Do you Ever Feel Like the Market Goes Up and Your Portfolio Doesnt Go Up as Much?
Have you ever had that feeling? I know I have, and I certainly fielded those questions in the past from clients. If you do have that feeling then you may be told that it’s the investments you have, or “we need to change strategy,” but in my experience, it probably means that the fees are eating up your returns.
Yes, I mean the amount you’re being charged by your advisor, but also the cost of the investments you own. I hear stories all the time that “my guy only charges me 1%,” yes that could be correct, but you need to look at the cost of some of the assets you own. If you own a mutual fund or an ETF, they have management fees inside the fund that comes out of the return. For instance, if your fund has a 1% management fee, your return in your fund Net Asset Value (NAV) on your statement will already have the fee deducted. Then if you have the advisor fee as a line item you’ve now effectively paid 2%.
If that doesn’t sound like a big deal, the power of compounding will change your mind. We’ve all heard about the power of compounding, when you invest money into a fund that gives you a rate of return, your money grows by that rate. But that rate not only applies to your initial investment, but also the amount your money has grown. So, the more it compounds the more you have. The more you have the more it compounds.
The opposite is also true. Fees compound as well. For instance, even a seemingly small fee like 1.27% (the average actively managed mutual fund cost according to Rebalance IRA) can eat away almost 30% of your return when compounded over 10 years.
Ok how can you get on top of this? Well, first I would suggest that you understand what you’re invested in. This will help you measure against the appropriate benchmark. If you’re invested in cash and bonds, you can’t expect to make stock market returns each year. If, however, you’re invested in all stock then you should measure yourself against an appropriate index: S&P 500, DOW Jones, or Russell 2000 etc.
I publish each quarter on my website returns for the S&P 500, a conservative index consisting of 40% bonds and 60% stocks, and moderate index consisting of 60% stock and 40% bonds. These figures are index figures and you can then measure how your portfolio did against the benchmarks. It’s not about how you performed in any period, it’s about how you performed against your index net of fees.
For those that have not seen my buy/sell sheet, it’s a graph that shows both where I think the market will be on a three-year rotation, and highlights where it is now. The yellow line is where I think the market should be, and the blue is where it is. The lines above are 5% either way. Again, check out the website, mickcpm.com, as we update it every week.
I hope this helps you look in the right direction if you have had that feeling of not keeping up when we’ve had a good market run. If you have any questions please don’t hesitate to give us a call.
Any opinions are those of Mick Graham and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. The Russell 2000 index is an unmanaged index of small cap securities which generally involve greater risks. Barclays Capital U.S. Aggregate Bond Index is made up of the Barclays Capital U.S. Government / Corporate Bond Index, Mortgage-Backed Securities Index, and Asset-Based Securities Index, including securities that are of investment grade quality or better, have at least one year to maturity, and have an outstanding par value of at least $100 million. Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Holding stocks for the long-term does not insure a profitable outcome. Investing in stocks always involves risk, including the possibility of losing one's entire investment. There is no guarantee that any statements, opinions or forecasts provided herein will prove to be correct. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Investors should consider the investment objectives, risks, and charges and expenses of mutual funds & ETFs carefully before investing. The prospectus contains this and other information about this investment. The prospectus is available from Mick Graham and should be read carefully before investing.
