At the beginning of each year, we receive our portfolio statements, which show us how our investments have performed. Most of us take note of the values and leave it at that. But haven’t you ever wondered whether the returns you have achieved are really good? Whether and how you could have achieved a higher performance? In this article, we want to explore this topic further.
Assessing Performance
The first task is to be able to make a rigorous assessment of the return achieved. This requires some effort, but it is doable. Hopefully you are pursuing a clear investment strategy. How is it defined? Most investment strategies can be categorized on the basis of equity exposure: from income strategies (no or almost no equity exposure) to dynamic strategies (80-100% equity exposure). There are also wealth managers with whom you do not agree to a specific equity allocation, but rather a individual risk profile that is implemented with various asset classes based on opportunities and which target specified returns.
A good comparison of performance compares apples with apples and pears with pears wherever possible. So if you want to categorize your returns properly, you need to apply the correct benchmark. For example, if your money is invested in a “balanced” strategy, compared it to such strategies. As you know, hardly any providers publicize the returns they have achieved. Notwithstanding this there is a good alternative: wealth management funds. In the case mentioned above, look for “balanced” wealth management funds (also known as mixed funds, strategy funds or portfolio funds) that work with similar guidelines to yours or your wealth manager. It is best to take 3-4 funds and average them out. Admittedly, the search for suitable investment funds from the thousands on offer is tedious. But once you have done the work once, you can use the same funds every year.
To be able to make a accurate comparison, you also need to consider the costs. If you want to compare your own return after deducting all costs, don’t forget to include the custody account fee for the investment funds. In addition, distributions must be taken into account; depending on whether your interest and dividends are included in your return figures or not, you must select accumulating or distributing investment funds as a comparative figure.
Once you have compared your returns with the competing products, it’s time to interpret them. If your performance is comparatively better, you will probably leave it at that and sit back and relax. If your performance is worse, you will want to know why. There are almost infinite possibilities for this. It could be due to the geographical or currency composition of your securities, the proportion of equities, the average remaining term of the bonds, whether or not hedging has been undertaken, the selection of individual securities and so on.
It is normal to have a bad year from time to time compared to your competitors. Even the most successful wealth managers are sometimes off the mark. If, on the other hand, you notice a lower return over several years, you should take action.
Options for Actions
Do you manage your money yourself? Then ask yourself honestly and objectively why you should be able to do this better than professionals who deal with nothing but investments every day. Costs are often cited as a reason for managing your assets yourself. Sure, you save the wealth management fee. However, a good wealth manager recoups his fees through better performance. Another frequently cited reason for self-management is a lack of trust in one’s bank or a lack of knowledge about who are actually trustworthy and successful wealth managers. Since FinGuide AG was founded, however, this argument is no longer valid, because FinGuide guides you simply and free of charge to the provider that best suits your needs.
The easiest way to increase your target return is to increase your risks, because taking risks is rewarded with a higher return in the long term. If your risk appetite (how much risk do you want to take?) and risk capacity (how much risk can you take?) have changed since you defined your investment strategy, this may be a good option. However, increasing risk without taking into account your risk appetite and risk capacity can go very wrong. The key questions you need to ask yourself are (1) how long will I not need the funds invested and (2) what level of loss will I not lose sleep over?
Do you have your money managed? Then you will hear exactly why your return is lower than that of the competition in the annual performance review meeting. And the reasoning will always be that your provider did everything right and had very good reasons for the decisions taken. If you come to the conclusion that you are not satisfied with the performance of your bank or wealth manager, switch! FinGuide will help you find the right provider.
The switching rate of private banking clients in Switzerland is very low. As a result, many providers that do not offer any real added value are able to survive for a long time. The lack of transparency about the performance achieved protects the bad ones. If more bank customers were to look at their returns, the bad providers would lose their customers and the good ones would gain new ones. But the competition only plays if customers are informed and prepared to act. Are you?
FinGuide helps you to find the right wealth management for you. You can find more information on our homepage.
