Your Annual Review

on Friday, 13 March 2015. Posted in , ,
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This article was first published on Talk Magazine Shanghai 2015 March edition.

So you just sat down with your advisor to do an annual review of your investment account and despite many markets sitting at near all time highs, you see that your account is barely in the black after four years of investing. Your advisor gives you a lot of excuses, “It’s the weak currency”, “the Russian financial collapse” or, “oil price volatility”, but in reality, it might be something else that your advisor is afraid to tell you. After years of poor returns, it might be time to look under the hood to see what is keeping your account from at least keeping up with the market.

There are a couple of reasons why your portfolio may be significantly underperforming the market. One, either your advisor is not doing a good job in providing broad based diversification, but rather making bad bets on individual stocks or specific market sectors. Or two, the fees you are paying are dragging down your returns. More than likely it is a combination of both.
Annual Review

You should start by focusing on last year’s results and the impact they’ll have on achieving your financial goals. You should ask, what specific investments contributed favourably towards my overall investment performance? What specific investments hurt my overall portfolio performance? Looking back, what would you have done differently? If your advisor has an indexing strategy, which we highly recommend, your returns should be close to the benchmark you are trying to beat, and the review would revolve more around rebalancing the portfolio rather than guessing on which sector or individual stock to invest into.

Indexing is a proven investment strategy that eliminates the nearly impossible task of market timing and asset selection, and allows the advisor to concentrate on asset allocation and portfolio rebalancing. Index funds are low-maintenance, low-cost mutual funds designed to follow the price fluctuations of a broader index, such as the S&P 500 and the Dow Jones Industrials. Studies show that a portfolio of broad based index funds that invest in uncorrelated assets such as, stocks, bonds, real estate and commodities provide for consistently higher returns with a lower level of volatility than an actively managed portfolio.

An annual review is a good time to take a closer look at your investment fees. If you don’t know already, ask your advisor how he gets compensated – is he a commission or fee-based advisor? In other words, has your advisor already been paid for his advice or does he have a vested interest in the performance of your account? If you are using an investment platform, reconfirm the annual platform fees, transaction/switching fees and fund management fees. What you find may surprise you and could be a significant reason as to why your portfolio is not meeting your expectations. If all of the annual fees added up are greater than 1.5% of your assets, then you are paying too much and you should re-evaluate your options.

At the end of the day, if you are using the investment as your primary means to save for your retirement or your children’s education, it is in your best interest to make sure it is performing as it should. Time can be your ally or foe, make sure you take advantage of what time you have left by being properly invested.

Your Annual Review

Bill Longstreet has been a financial advisor since 2003 and prior to this were a institutional business development director, specializing in fixed income and foreign exchange markets. Bill has a Master in Business Administration with a concentration in Finance (1999) from the Olin School of Business at Washington University in St. Louis and am a candidate for the CFP (Certificate Financial Planner) qualification. He also holds a Bachelor of Arts with a Major in Economics from Denison University. In his last position before joint Caterer Goodman oversaw $350 million in client funds across a range of currencies and risks profiles.

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