If you invest directly in stocks or in actively managed mutual funds, you should check out a recent report titled How is my Portfolio Doing… And What Should I Do About it? published by Steadyhand funds. The report shows investors how to calculate their investment performance, how to compare performance with a benchmark and what action if any investors should take based on their findings.

The Steadyhand report provides enough information in checking up on the performance of a tax-deferred account such as a RRSP. But investors need to take a further step while analyzing taxable accounts and look at the after-tax returns of the investments. They should then compare this with the after-tax returns of equivalent passive investments. For example, if investors holding Canadian large-cap stocks in their taxable accounts, should look at how they fared compared to the iShares S&P/TSX 60 ETF (TSX: XIU) on an after-tax basis.

I used to be quite religious about tracking portfolio performance. In fact, the Sleepy Portfolio started out as benchmark for my active portfolio but after a few years, I determined that I’d be better off with simply investing in securities that track the index. Now that I’m almost fully indexed, reviewing portfolio performance is low on my list of priorities. These days, I care far more about maintaining portfolio balance and keeping trading costs in check. Investment returns? I can do nothing about it and it’s completely up to the market Gods.

This article has 19 comments

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  2. The URL for the link How is my Portfolio Doing… And What Should I Do About it? is http://www.canadiancapitalist.com/is-my-portfolio-doing-ok/, i.e. the CC post.

  3. Thanks Peter. I’ve corrected the link.

  4. the blunt bean counter

    Great point about the further step to adjust for after tax returns. There is always the argument of where you should hold your income investments (ie: in RRSP or outside) with general consensus seemingly being the RRSP. But when you take your point about comparing after tax returns, should investors be aggressively swapping equity for income within their RRSP’s during this time of low returns, since the tax effect of 50% of nothing (ok,maybe 1 or 2%) is nothing if you hold your income investments outside your RRSP?

  5. A question: I am attracted to the idea of ETFs and index funds, but am also a big fan of dollar-cost averaging through monthly fixed contributions, which I currently do through actively managed funds. The cost of making regular contributions through an ETF approach seems prohibitive. Any way to reconcile these two approaches?

  6. @Jordan: There are a few strategies you can use to take advantage of dollar-cost averaging with ETFs. This might help:
    http://canadiancouchpotato.com/2010/09/14/dollar-cost-averaging-with-etfs-part-1/

  7. @Blunt Bean Counter: Since I mostly invest in broad-market ETFs, it still makes sense for me to hold fixed income and foreign equity funds inside the RRSP. The reason is that income from these assets is taxed at my marginal rate. I keep some Canadian equities in my taxable account because I don’t have room in my RRSP & TFSA and the tax treatment is better.

    Let’s say my marginal rate is 40% (for illustration purposes). Bonds yield 2%. Foreign stocks yield 2%. Canadian stocks yield 2.5%. In a taxable account, I’d pay 0.8% tax on bonds, 0.8% tax on foreign stocks and 0.5% on Canadian stocks (at a dividend tax rate of 20%). Clearly, it is cheapest to hold Canadian stocks in a RRSP even before considering swap fees, capital gains taxes etc. Investors should also consider the tax implications of a swap between RRSP and taxable account: they might trigger a capital gains which they have to pay tax on or they might trigger a capital loss that cannot be claimed.

    @Jordan: Index mutual funds are the answer. One of the cheapest funds available in the TD e-Series. Another option is to purchase the equivalent index mutual fund with regular contributions and periodically sell the mutual fund and buy ETFs. Watch for tax implications in a taxable account.

  8. Thanks for mentioning the article CC. We’re seeing a lot of interest in the topic.

    Scott R
    Steadyhand Investment Funds

  9. Benchmarking is important but selecting the appropriate benchmark is crucial. For example, I am an active ETF investor. If the broad US equity markets fell 25% over a 12 month period and my portfolio fell by 20%, would I act like a typical mutual fund manager and point out that I beat the market by 5% or would I be upset that my portfolio value fell by 20%? For me, it would be the latter. The ETF’s I use cover a variety of equity markets, currencies, precious metals, commodities, real estate, US bonds, emerging market bonds, etc so there is no relevant index that serves as a benchmark.

    My goal is to generate positive returns over any twelve month period. This happens to be the goal of many hedge funds and for that reason a relevant benchmark for me is the Hennessee Hedge Fund Index ( http://www.hennesseegroup.com/indices/returns/year/2010.html ).

    I don’t have time to read the Steadyhand article right now but I do believe it is vital that investors always ask themselves “Can I do better?”. After all, it’s your money, your future.

    Fred

  10. I’ll be the first to admit that I don’t know my overall portfolio performance because I only track the performance of my current holdings. When stocks run up so far that they get ahead of themselves (in my opinion) then I may dump them for a sizeable capital gain. And sometimes when I get disappointed by a stock one too many times, I’ll dump it to offset some of my capital gains. But once the stocks are no longer part of my current holdings, then they aren’t included in my performance measurement.

    The same goes for bonds and GICs which reach maturity. Once they’re no longer a line item on my spreadsheet, they’re no longer tracked for performance.

    I guess that’s one of the “holes” in my own custom built tracking spreadsheet and maybe one of those programs would be much better at it than my own little monster.

  11. @Fred: I agree that timing investors should benchmark differently. The Steadyhand performance analysis is geared to those active investors who pick stocks (or managers). I think it is important to make that distinction, so thanks for bringing it up.

    @Phil S: I think tracking performance of your current holdings should suffice. As long as it is acceptable and you are not lagging the benchmarks too much over meaningful time periods, you are on track.

  12. Phil, I’ve tried most of the common software packages for tracking investments, but in the end I’ve found a spreadsheet works the best. Quicken isn’t too bad, but the interface is baroque, the upgrades are pricey, and you have to jump through hoops to have it represent U.S. dollar securities held in Canadian denominated accounts. (This may not be a problem for those with USD RRSP and TFSA brokers.)

    Tracking total portfolio performance on top of individual security performance is fairly easy to set up on a spreadsheet. My only problem is that Excel and others don’t have an easy function for finding IRR limited to specific periods (e.g. 1, 3, and 5 years). (One day I’ll crack open the manual again, refresh my memory, and figure out how to write a function that takes ongoing data, limits it to the specified period, and feeds it to XIRR…. I think that’s the way to do it.)

  13. I use Mawer Canadian Diversified Investment as my benchmark. It’s the highest performing, globally diversified, actively managed, of the mutual funds that is older than 10 years.

    Since I’m utilizing a couch potato strategy, the question I want answered is whether I’m better off going with actively management instead. So far I’m beating the Mawer fund, but my equity allocation is 90%, so it’s not a apples to apples comparison.

  14. @Viscount: I find Microsoft Money’s portfolio tracking to be clunky as well. It would be very nice if we can get good portfolio tracking within these personal finance software.

    @Slacker: It’s a tough call because picking an active manager is in some ways an act of faith. You may want to check out this post that links to a report on what to look for in an active manager. I know Mawer is highly regarded but I haven’t personally checked them out to form an opinion:

    http://www.canadiancapitalist.com/how-to-pick-a-winning-mutual-fund/

  15. I’m curious what anyone thinks about this new “turn-key” ETF portfolio management program as an alternative to trying to do-it-yourself. See more at: http://www.piefunds.ca

    This program uses customized benchmarking to compare results. Also, because it is set up in a corporate class structure, there are no capital gains taxes when the funds are automatically rebalanced periodically.

    • @PIE Guy: 1.8% for what’s essentially an index fund wrap portfolio? You gotta be kidding me. There are far cheaper options available for folks unwilling to do some simple math to rebalance — the ING Streetwise Fund or the TD e-Series Portfolios. Granted there is some tax efficiency in a corporate class fund (I haven’t looked into this further, so I’ll take your word for it) but investors can easily duplicate this by strategically placing their assets across taxable, RRSP and TFSA accounts.

  16. The 1.8% MER is only applicable if an investor buys through their advisor who gets 1% of this fee for providing financial planning services and advice.

    But there is a lower 0.8% MER for investors who buy directly from the Manager (R.N. Croft Financial Group). This fee is comparable to the ING and TD options you mentioned, except instead of funds from only one company, the manager will continually update the funds by choosing the best funds from different providers i.e. Claymore,
    i-shares, Vanguard etc…

    If the investor wants to rebalance on their own as you suggest, they can purchase a different class of shares for only 0.30% MER. This fee is also available for institutions such as non-profits or corporations that offer Group RRSPs, DC or other pension plans.

    You’re right about the math being rather simple for rebalancing but the trading costs are another matter entirely, not to mention the inconvenience.

    Good point about spreading different assets across different types of accounts (RRSP and TFSA) but these accounts are limited in how much you can contribute each year, whereas you can put an unlimited amount in a Corporate Class program at anytime. For very large accounts the annual capital gains savings can be substantial.

    Thanks for your feedback – much appreciated. You raise very important points that investors need to consider before choosing the best investment vehicles for their needs.

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  18. Sirs: Ken Fraser had a stock market GIC on the S&P/TSX 60. Ken made money over five years at a mean of 8.18% per year. The GIC was held for Ken by TD Canada Trust. I received the profit. Is the profit a taxable capital gain. Oil company executives etc buy say oil or banks or utilities indexes on line and it is considered a capital item. TD also buys on line for Ken Fraser. Please advise if the gains are taxable capital gains that can be wrote off against non-capital losses of other years. You are good soldiers ti help old Ken with advise.