This is a guest post from a fellow Canadian blogger Robb. Robb Engen is a DIY investor and blogs about personal finance at Boomer & Echo. You can follow him on Twitter @BoomerandEcho.
How well did your investments perform last year? Did your portfolio beat the market? Which market?
You can look at your mutual fund prospectus or use a website like Morningstar to see how individual funds performed, but this won’t give you your personal rate of return.
You’ll need to account for all your contributions and withdrawals for each of your holdings in order to calculate your returns.
The financial industry doesn’t provide investors with a personal rate of return or compare your returns against an appropriate market index like the S&P/TSX Composite Index.
You can ask your advisor for this information and for suitable benchmark comparisons, but don’t be surprised if you hear crickets after asking the question.
Related: Why I Became A DIY Investor
It’s important to compare your portfolio rate of return to an appropriate benchmark so you know whether or not active management is really adding value over a passive investing strategy.
If not, you should consider passive management – buying low-cost index ETFs and mutual funds and holding them for the long term.
I started investing on my own in 2009 and my portfolio now consists of 16 Canadian dividend stocks and REITs. I follow a strategy that I’ve learned from reading Tom Connolly’s Dividend Growth website.
Dan Bortolotti, author of the popular Canadian Couch Potato blog, says an appropriate benchmark for me is CDZ, the Canadian Dividend Aristocrats ETF from iShares.
“Both you and this ETF favour a dividend growth strategy, so the key difference is how that strategy is implemented,” said Bortolotti.
CDZ imposes a number of quantitative rules and then makes all of its “decisions” according to those rules, so there is no manager judgment involved.
For example, the big banks were booted from the index when they failed to increase their dividends after the global financial crisis in 2008.
Related: Should You Buy A Dividend ETF?
My investing strategy uses similar criteria, but it’s not imposed so methodically: there is some judgment on my part.
“By comparing your picks to the ETF, you are measuring the quality of that judgment,” said Bortolotti.
In other words, does my judgment add or subtract value? Would I have been better off simply using the index to make all the decisions for me?
Investors need to ask the same questions of their advisor. Are you getting first class advise for that 2.7% management fee, or do you just get a statement in the mail once a month?
At the beginning of the year I asked Justin Bender, a portfolio manager at PWL Capital, to help calculate my individual rate of return going back to August 2009 when I started investing.
Growth of $1 graph: This shows how much $1 invested in my portfolio would have grown to, compared to $1 invested in the iShares S&P/TSX Canadian Dividend Aristocrats Index Fund (CDZ).
I’ve been impressed with the results so far but question how much of that performance is due to skill and how much is just being in the right place at the right time. Only long-term results will answer that question.
Whether you choose to work with an advisor or go it alone you need to calculate your personal rate of return because you can use this information to:
- Discuss and compare your returns to proper measuring sticks and explain why your returns are higher or lower
- Highlight the negative effect that fees have on your overall returns.
- Negotiate fees
Now I use the personal rate of return calculator posted on PWL Capital’s website to continue to track the results on my own. All you need are your month-end account statements, then just plug-in the values into the calculator.
It hasn’t been a banner year for Canadian dividend stocks, but my dividend portfolio is still up 5.05% this year while CDZ is up just 1.66% year-to-date.
Do you track your personal rate of return and compare it against a benchmark index?
Great post, thanks.
I started investing around March 2009. Every year in March, I take a screen shot of my accounts to see how much it grew.
I never thought it was very accurate because I keep adding money from my savings (employment income, tax return, self-employment) into my portfolio.
How do you account for the money you add to your portfolio?
Does it count for your ‘real’ rate of return when you keep adding your savings to your portfolio?
@HD – If you download that Rate of Return calculator from PWL Capital’s site you’ll see a place to enter your new contributions (day and month), so it will track your real rate of return.
My discount brokerage provides me with my rate of return. I know I’m beating all the indexes but I only have a mild interest in that measurement.
My main focus is dividend growth. I strive to beat 12% portfolio growth (% yield + % annual dividend growth). I’ve handily beat this benchmark since I’ve been a DIY investor in 2008.
@Bernie – do they provide your rate of return, including contributions?
I like your goal of dividend growth. The reason I use CDZ as a measuring stick is that some years (like this one) are poor for dividend stocks and so I know I’m not going to achieve 12%. I just want to make sure my portfolio is still beating it’s benchmark, otherwise I’d be better off indexing.
The Passive Income Earner
It’s hard to track all investments and dividends effectively I have found. How are you tracking it? I used to use Quicken but when I switched to a Mac, Quicken was not available. I don’t like Mint.com as it has all my passwords …
I don’t personally track my ROR across all my accounts. The proper ROR anyways … I may look at doing it
I’m in the same boat at HD I would like to but finding it a struggle, mainly do to the fact that I add money at irregular intervals. I tried a few spread sheets but found them too complicated.
Since I’m doing David Stanleys’ Beating the TSX I do make a note of the start price and dividend yield and then check it a year later when I rebalance, not perfect but the best I’ve come up with.
I’ll check out your link and see if it works
@PIE and @Rob- I downloaded the PDFs of all my monthly statements from TD Waterhouse. Then I used the PWL RoR calculator and entered my portfolio value each month, along with my contributions.
I agree, this would be painful to figure out previous years’ RoR if you had switched brokers or have multiple accounts with different brokers.
But going forward, use the RoR calculator and you’ll find it’s a piece of cake.
JC @ Passive-Income-Pursuit
I’ll have to check out this calculator. I’ve got 2 different ways that I calculate my RoR. One I use actually cash flows and final value with the XIRR function but the problem I see in that is that comparing to a benchmark, not sure if the S&P 500 is the best to use, it doesn’t account for the timing of purchases, i.e. SPY “purchases” are made the day the cash flow hits the account whereas in real-life there are delays between cash hitting my brokerage account and then actually getting invested. I’m working on another one use the actual dates that purchases were made for each position with corresponding SPY purchases and then taking a weighted average.