Global Equities Are Basically Where They Were In November 2017

If we use the All Country World Index (ACWI) ETF as our proxy (a little over 50% of this index are U.S. equities), we can draw a straight line back to November 2017 from yesterday's close where the price is the same.

There has been a huge swing in that price over this period: falling about 21% from the January 2018 highs to the December 2018 lows and back up to yesterdays close which is about another 16% swing higher. And, it is probably not the end of the volatility.

Suffice it to say, with an annual dividend yield of approximately 2% on this ETF, that would have been your passive portfolio gain since November 2017. You are definitely going to have to be rather patient if you want to see this ETF get back to historical average returns:

The total return on ACWI for the last 10 years (monthly data) has been about 9.25% average annual return. This is in $US terms, the weaker $C will have been a bonus for Canadian investors over this period, but for simplicity, lets just focus on the actual return here. If you had a fully-invested, balanced portfolio (60% equity / 40% fixed income) over the last 10 years, 60% of 9.25 = 5.55%, would be the approximate annual return of the equity allocation in your portfolio.

For the fixed income allocation: 

Let's use the proxy of the Canadian Bond Index ETF, XBB. 10 year total return is about 4.14%. 40% of 4.14% = 1.66%.

So the combined 60/40 portfolio would have an approximate average annual passive return of about 7.21% over 10 years. That can be a simple benchmark for comparison; If your passive portfolio has given you at least this return or better, then you are doing just fine.

If it has not, time to do a little homework: ETF MER's are included in the returns above. Time to assess what you are paying for returns that returned anything less. If you own mutual funds (why does anyone own these expensive investments?), in all likelihood, your return will be considerably less. 

For example, the (actively managed) RBC Balanced Fund has a 10 year average annual return (as of June 30, 2019) of 5.5%. The MER is 2.15%.

Simple future value formulas on a $100,000 investment for 10 years suggests a difference of close to $30,000 between the two options.

Most of the difference? The fee. The MER. And that cost is not tax deductible for your income tax returns.

If the passive portfolio is under-performing the averages at the moment, the MER's of the actively managed portfolio are going to likely be dragging performance into negative territory.

Unless, of course, the actively managed portfolio is able to take advantage of some of the volatile swings in the  global equity markets and add value. Or find ways to enhance bond returns above the average on XBB. Good portfolio management will do that. Perhaps that can be paid for, but you should always know the costs and ask the tough questions about what you are paying for.

1) Financial Planning (at High Rock we call it a Wealth Forecast)

2) Investment Strategy: Active or Passive (should be cheaper) and most importantly, re-balancing.

3) Personal Service (are you a human being or just a number?)

4) Regular monitoring, reviewing and updating of plans and strategy.

When portfolio growth is robust, usually in the earlier stages of the economic / investing cycle, we tend to put the management of our wealth down on the list of our priorities (we get fewer inbound calls at High Rock, probably the same for most in the financial advice world). When growth of returns slows and there is under-performance relative to the historical averages or risk asset markets start to head lower as they may at the end of an economic cycle, financial awareness sometimes starts to creep higher on people's priority lists (and we get more inbound calls, mostly from folks who are checking into our High Rock philosophy of disciplined investing).

Now, interestingly, with global equity markets little changed from almost 2 years ago, showing increasing volatility and behaving as risk markets might at the end of the cycle, it is the latter. 

If you find yourself reviewing your financial status and having a call with an advisor or portfolio and wealth manager (big difference, by the way), ask the tough questions (especially about fees and what you pay for) and make sure you get good answers, clear and concise and sensible (and that you fully understand them).

and that ... historical performance is not a guarantee of future returns!