What is your personal rate of return?

By now many of you have gotten your year end investment statements.  So how did your portfolio do this year?  There are many ways to figure out how you did but the best way is to understand your personal rate of return.

Too many are clueless

Most people I talk to don’t really know how their portfolio is doing so let me offer some of my might take a quick glance and a few people might really take a detailed look.

Relative benchmarking

One of the ways to evaluate the performance of the portfolio is to look at the returns relative to the appropriate benchmarks

2012

2011

2010

2009

2008

Cash

0.90%

1.00%

0.54%

0.63%

3.33%

DEX Universe Bonds

3.60%

9.67%

6.74%

5.41%

6.41%

TSX Composite

7.19%

-8.71%

17.61%

35.05%

-33.00%

S&P500 (CAD)

13.49%

4.51%

9.19%

9.26%

-22.85%

MSCI EAFE (CAD)

14.78%

-9.66%

2.68%

14.44%

-30.27%

How can this market data help you to review our own portfolios?

Take a look at the investments in your own portfolio and try to figure out how each investment did against these benchmarks. For example, I own the BMO Guardian Growth and Income Fund which has 98.7% Cdn Equities and 1.3% cash.  In 2012, this fund made 9.1% which was better than 7.19%.

On the other hand, I also own the Clarington Global Opportunities fund which only made 4.4% in 2012 which really under-performed the 2 global indices.

Are you using the right benchmark?

Most people have lots of different investments and sometimes it’s not easy or appropriate making comparisons to a proper benchmark.  For example, let’s say you own a bond fund that invests in mostly shorter term bonds.  Comparing it to the DEX Universe Bonds may not be the best for comparison purposes.

In this example, it may be best to use the DEX Short Term Bond Index for comparison instead which made 2.01% last year.

If you want to get a little more detailed, try to come up with your portfolio asset mix and then compare it to a weighted return of the market indexes above.

Investment returns vs Investor returns

Up DownThere is a difference between an investment return and the investor return.

Globefund, Morningstar and Fundlibrary provide investment returns.  Let’s look at another example using the TD Dividend Income Fund.  If you look up the performance of this fund, last year, this fund made a very respectable 9.3%.

The problem is this return is the investment return and not necessarily the investor return.  The only way the two would match is if the investor invested all the money on January 1, 2012.

If I put away equal amount of money away monthly into the TD Dividend Fund, my personal rate of return would be 8.7% because not all the money was put to work at once.  As you can see, there’s a difference between the investment return (9.3%) and the investor return (8.7%).

Know your personal rate of return

It is so important to know your personal rate of return.  Your personal rate of return is the only proper way to know how your investment portfolio is doing.

What is the personal rate of return?  A personal rate of return takes in to account several factors can affect your returns over any time period.  A personal rate of return accounts for things like contributions, withdrawals and fees. You can have 2 different investors that invest in the exact same investment but they may have different personal rates of return because they invested in that investment at different times.

Some statements provide this information but not all do.  My statement does not give me this information so I have to calculate it.  If your statement does not give you your personal rate of return, there are a few ways to figure it out:

  1. Call your financial advisor or institution and ask them to provide your personal rate of return.  If they won’t figure it out for you, then find a new advisor or try to figure it out yourself.
  2. There are a couple of great online tools to help you figure it out yourself.
    •  I used this personal return calculator from Weigh House.  It’s simple and easy to use.  You have to enter the portfolio value at the beginning of a period and the value at the end of a period.  I used a one year time frame but you can use any time frame you want.  It’s important to enter all the deposits and withdrawals so if you trade regularly then there will be a lot of data to enter.  Using this calculator, my RRSP portfolio made 8.68% last year.
    • For those that are a little more analytical, you may want to use a tool created by the folks at PWL Capital called the 2012 personal rate of return calculator

Remember, nobody cares about your money than you.  If you want to start understanding how your investment portfolio is doing, you have to understand your personal rate of return.

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace.For more information you can follow him on Twitter @JimYih or visit his other websites Group Benefits Online and Advisor Think Box.

One Response to What is your personal rate of return?

  1. Our rate of return was just under 6% which given we are ultra-conservative investors suits us well. It is very important to keep an eye on the ROR of all forms of savings as even company defined contribution plans may need adjusting from time to time.

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