It is time for your end-of-the-year performance audit. So today, here are my seven questions to ask yourself if you manage your investments or your financial professional when auditing your account.
First, while reviewing your portfolio returns for 2020, compare your holding’s returns with that of the market or investment benchmark. For example, compare your holding returns with SPY, the main tracking fund for the S&P 500. If you have bond funds, then compare them with a bond index benchmark. Always compare apples to apples for a fair analysis. Second, research proves that low-cost index funds and ETFs tracking market benchmark funds beat most actively managed mutual funds.
As I type, the S&P 500 has a respectable 15%+ return for the calendar year. The beats an average 8% return by 7%. Hopefully, your returns will be at least equal to or higher than the returns of the market. But, what if they’re not?
In reviewing your 2020 investment results, you need to already know your returns in three different time frames depending on how long you have owned them: Long term — since March 2000 — and from March 2009 to date. Plus, you should also know your cumulative returns for each security, at least monthly.
Unfortunately, many account statements are not designed to give data for these timeframes. If yours does not, it can be available upon request. If your securities outperformed the market, or more importantly, its tracking benchmark, that is fantastic. If not, you need to determine why.
If your equity positions are not matching the returns of the market and are looking for alternative investments then research zero-commission, low expense index ETFs (Exchange Traded Funds). See my upcoming columns for how many main index ETFs fared in 2020.
Being a financial advisor or broker must be one of the most difficult occupations in the U.S. Also, there are good ones and bad ones, just like any occupation. The majority that I have met or coached are hardworking Americans, working in a difficult environment. Unfortunately, a small number are salespeople selling products that are better for the brokers’ company than for their clients. See previous columns on the term fiduciary.
Conversely, advisors or brokers would love to have better-educated clients. If you are wondering if you have a professional or simply a salesperson, here is an acid test (so to speak).
Review the following questions; if your financial professional has already covered these topics, you have your answer. If they have problems with these questions or you cannot get the facts, then you also have your answer. Let’s begin with these fair questions:
1. What is your market outlook for 2021 and beyond?
2. How did my securities perform after the 2020 sell-off?
3. What is my current allocation of securities … in percent and dollars?
4. What is the total performance of my account and each position since we began … and year-to-date?
5. What fees did/does your firm receive from my investments — monthly commissions, 12b-1 fees, etc.? Does your firm receive an end of the year revenue sharing from my Mutual Funds or Annuities?
6. What are my ongoing costs/fees for each security?
7. What is our strategy for when we have another sell-off?
These are fair questions that few investors ask — but should. Remember, it is YOUR money and not theirs. Sometimes this gets lost in the shuffle.
Professional money managers will have covered these areas when they suggested the securities that you purchased — they will have no problems answering these questions.
Be sure and update your investment goals, especially if they have changed. Finally, professional brokers like an educated client, so give them a fair opportunity to earn and keep your business.
Next, if you manage your own money then you need to answer the same questions. Be honest. If you don’t have a clue to the answers then you need to reconsider your decision to manage your own money.
If you have additional questions or need an account audit, email me at my address below.
Plan your work, work your plan, and share your harvest!
David O. England is an investor/trader, financial analyst/educator/lecturer and Associate Professor Emeritus of Finance. This column is for educational purposes only and not intended as financial advice. Past performance does not dictate future returns. Questions? Send to email@example.com.