Financial Literacy – Understanding Your Investment Statements

Throughout November, Canadians are encouraged to take charge of their finances and be smart financial consumers. Be an informed investor by reviewing your investment statements and knowing what they are telling you.  Don’t just glance at your holdings and transactions and call it a day.  You want to know how your investments are doing and if they are meeting your goals.

How are your investments performing?

If you use a financial advisor or portfolio manager your rate of return for the year will be on your statement.  If you are a do-it-yourself investor, some discount brokerages will also show a rate of return.  However, most of these calculations are “money-weighted” – just based on a specific period of time and fixed dollar amount.

More accurate is a “time-weighted” calculation.  For the last several years I have used this calculator from Canadian Portfolio Manager.  I assess my entire portfolio – RRIF, TFSA and non-registered accounts – as a whole and the calculator incorporates all my dividends, my RRIF withdrawals and any deposits I make.

Many investors base the success of their portfolio solely on their annual rate of return, but you should also compare your return to a specific benchmark index.

Comparing your return with benchmark indexes

A benchmark index is a statistical tool designed to measure the performance of investments over time.  Market indexes are the most widely accepted performance benchmarks.

Your portfolio should be compared to a benchmark that closely resembles the investments you own.  A reference benchmark index may be included on your year-end investment account statement.

You can also create your own customized benchmark based on indexes for each of the asset classes you own.

Say your portfolio is a typical one that contains 20% Canadian large cap equities, 20% US large cap, 20% global equities, and 40% Canadian bonds, and you want to assess its performance over the past 5  years.

To create a suitable benchmark, you calculate 20% of the 5-year return for each of the S&P/TSX Composite Total Return Index, S&P 500 Index and MSCI EAFE Index, and then add 40% of the FTSE TMX Canadian Universe Bond Index.

Benchmarks are most useful for evaluating longer-term investment returns, ideally five to ten years.  These are the results you want to focus on.  The return of a single year is much less important. 

Also remember that index returns don’t include management fees, trading costs or administrative expenses.  It would not be unusual for your portfolio to underperform its benchmark index due to these costs, so take that into account.

If the market is strong but your portfolio value has remained flat, it’s wise to discuss this with your investment advisor and look more closely at your individual investment choices. 

However, underperformance in a given year may not be an issue if your goals are being met otherwise.

For example, my Canadian holdings are mostly individual dividend paying stocks, but I don’t have exactly the same stocks as the TSX which represents about 300 companies.  My portfolio may underperform the index in certain years if a particular sector – such as resources or mid-cap companies – is doing extraordinarily well.  But overall, if my stocks are growing and I’m receiving increasing dividends, then my goal is being met.

Managing your investment fees

Many investors are unaware of the fees they pay for their investment products.  Until recently it was hard to track how much we were paying.  Account maintenance fees and asset management fees are often subtracted from our portfolios before the returns are calculated or rolled into an investment’s purchase price.  Effective January 1, 2017, new rules required investment firms and advisors to clearly outline the costs of any funds held by their clients.

Here are some of the most common investment fees:

  • Annual administration cost: May be charged for registered accounts (RRSP, RRIF, TFSA) holding less than a minimum balance. They may be waived under certain conditions such as combining family assets.
  • Trading commissions: Charged when you buy or sell stocks or ETFs. Some brokerages offer commission free trades on a limited selection of ETFs, some have no-cost ETF purchases only. Some brokerages offer discounts for active, high volume traders.
  • Expense ratios – These are annual fees charged by all mutual funds, index funds and exchange-traded funds to cover operating costs including management and administrative costs.  Funds that are actively managed usually carry higher expenses than index funds and ETFs which passively track an index. 
  • Trailer fees – paid by the mutual fund company to the broker for ongoing services. If your mutual funds are held in a brokerage account, see if the funds are available in “series D” versions.
  • Management or advisory fees – If someone is managing your money – whether a human financial advisor or a robo-advisor – you are paying for it. These annual fees are typically a percentage of the assets under management and can include the cost of advice as well as trading commissions. Some advisors also earn a commission from the sale of specific investments. You need to understand how your advisor is paid and how that impacts your investment.

Some other investment fees you may come across are:

  • Fees for paper statements and trade confirmations – opt for no cost e-services.
  • Account transfer fees – some financial institutions will reimburse these fees for new customers.
  • Foreign exchange fees – If you hold US dollars or US dollar securities in your portfolio you have to pay the exchange fee to transact back and forth to Canadian dollars.
  • Inactivity fee – Sometimes this is charged if you don’t make any trades for a prolonged period of time.
  • Full or partial withdrawal fees – usually for making a withdrawal from your RRSP.

We can’t avoid all investment fees. They are built into mutual funds and ETFs.  If we hire a financial advisor, we should fully expect to pay for his or her services.

Instead, the aim is to understand what we are paying, whether we are receiving value for the fees we are paying – and to know how the cost of investing can impact your real returns over time.

Check your statement for errors

I always check my investment statements for accuracy on a monthly basis and compare them to my transaction slips.  I don’t really expect any fraudulent activity on my account, but mistakes can be made, even by a large discount brokerage such as the one I use.

Even minor errors should be reported.  You don’t want to ignore your investment statements or sit on an error and then try to sue the firm when things don’t work out to your satisfaction or you’ve lost money, as is often reported in the news.

The bottom line

No matter what investments you choose, or who is managing them, you need to review your statements at least once a year.  If you are working with an advisor, make sure you ask for rate of return information and review how this compares to the appropriate market benchmarks.  Look at one, five- and 10-year rate of return figures so you know how your investments are doing.

Reviewing your investment statements is an important part of being a good, informed investor. 

Be responsible for your own wealth.

Related:  Financial Literacy Month

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