Answer
Understanding investment returns is crucial for making informed decisions about your portfolio. At KWB, we emphasize that these returns represent the gain or loss on your investment over a specific period, and they can be influenced by various factors such as market conditions, inflation, and the type of assets you hold. By carefully analyzing your investment returns, you can assess the performance of your portfolio and make adjustments to align with your financial goals.
Overview
This guide outlines how investment returns are calculated and the various factors that influence them. It also presents a labeled real-world hypothetical, featuring a business owner named Sarah, to illustrate these concepts with practical application.
- Investment Returns: Gain a comprehensive understanding of investment returns and their impact on your portfolio.
- Common Questions: Find answers to frequently asked questions about investment returns in our FAQ section.
Understanding Investment Returns: A KWB Guide for Business Owners
Returns
One thing frustrated investors often lament are their returns. So here’s a question. Do you know what your returns really are?  We think you should. We strongly believe that it is the responsibility of financial advisors to provide you with details about your returns
Ideally, you should be given one return as if all your accounts were a single consolidated portfolio. These returns should be provided to you (on an after fee basis) so that you can see the big picture. Does knowing that your $25,000 TSFA returned 8%, while your $350,000 RSP earned 3.5% and your $250,000 personal account earned 5% often leave you wondering how much your wealth grew by?
Evaluating
Once you do know your consolidated return…are you outperforming or under-performing? Should you keep doing what you’re doing or change strategies or advisors? A pure statistician would argue 20 to 30 years of performance data is required to properly evaluate manager luck versus manager skill.
The choice of hiring a new advisor or changing your current advisor is of immense importance no matter what size of portfolio you have and this should be an educated decision. Practically speaking, you should give your financial advisor at least 3 years in order to assess their investment results.
Benchmarks
An easy way to expose poor results is to compare your portfolio return to an appropriate benchmark return. It also shows if your financial advisor’s management is helping or hindering the performance of your portfolio. There are many benchmarks for each of the asset classes: Canadian stocks, U.S. stocks, international stocks and even bonds. Two common benchmarks are:
S&P TSX Composite Index:Â This index currently consists of 234 Canadian companies chosen from 10 industries. This index provides an indicator of Canadian stock market performance.
S&P 500 Index:Â This index includes approximately 500 U.S. companies chosen to provide an indicator of U.S. stock market performance. It is one of the most widely followed stock market indices and is considered a good indicator of the U.S. economy.
Benchmarks make it crystal clear whether you are capturing the full returns of the market over time. Mutual fund managers have fared poorly versus their benchmarks. For the five years ending 2011, only 2.7% of Canadian stock mutual fund managers beat the S&P TSX Composite Index return after fees and expenses, and just 11% of U.S. stock funds outperformed the S&P 500 (in Canadian dollar terms). http://www.spindices.com/documents/spiva/spiva-canada-year-end-2011.pdf
You have to be careful when choosing or changing a financial advisor, and you should gain as much information about your stock portfolio as you can. Only then are you truly an enlightened investor able to make educated decisions that bring you desired results.
If you would like more information or have any questions, feel free to contact us at 780.466.6204, or click here to send us an email.
Thanks to Chris Turnbull of The Index House for providing much of this content.
The Index House is a division of Polaris Financial Inc.
FAQ
To further enhance your understanding of investment returns, we’ve compiled answers to some common questions about this crucial topic, specifically tailored for investors in Edmonton, Alberta.
| Question | Answer |
|---|---|
| What specific types of investment returns are most relevant for investors to understand in Edmonton, Alberta? | In Edmonton, investors should focus on understanding capital gains from asset sales and income returns like dividends and interest. These are essential for accurately evaluating your portfolio’s performance within the local investment landscape. |
| What are the primary methods for calculating investment returns for investments in Edmonton, Alberta? | Calculating investment returns for your portfolio in Edmonton, Alberta, typically starts with determining the percentage gain or loss from your initial investment. For more complex investments with varying cash flows, sophisticated annualized metrics like Time-Weighted Rate of Return (TWR) or Money-Weighted Rate of Return (MWR) provide a comprehensive view of performance. These methods help investors in Edmonton assess their financial growth accurately. |
| What makes understanding investment returns essential for investors in Edmonton, Alberta? | Understanding investment returns is essential for investors in Edmonton, Alberta, to accurately assess portfolio effectiveness and make informed decisions. It ensures investments align with local financial goals and helps identify necessary adjustments for optimal performance in the Edmonton market. |
| Why is adjusting for inflation essential when evaluating investment returns in Edmonton? | Adjusting for inflation is essential when evaluating investment returns in Edmonton because it reveals your true purchasing power. While nominal returns indicate monetary gains, real returns account for inflation, showing your actual wealth growth. This adjustment helps determine if your investments are genuinely enhancing your financial standing over time. |