Tuesday, June 7, 2011

How is My Portfolio Doing? - Part 2

You may remember that I recently saw my financial adviser about my mutual fund portfolio and came out feeling very disturbed by the answers, or rather, the non-answers, I got.

Over the short-term, it's better not to panic over sudden dips and sell -- such as the 2008 NINJA loans crisis and subsequent market meltdown. If your adviser knows what they're doing, and the underlying funds they've put you in are good ones, a crash like that is actually a great time to buy low and really get extraordinary gains when the market recovers.
My own portfolio weathered this -- -41% in 2008, +56% in 2009, +12% in 2010. The money came back, obviously... but it wasn't good enough.
And using a mix of market indexes to mirror my portfolio market exposure and thereby determine a benchmark, 12% in 2010 was only average.

As mentioned in the previous post, I struggled to articulate why I felt my overall portfolio over the last 10 years had done very poorly. After a lot of reflection and looking for benchmarks and, I think I've come to some concrete numbers showing just what was wrong and why I was right to be concerned over the last few years.

First of all, I hadn't kept statements. Big mistake.
When I first moved over to Investors Group, the initial returns were good. There was the whole 9/11 market reaction, but we pulled through. I gave my financial adviser a free hand in adjusting my portfolio.

She seemed confident and competent, and seemed willing to take the time to sit down with me and look through my financial situation as a whole, not just mutual funds. That part never changed -- the customer service part was always good.
So I stopped looking at the portfolio very closely, assuming that I was with a competent adviser who was getting me great returns. Another Big Mistake.

You can get great gains and your financial adviser might have a good strategy of buying promising funds when they are low, but just one market crash can wipe it all out. For example, my 2008-2010 performance was a net +10%, or approximately +3.25% compounded annually for 3 years. That's not good enough. If I had kept it in bonds, it would have done just as well, if not better.

But, you say, my portfolio is obviously a higher-risk one, and those are the risks.

NO.

I used to think that, and at various times financial advisers have used that to scare me. If they are saying that to you, BE WARY.
High Risk is NOT the same as the possibility of losing your money. Poor portfolio management means your risk hasn't been managed well. You still haven't lost all the potential in your money, but you could be stuck in a poorly performing fund and your money is simply not growing -- or worse, eroding slowly.

What High Risk really means is high VOLATILITY. You must be willing to ride out the market roller coaster. Some people can't sleep well at night from that, but this has nothing to do with losing money.

As mentioned before, when the market drops, it is a good time to buy low and be position for the highs when they come. It is the job of the mutual fund managers to rise to the challenge and seize that opportunity. It is the job of your financial adviser to find good mutual funds, the ones that are managed well. It is your job to stick with the tolerance for volatility you have stated and not panic so that your financial adviser can do their job.

Going back to my 2008-2010 performance (basically +3% after 3 years) -- for that period is simply not good enough. Even hiding my money in a GIC in the bank would have done more each year.

So why didn't my financial adviser put me in something else? Well, Investors Group has their own family of funds, and they've been under-performing. At some time, they were good. Now, they're not so good. But the Investors Group are still peddling them and if, like me, you stopped looking, your money is stagnant without you even knowing.
The classic response from your adviser would probably be about how selling the fund suddenly would trigger the deferred sales charge, or you would be selling low and realizing losses. But -- why are you in a badly performing fund in the first place?

Which brought me to a different way of evaluating my portfolio. As I mentioned, I didn't have statements from prior to 2008, when I started keeping them to see how I'd weather the scary market crash that lost me 40% of my portfolio.
We're through the crash now, AND my portfolio has been with the Investors Group for about 10 years. Market crash or not, 10 years is more than enough time to decide how your portfolio is doing.

Right now, (portfolio value - money in) = ~47,000. Let's round it up to about 50,000 and pretend my financial adviser made me 50,000. And obviously not all the money went in at the same time, but spread out over the years after an initial lump sum.
To make about 50,000 over 10 years from a lump sum of 50,000 ten years ago would require an annualized return of +7%. That's basically 50,000 compounded every year at 7%. You would end up with 98,357.57.

I started with much more than 50,000. And over the years, I put in enough that the current book value is over 170,000. And 7% annually? -- You can get that from a balanced fund with much less volatility that what I was prepared to take (for the last few years have sat at 95% equity).

So where did all my money go? Where were my returns? And this, after accepting Very High Risk (willing to tolerate very high volatility). To go even higher risk, my adviser suggested there were still some sectors like gold or resources that she could put me in, but that came with a warning -- That I might see a drop for several years, that it might never recover.
Obviously a pretty good scare, and yes, I was scared. But not anymore. I now know that is probably because she has her hands tied with a very limited family of funds, but she didn't want to say it.

I probably didn't do more than what would work out to be 3%-5% annually for 10 years, and likely it was because of a couple of crashes where we came out just breaking even -- thus losing any gains for 2-3 years.
For example in 2008 I lost 41%, in 2009 I gained 56%. If you do the numbers for the two years, I'm still at -8% after 2 years. We did 12% in 2010, but that only puts me at +3% after 3 years. 12% sounds great. 56% sounds really great and certainly looks bigger than 41%. But this isn't addition -- this is multiplication:

(1.00 - 0.41) * (1.56) * (1.12) = 1.03.

I'm grateful for my financial adviser's time and patience and friendship. But 10 years is a lot of lost time to have my portfolio stuck in a rut of poor returns. More than that, it's 10 years more I have to wait to get closer to my financial goals and what that means for my lifestyle, security, and dreams.

You can always make more money. But you can't make more time.

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