It’s time you knew how you’re doing

Clear portfolio reports are coming. But will clarity protect investors from dumb mistakes?

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From the January 2017 issue of the magazine.

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crm2

Illustration by Robert John Paterson

Investors are about to get a much better picture of how fast their money is growing. This is great news because tracking how well you’re doing is a lot harder than it sounds.

Hands up if you diligently calculate your portfolio return at the end of the year, including not only dividends and distributions, but also lump-sum contributions (or withdrawals) on a dollar-weighted basis to reflect the date and sum of those transactions. That, dear readers, is called a personal rate of return, and you no longer have to do it yourself; it will be provided to investors starting in the new year, in addition to stronger fee disclosure, under Client Relationship Model Part 2 (CRM2) regulations.

We could all do with a clearer snapshot, whether we use an advisor or do our own investing. Being a self-directed investor, I’ve always tried to use the tools and performance measures provided, but it’s easy to use them wrong. While many online brokers have introduced dollar-weighted performance tools, you have to dig for them. Meanwhile, the daily and cumulative changes featured on the main screen are the ones most investors pay attention to and these can easily throw you off your game. If you see BCE and it’s up a cumulative 77% you can’t help but feel good when you log on. But there is no reference to when you bought it and it may well be way underperforming the market.

Why you may not know how your portfolio is doing

There are other ways performance measures can trip up investors. For example, I hold ETFs whose distributions are automatically reinvested, but my account screen treats them as new contributions, which overstates the book value (what I paid for the ETF holding). In some instances, my ETFs might show a negative return when I’m actually up. Another ETF I have won’t reinvest its dividends, paying them to cash instead. In this case, the performance figure I see is based only on unit price, which is just half the picture. All of which is to say, ‘How you doing?’ isn’t always an easy question to answer. CRM2 will fix that.

What these cumulative moves are useful for is tax-loss selling in non-registered accounts. But they are the most prominent performance measure on screen, so you have to think a lot of investors have made trades based on them. Having lots of partial information at your finger tips doesn’t help, whether you’re investing or trying to self-diagnose on a medical website.

New rules

The new rules call for dollar-weighted returns over periods of one, three, five and 10 years. But don’t expect the industry to start providing all those numbers right away, cautions Tom Bradley, founder of Steadyhand Investment Funds. If banks or fund companies drag their feet and just offer one-year returns, that could reinforce short-term thinking, which is never a good thing in investing, he says.

Lots of us are wondering if all this clarity will actually help investors make smarter decisions? Maybe. A clear picture of subpar returns, combined with a cold-water splash of fee disclosure, could lead some investors to dump their advisors. That’s one impact. And an investor who keeps making reckless, money-losing trades might learn to curb her actions if she got a clearer picture of her underperformance due to that trading.

Then again, another investor might look at his statement and find a rationale for even more ill-advised trades. “There’s not enough understanding about the vitally important role of investor behaviour,” stresses John De Goey, a portfolio manager with iA Securities. In other words, clearer statements spell clear progress but they’re unlikely to stop investors from making the same self-defeating decisions they always have.


 

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