Are Your Investments Performing?
My observation is that many
people with investment portfolios receive less than market returns and take
higher than market risk. This means they
have inefficient portfolios.
two primary reasons for this.
people do not construct investment portfolios on the basis of an intelligent
framework (or model) for making investment decisions. Most investment portfolios are constructed on
the basis of intuitive predictions and the last best investment.
people measure their return on capital but don’t understand that this is
meaningless information unless it is compared with a market benchmark (are you
receiving more or less than the market rate of return?). Also, most people don’t measure how much risk
they are taking compared to market risk (managing risk is the key to investment
Click here to read about
basic investment principles that should be a part of your framework for making
Measuring the efficiency of your investments
investments carry risk
return are related
investments (cash) deliver a low return and high risk investments (shares)
deliver high returns
return you receive for making an investment is the reward for the amount of
risk that you take
and managing your risk is the key to successful investing
Your Minimum Return
someone advises you to invest in the stockmarket, then as a minimum you are
entitled to the market rate of return
invest in an indexed fund and you will receive the market rate of return
people do this and instead they choose to invest actively to receive a higher
people fail to achieve the market rate of return and few are able to
consistently achieve a higher than market return
the Risk and Return of your Investments
important that you understand where your investment return is generated and
where you are taking risk. The only way
that you can know this is to measure it in your investment portfolio. If you don’t measure risk then you can’t
measure your risk and return and show you where you are taking too much risk.
a service where we measure and analyse the different elements of your portfolio
that affect risk and return (we call this a Benchmarking Analysis). We then compare the risk and return of your
portfolio against the market risk and return and other benchmarks. This places you in a position where you can
understand how efficient your portfolio has been in capturing the return of the
asset classes in your portfolio and you will see whether you are taking any
risk that is not rewarded with an appropriate return.
how we do it.
Our process is to collect data on the month end prices of
each of your investments and we can then calculate the average annual return
your portfolio would have delivered if you rebalanced to your present asset
allocation annually (which you should have done). We will also calculate the return of each
individual investment and the amount of risk you have taken in each investment,
as well as the overall portfolio. We use
standard deviation to calculate risk.
We will construct a market portfolio made up of indices with
the same asset allocation as your portfolio and perform the same measurements
over the same time period.
The market portfolio gives us the market (or index) rate of
return for a portfolio with your asset allocation. This is
the minimum return that you should receive. The risk of the
market portfolio gives you a benchmark to compare with the risk in your
portfolio. You will then be able to observe how efficient your portfolio is, in
terms of being rewarded for the risk that you take.
Click here if you would
like us to prepare a Benchmarking Analysis of your portfolio.
a fee for this service. The fee relates
to the number of investments in your portfolio and therefore the amount of time
we spend in analysis. We will advise you
of the fee and ask your approval before we do any work.
website has been designed by Adjunct Professor Wesley McMaster of Victoria
McMaster is also a Certified Financial Planner and an Authorised Representative of DDM Financial Planning Pty Ltd, AFSL no. 384727.