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Benchmark your investment returns
It is important to ensure that you are receiving value-for-money from your investments, as this impacts on the future lifestyle you may enjoy. The value-for-money equation for investments is often determined by the investment returns that you receive for the management fees that you pay. Whilst management fees (reported as MER) do vary the investment returns generally vary much more. Therefore comparing the investment returns to a relevant benchmark is a great place to start your analysis.
There are plenty of possible benchmarks, but a great place to start is to compare your investment performance to the average of the market. You do this by:
- Working out in which markets you are invested. This is also known as asset classes. (For example: Australian shares, International shares, Listed Property, Fixed Interest)
- Calculate the proportion of your investments in each asset class. This is known as asset allocation.
- Find the average market performance for each asset class. These are also known as market indices.
- Calculate the benchmark return for your overall account by proportioning the market index returns to your asset allocation.
- Compare your actual investment return to the benchmark return
Here is an example of how to do this. Please note that this is an example only and the figures are fictitious, and not to be relied upon.
Asset Allocation
You will find the table below on your statement, which will be posted to you by your superannuation or investment product provider.
The top row headings show the common markets in which you may be invested, known as asset classes.
Each of the investment funds invests differently in each market. For example, Fund A has 94% invested in Australian Shares and 6% in cash. While Fund C also has 94% in Australian Shares but also 4% in Australian listed property.
The final line shows the overall asset allocation of the example account.
Investment PerformanceAgain, a variation of the table below will be found on your statement. Alternatively, your statement may just show the total investment performance of your account, rather than listing each investment individually.
It is very important to note the time period over which performance is quoted. For example is it over 1 year? And if so, until what date? Perhaps the end of the calendar year, or end of the financial year. This is important as you need to compare apples-to-apples.
In the example above, the time period is not shown but let's assume it is 1 year until the end of the calendar year. The overall investment return is shown in the final column titled RoR%. RoR means rate of Return. So in this example it is 12.88%.
Market Index Benchmark
You can find the investment returns of the various market indices published in major newspapers and investment magazines. But the quick and easy place to find them is this website under the Resource Centre. The returns are updated monthly.
View the latest returns and download a calculation tool (spreadsheet).
The table below shows sample investment returns. Let's assume they cover the exact same time period as the example statement above.
In the second column I have inserted the asset allocation percentages of the example account. For example 44% in Australian Shares.
It is important to compare apples-to-apples, so you need to blend the market index returns to match the same asset allocation as your account. You will then have an index return that can be used to benchmark against the returns of your account.
To obtain the weighted average you proportion the returns. For example, over 1 year:
- 44% x 22.45% (Australian Shares); plus
- 40% x 16.82% (International Shares); plus
- 10% x 12.70% (Australian Property Trusts); plus
- 6% x 5.73% (Australian Cash)
Equals a weighted average of 18.22% over 1 year.
Compare the benchmark to your accountHaving obtained the 1 year benchmark of 18.22% you then compare that to your actual return, which in the example is 12.88% over the same time period.
If this was your real account you may not be very happy, because your investments have under-performed the average market by 5.34% over one year.
Now what?Having made an apples-for-apples comparison (we presume) you are now in a better position to make an informed investment decision. But a strong word of caution: don't make your decision solely based on past performance. Often it won't be valid as there are many other variables to consider that impact on the future likelihood of above-benchmark returns.
For example the professionals who work for your managed investment company could decide they want to work elsewhere. They can change jobs just like you may change jobs. Depending on how important they were in the process the future investment returns for that managed investment may be impacted.
The people in the best position to assist you in evaluating the future likelihood of above-benchmark returns are financial planners. They have access to detailed research about the systems, process and people who work in the investment companies. And it is those factors that have a far greater impact on future returns.
Unless you are taking over a million dollars directly to one investment manager they won't have a personal meeting with you. Yet, financial planners often have the opportunity to meet directly with the people managing their clients money.
So tap into the experience of your financial planner to help you select investments appropriate to your goals. And if you don't yet have a financial planner contact us to discuss how we may help you to own your financial future.
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Matt Hern trades as FINDRE
(Empowered Wealth Pty Ltd t/as)
ABN: 21 592 525 720
Phone: 08 9467 7320, Fax: 08 9463 7848
PO Box 259, Bull Creek, Perth, Western Australia 6149, Australia
Website: www.MattHern.com.au
Blog: www.Money-Guide.com.au
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