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?