Investment companies have a responsibility to provide clients with personalized returns. However, merely showing clients how much their accounts have grown or declined without providing sufficient context can leave them unable to gauge the performance of their investments. In a submission to the Carrick on Money newsletter’s Q&A section, a reader expressed concerns about his managed account’s 6.4% return over the last five years and wondered how it compared to other managed accounts and do-it-yourself (DIY) investors.
To facilitate a better understanding of investment returns, investment companies should offer clients benchmarking information. Ideally, these benchmarks would include a blend of stock and bond market indexes relevant to the client’s portfolio mix. Indexes are effective benchmarks since investors can easily access a wide range of well-known ones using low-fee exchange-traded funds (ETFs). If a portfolio cannot outperform ETFs, investors may opt to invest in those instead.
A straightforward approach for assessing returns is by comparing them with the results of asset allocation ETFs. Asset allocation ETFs offer fully diversified portfolios packaged into a single fund. These portfolios come in conservative, balanced, growth, and all-equity options, allowing investors to choose the one that closely matches their portfolio and utilize it as a benchmark.
Regarding the reader’s 6.4% five-year return, even though the portfolio mix was not specified, assuming a medium risk mix of 60% stocks and 40% bonds is reasonable. In such a case, a suitable benchmark would be the Vanguard Balanced ETF Portfolio (VBAL), which achieved an average annual return of 4.8% over the five years until October 31. For a portfolio with approximately 80% stocks and 20% bonds, the Vanguard Growth ETF Portfolio (VGRO) would be a relevant benchmark. Likewise, the Vanguard Conservative ETF Portfolio (VCNS) aligns with a 40-60 portfolio.
It is essential to match the correct end dates when benchmarking investment returns. Stock and bond markets are volatile, meaning that five-year results can fluctuate significantly based on the month. For instance, VBAL had an average annual return of 4.2% for the five years until September 30.
In the case of the reader who sought advice about their returns, it appears that they have had a commendable performance over the past five years, a period marked by market volatility. However, it raises the question of why their adviser and investment company neglected to present this positive news to them.
Q: What should investment companies provide in addition to personalized returns?
A: Investment companies should provide benchmarking information, including a blend of stock and bond market indexes relevant to the client’s portfolio mix.
Q: How can investors compare their returns effectively?
A: Investors can use the results of asset allocation ETFs that closely match their portfolio as benchmarks.
Q: Why is it important to consider the correct end dates when benchmarking returns?
A: Stock and bond markets are volatile, causing significant variations in investment returns over different time periods.
Q: How did the reader with a 6.4% return over five years perform compared to relevant benchmarks?
A: Assuming a medium risk mix of 60% stocks and 40% bonds, the reader’s return outperformed the Vanguard Balanced ETF Portfolio (VBAL) which achieved an average annual return of 4.8% over the same period.