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BENCHMARK YOUR PORTFOLIO PERFORMANCE
8/19/2018 9:28:27 AM
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Fund Library Q&A
Your questions about financial planning, investments, and portfolio management answered by an industry expert



By Robyn K. Thompson  | Friday, May 25, 2018




Q –– I consider myself a middle-of-the-road investor, with exposure to both stocks and bonds in my portfolio. But I’m seeing negative numbers on my quarterly performance reports, by my advisor assures me that I have done better than the “market.” I’m not quite sure of what he means. How can I figure out if I’m outperforming the market? What benchmark should I be using for a balanced portfolio like mine? – Rick T., Mississauga, Ontario

A – You’re on the right track when you mention comparing your portfolio performance with a “benchmark.” A benchmark is a market yardstick independent of your portfolio against which your performance can be evaluated. It’s usually an index that tracks the performance of the broader market, like the S&P/TSX Composite Index or the Dow Jones Industrial Average, and so on. But with the growth of financial products over the past 20 years or so, especially exchange-traded funds (ETFs), indexes have sprouted like mushrooms, tracking ever-finer slices of this market or that. Many indexes have been created solely to provide a benchmark for just one ETF or one investment fund or pool, and are therefore virtually useless as a gauge of broader market performance.

So when looking for a benchmark against which to measure your portfolio performance, make sure you find one that isn’t skewed or biased to your own investment portfolio.

A good benchmark has five essential characteristics:

1) It’s unambiguous in that the components of the index or benchmark are clearly specified.
2) It is representative and consistent with your portfolio objectives – e.g, equity, fixed-income, balanced, etc.
3) It is quantifiable and its performance can be measured frequently.
4) It is current and based on marketable securities
5) It is investable, meaning that it can be replicated as a portfolio and its components can be purchased separately.

A benchmark is important from a couple of perspectives. It provides a basis to compare how your portfolio performance compares with a passive (that is, not actively-managed) alternative, and it provides a gauge to measure the performance of the entire portfolio, not just the individual securities within the portfolio.

Some of the most widely watched benchmarks for Canadian investors include S&P/TSX Composite Net Total Return Index, the FTSE TMX Universe Bond Index, the S&P 500 Composite Index Canadian dollar hedged, and the MSCI EAFE Index in Canadian dollars.

It’s important to compare apples to apples when measuring performance. In other words, match your fixed income holdings against the fixed-income benchmark, Canadian equities against the Canadian equity benchmark, and so forth.

One of the most commonly used benchmarks for fixed income in Canada is the FTSE TMX Universe Bond Index or the ETF that tracks it, the iShares Canadian Universe Bond Index ETF (TSX: XBB). You might use this benchmark for your fixed-income portfolio portfolio. One of the most widely used Canadian equity indexes is the S&P/TSX Composite Index or the ETF that tracks it, the iShares S&P/TSX Index (TSX: XIU). You might compare the performance of your Canadian equity portfolio against this kind of benchmark. Remember that if you use the ETFs, there will be a small tracking error because of the ETF cost structure.

If you’re looking to compare your overall portfolio performance with a benchmark, make sure that the benchmark is made up of the same kind of asset mix as your portfolio. In other words, if you have, say, Canadian bonds and Canadian equity, you would use a fixed-income/equity benchmark to make your comparison, and not one that, for example, also includes commodities.

For a low-risk balanced portfolio, then, you might consider a hybrid index using two broad liquid benchmarks for stocks and bonds.

If you entrust your portfolio to professional money managers, remember that an active portfolio manager should beat the applicable benchmark index more often then they miss it. If your returns consistently do not match or exceed the benchmark, or if the benchmark mysteriously changes frequently, then you are in effect paying a manager for poor performance. In that case, you could simply buy the ETFs that track the underlying benchmark indexes yourself and not pay the manager at all.

Whether yours is a do-it-yourself or a managed portfolio, it’s important to do your research, comparing your portfolio performance against the benchmark over various time periods. That way you’ll have a clearer picture of your true performance. If you still have concerns, then speak to your advisor.

Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. She is also listed as a MoneySense Approved Financial Advisor. Contact her directly by phone at 416-828-7159, or by email at rthompson@castlemarkwealth.com for a confidential planning consultation.

Notes and Disclaimer

© 2018 by the Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.

 
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