are comparing apples to apples, and not apples to watermelons.

What Makes Up the Portfolio?

More risk, more reward. Four words that summarize investing. If you’re willing to take on more risk, you’re more likely to reap more rewards. It’s the game, and the thrill. Stocks in companies are more volatile, more risky, and therefore more rewarding. Whereas bonds are very safe, not risky, and less so rewarding than stocks. Here is a great resource from Vanguard that highlights the relationship of stocks and bonds.

From the period of 1926–2018, bonds have averaged a yearly return of 5.3%, whereas stocks have averaged 10.1%. Over that same period, a 100% bonds portfolio has had a negative year 15% of the time, and a 100% stock portfolio has had a negative year about 28% of the time. So it perfectly shows what we’ve come to know about stocks. They offer more reward, but at a greater risk.

Knowing how the overall markets have performed can give you a benchmark. A benchmark is a measure that you can compare your portfolio to, but a benchmark is only comparable if it has the same weighting of stocks to bonds. Then you can see how it’s done. Remember, year to year performance varies a lot. Sometimes a negative return can be good (if the comparable benchmark performed much worse), and sometimes a 20% return can seem bad (if the comparable benchmark performed much better).

What Can I Do if I’m Not Happy with the Performance?

If you’re unhappy with your funds performance there are things you can look into to try to figure out the cause. I find that more often than not when someone is not impressed with their investment performance compared to someone else, it’s because their portfolio is in a position where it can’t catch up. You can’t expect to keep up with a car if you only have rollerblades.

Sometimes people are in the absolute wrong portfolio. Already, I’ve seen more times than I thought I would have, people in portfolios that are designed to not even beat out inflation. I can’t definitively say why this happens, but it does. If you’re contributing to an RRSP or TFSA or anything else, it isn’t enough to only say that you’re contributing, but you need to know what you’re invested in. Money market funds or savings accounts offer very little return. For some people that’s okay, but if you’re trying to maximize your performance, they are not good options.

Another reason why a lot of funds underperform the market is because they are trying to outperform it. Here’s what I mean. When a fund tries to outperform the market, it usually comes with high fees. If markets average 10% and you’re paying 3% in fees, you’re already at a 30% loss if the portfolio breaks even and matches the market. So in order to actually show a return that beats the market, the portfolio would have to outperform the market by at least 30% (before the fee).

It seems silly, especially when you’re paying someone to help manage your investments, but you can’t take for granted that they are doing everything in your best interests. The more you know about how investing works, the better questions you can ask, and the better you can ensure you are getting a good, fair, experience.

About the Author

Derek Condon, CFP®

Derek Condon is a Certified Financial Planner and Mortgage Advisor specializing in financial planning, investments, wealth-preserving insurance, mortgages, and others. I help my clients with a variety of goals. From someone who is just starting their investing journey to a retiree managing their wealth. From a first-time home buyer to someone refinancing to get their very best mortgage. And, of course, everywhere in between.