Dear Nancy Woods,
My returns last year were not as good as the market. Now that we are starting a new year, what should I be doing to improve my returns?
Signed,
Dave
Dear Dave,
2013 was a banner year for the markets - especially the U.S. Be very careful about comparing the return on your portfolio to that of the general markets. The indexes are the benchmark that portfolio managers are usually measured against. If managers "outperform" the benchmark, sometimes they are issued a performance bonus.
The Dow Jones industrial average is only an index of 30 publicly traded companies. In a world of hundreds of thousands of companies, it is a very small snapshot of the economy. The companies that comprise this index are industrial companies and unless your portfolio only owns these, you will not be able to get the same returns.
You need to have a target return in mind. It needs to be reasonable in relation to your asset mix. If you have 60 per cent of your portfolio in fixed income, and interest rates rise, then you are going to see a drop in your portfolio unless your equity portion has an enormous positive return.
If you have a target return of 6 per cent and you own income-yielding investments that pay a 2- to 4-per-cent dividend or interest income, then 2- to 4-per-cent growth is not unreasonable. If you end up with a higher growth, then you won't be disappointed but instead pleasantly surprised. Managing your expected rate of return is a significant part of portfolio management and planning. Not to mention financial planning.
As the yield environment changes (up or down), then you adjust your expected rate of return and invest accordingly. Managing a portfolio is not a stagnant thing. Economic conditions, purchasing power of your dollar, inflation, real rates of return are always changing. You should monitor constantly, and your expectation of how your money is going to work for you should be flexible as well.
Not only do you have to consider the markets, but you must also consider your own personal risk tolerance, objectives and ability to emotionally handle a downturn in the markets.
Nancy Woods is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. Visit her website www.nancywoods.com or send an email request to asknancy@rbc.com. You can send your questions to asknancy@rbc.com as well.
Nancy Woods