Measure It Up

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Certified financial planner Scott Leonard has some clients who've been averaging a 20 percent return a year over the past five years. Sounds pretty good, huh?

Not when you realize that the Standard & Poor's 500 has been generating an average annual return of 28 percent.

If you had returns like that, "you missed 8 percent for five years," said Leonard, president of Leonard Capital Management in El Segundo, Calif.

Ouch!

One way to find out how your portfolio is doing is to benchmark it. One good way to do that is by looking at market indexes, Leonard says. That's why he's a big proponent of index funds.

If you invest with one fund family, it may not offer index funds. But, it's easy to open an IRA with a mutual fund family that does.

How can benchmarking help? It allows you to figure out if your fund is a dog or whether the asset class you've invested in is just going through a rough patch. Remember, when you created your allocation strategy you accepted the fact that some of the asset classes you invested in wouldn't perform as well as others.

"The public is programmed to believe that the results of the fund are tied to the manager, when in reality 75 percent to 90 percent of the results depend on the asset class," Leonard said. "What that means is that the worst large-cap manager will do better than the best small-cap manager, when the large-cap is beating the small-cap."

Leonard says, it's common for his clients to say, they were happy to average a 20 percent return over the past five years. Yet, over the past five years, the S&P 500 Index, a widely watched stock market barometer, posted 20-percent-plus returns. In the last five years, fewer than 10 percent of large-cap funds failed to beat this benchmark he said.

If you were invested in those funds, sure your portfolio did well, but you likely missed a few extra percentage points of return, and that will hurt your ability to match the market's average return.

The lesson: Benchmark your portfolio in the good years as well as the bad so you can figure out whether a fund's performance is manager- or market-related. If it's manager-related, go ahead and get rid of the fund, but "don't fire an asset class," Leonard said. 

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

Measure It Up

By

Certified financial planner Scott Leonard has some clients who've been averaging a 20 percent return a year over the past five years. Sounds pretty good, huh?

Not when you realize that the Standard & Poor's 500 has been generating an average annual return of 28 percent.

If you had returns like that, "you missed 8 percent for five years," said Leonard, president of Leonard Capital Management in El Segundo, Calif.

Ouch!

One way to find out how your portfolio is doing is to benchmark it. One good way to do that is by looking at market indexes, Leonard says. That's why he's a big proponent of index funds.

If you invest with one fund family, it may not offer index funds. But, it's easy to open an IRA with a mutual fund family that does.

How can benchmarking help? It allows you to figure out if your fund is a dog or whether the asset class you've invested in is just going through a rough patch. Remember, when you created your allocation strategy you accepted the fact that some of the asset classes you invested in wouldn't perform as well as others.

"The public is programmed to believe that the results of the fund are tied to the manager, when in reality 75 percent to 90 percent of the results depend on the asset class," Leonard said. "What that means is that the worst large-cap manager will do better than the best small-cap manager, when the large-cap is beating the small-cap."

Leonard says, it's common for his clients to say, they were happy to average a 20 percent return over the past five years. Yet, over the past five years, the S&P 500 Index, a widely watched stock market barometer, posted 20-percent-plus returns. In the last five years, fewer than 10 percent of large-cap funds failed to beat this benchmark he said.

If you were invested in those funds, sure your portfolio did well, but you likely missed a few extra percentage points of return, and that will hurt your ability to match the market's average return.

The lesson: Benchmark your portfolio in the good years as well as the bad so you can figure out whether a fund's performance is manager- or market-related. If it's manager-related, go ahead and get rid of the fund, but "don't fire an asset class," Leonard said. 

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.