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Benchmark Your DIY Portfolio

Paul - The Wry Eye Guy 1 Comment
Measuring Portfolio Performance

How does your portfolio stack up against a simple, globally diversified, broad market index portfolio? Does it matter? It might. Most of us, short of placing some lucky bets, are unlikely to beat the markets over the course of our decades-long investing lifetime. But that doesn’t stop us trying. And that can get messy. Do you know what’s in your basket? And how well it’s working? If you find yourself wondering about this every now & then, it might be worth checking. How do we do that?

Plug your portfolio details into one of the online tools that provide portfolio comparison features. I like the Backtest Portfolio feature in Portfolio Visualizer for this. Once your portfolio is loaded, compare its total return performance to one of the all-equity ETFs like ZEQT, VEQT, or XEQT. If the equity side of your portfolio is crushing the returns of these all-equity funds, well done. Do you know why? Is it luck or skill? Can it continue? If you think it can, keep doing what you’re doing & get ready to enjoy your retirement!

If things are not going that well, it might be worth exploring why not. Of course, some investors may deliberately choose a portfolio mix that lags index funds. Not that the goal is to lag, but other attributes (low volatility, increased cash flow, whatever) may be favoured over maximising total return. It also doesn’t matter if you have a growth, dividend, or income investing approach, benchmarking total return performance can still be enlightening. And useful. Sticking with any strategy, even one that lags, is a decision best made when we know the cost.

I’ve left out a bond or cash component. However, that’s easily added. Make sure it’s in the same ratio as in your own portfolio, for an apples-to-apples comparison. Or use one of the asset allocation ETFs, like XGRO, VBAL, ZCON, etc. as your benchmark. These are the all-equity ETFs with bond funds built in. Select one with a built-in bond percentage that matches your own portfolio. I prefer not to use an S&P 500 Index® fund as the benchmark, because it’s less geographically diversified than I prefer for my portfolio. For for those who invest only in the US market, it’s a valid choice.

Most of the comparison & performance tools will require a subscription if you want to take advantage of the full capabilities. But, despite the limits, the free access can still be very useful. For example, Portfolio Visualizer allows 15 holdings & 10 years of back testing under the free tier. While stock pickers will almost certainly be challenged here, most ETF investors are likely to have fewer holdings. But if you’ve got more, choose all the bigger ones & hopefully the top 15 holdings will make up the bulk of your portfolio value.

Another challenge with making comparisons is that the first of the all-equity ETFs only launched in 2019. That limits how far back we can look for direct comparison. But there are some tricks that we can employ. Like breaking down a fund into older constituent (or similar) ETFs. For example, we can use an all-equity ETF proxy made up of VUN (USA 45%), XIC (Canada 25%), XEF (International Developed 25%), & XEC (Emerging 5%). This gets us a comparison all the way back to September 2013. On the flip side, if your portfolio has a bunch of new funds, there won’t be much history to look at. And, in general, the shorter the timeline, the lower the value of the comparison.

This next proxy drifts further away from using a single all-equity ETF. A comparison portfolio of SPY (USA 45%), XIU (Canada 25%), & EFA (International 30%) is a rough approximation that allows benchmarking all the way back to September 2001. It would have been interesting to see the impact of the dot-com implosion in 2000, but EFA wasn’t old enough to catch that event. I guess we could use a 50:50 portfolio of SPY & XIU to get back to 2000. The problem with both these “created” benchmarks is that the funds are in different currencies. This further muddies the waters. Pretty significantly. That said, for rough comparisons, they look back about 25 years. But why are we bothering with all this history stuff anyway?

We all know that past performance does not predict what the future holds. But benchmarking against one of these all-equity ETFs, or against a proxy for longer timeline comparisons, can throw up some interesting insights. It’s good to know how an asset mix survives things like the dot-com meltdown & the great financial crisis. There is tremendous value in seeing how things worked while accumulating. And then how things can change, sometimes seriously, while decumulating in retirement. I know some people are shocked by the outcomes from these comparisons. If that’s you, I hope you are positively shocked. Because of how well your portfolio has performed. And if so, congratulations!

If you are negatively shocked, you might want to reconsider what you are invested in & why. If the equity portion of your portfolio is way behind the returns of the globally diversified fund, is that acceptable to you? Is your original investing hypothesis intact? Ah look, I’m trying to tiptoe around asking you if you know what you’re at here! And if you don’t, consider this …

Should an investor seriously trailing an ETF filled with globally diversified, total market index funds think about the potential for buying that ETF instead? Or maybe this investor should consider talking to an advisor. I know that is a heretical thing to say out loud amongst DIY investors. But if the results are likely to be better, after paying an advisor 1% to just buy the all-equity ETF for you, why would you not think about this? And if this advisor throws in some fancy financial planning, that’s an added bonus. Look, DIY investing is not a religion. And we didn’t take a vow. We don’t have to remain committed to underperformance. Particularly if we can’t figure out how to fix it on our own. Of course, it can be as challenging to choose a good advisor, as it is to build a good portfolio! Seems like there is no escaping the need to invest in learning when it comes to making enlightened decisions about our money.

I guess this is all a bit simplistic, eh? But if you’ve been doing your own thing for a bit, it can be insightful to benchmark your performance against a simple off-the-shelf portfolio, like the all-equity ETF we used for benchmarking. And it’s an EFT that some academics & professionals argue might be the best long term investment choice for many DIY investors anyway. Only you can decide what to do once you see the results of a benchmarking exercise. Just don’t jump from the frying pan into the fire!

There are other considerations, of course. Some favour lower volatility portfolios. Others treat & handle risk differently. Retirement cashflow or income can be a big influence on portfolio choices for those nearing retirement. Worries about sequence risk in early retirement can factor into portfolio selection. And on & on it goes. But, regardless of these many influences, measuring & comparing performance can provide insight. And the insight may help guide us towards better solutions going forward. And if you do decide to have a discovery chat with an advisor, why not benchmark the advisor’s proposed portfolio against one of the all-equity ETFs as part of that process. After going through all this, I’m now questioning my own portfolio. Think I’ll head off & do a little benchmarking of my own. Catch up with you later! 😜

If you want to learn more about saving & investing, please check out Double Double Your Money, available at your local Amazon store.

Important – this is not investing, tax or legal advice, it is for entertainment & conversation-provoking purposes only. Data may not be accurate. Check the current & historical data carefully at any company’s or provider’s website, particularly where a specific product, stock or fund is mentioned. Opinions are my own & I regularly get things wrong, so do your own due diligence & seek professional advice before investing your money.

DIY Investing or Work With a Financial Advisor?

Paul - The Wry Eye Guy Leave a comment
Good old-fashioned financial advice.
But at what price?

DIY investing can drive you a little crazy. Do you like the crazy? Are you enjoying the work that comes with portfolio management? Some of us do! But it gets a little more challenging when we need to withdraw money during retirement. And will a surviving spouse be able to carry on with the crazy portfolio in the event the “money manager” departs first? Are you a good DIY investor? Or would you do better with an advisor?

There is an easy way to figure out if you should consider paying a fee to have a professional manage your portfolio & the retirement cashflow stream for you.
And it’s this …

Compare your DIY portfolio performance against an equivalent ETF. We all need a “benchmark” to check our portfolio against. If you’re 100% in globally diversified stocks, for example, compare your portfolio performance to that of one of the XEQT, ZEQT, VEQT all-equity ETFs. If you’re in a 60/40 stock & fixed income mix, compare your DIY portfolio performance against XBAL, ZBAL, or VBAL. Are you buying a mix of Canadian & US large-cap stocks? Then compare that to an appropriately allocated portfolio of VFV & XIU ETFs. A portfolio filled with way too many stocks & ETFs might also be usefully compared against one of the all-in-ones. If your portfolio performance lags its benchmark by 1% or more, you might want to consider handing it over to a financial manager.

As an aside, since some of these all-in-one funds are so new, you may need to break them down into their constituent ETFs to usefully use them for benchmarking over longer time periods. The longer the history, the more useful the insights.

I’m using 1% here because many financial advisors charge an annual 1% of portfolio value as a fee for managing a portfolio. Is that fee worth it? Get the advisor’s performance history & compare that to an equivalent benchmark ETF too. Their recommended portfolio should only lag the return performance of those ETFs by the 1% fee. If they meet that requirement and if your self-managed portfolio was lagging by more than 1%, you could be getting better results by paying the advisor the 1% fee. As a bonus, you’ll have less work & an advisor who will tell you that everything will be okay when the markets are imploding. Hand-holding is included in their fee! For retirees, the advisor may also plan the income strategy & tax-efficiently manage the cashflow for you, across all accounts. You might even get some estate planning advice along the way. If you have a good advisor, they can deliver a lot of value. Even if they underperform the market average by the amount of the fee they charge.

Can you find an advisor that will consistently beat, after fees, the market or benchmark returns? I don’t know, but be sure to review their data supporting this opinion very carefully. And not necessarily against the benchmark provided by the advisor.

Unfortunately, it can be pretty challenging to tell if an advisor is any good. And those investors who are most challenged by DIY investing will also be challenged by the process of choosing a good advisor. We all like to believe we have the best doctor taking care of our health. In reality, most of them will be closer to average than exceptional. Fortunately, there are minimum standards & qualifications that we hope will ensure an adequate level of service from these professionals. The same is only variably true for financial advisors. Because the qualifications for calling yourself a financial advisor in Canada are variable. Some advisors are closer to being a product salesperson. And while some feel or profess a fiduciary responsibility, it is not a legal duty or obligation for many. They cannot just take your money & head off to a beach somewhere, but they may be putting their own, or their company’s, interests just slightly ahead of yours when it comes to investment choices. Even if only subconsciously.

Of course, a good salesperson will make you feel better about the relationship you are getting into. And that’s not a bad thing. But you also need an advisor who can at least deliver average market returns for a broadly diversified portfolio. Minus the fees. And you do need to know exactly how much you’re paying for whatever services & products are being recommended! There may be advisory fees and product fees, check carefully.

If you are a balanced 60/40 style investor, what would you think of paying an advisor to put all your money into ZBAL? Or maybe 60% into XEQT, with the other 40% into a couple of bond & HISA-type ETFs? We sometimes resent paying for simplicity. Advisors know this & are less likely to present you with such a simple portfolio solution. After all, if things are that simple, why would we need an advisor!
Yet, in DIY mode, we sometimes struggle to follow the simple path ourselves. Instead, we prefer to work hard creating a portfolio that underperforms!

Of course, that simple solution might not be the ideal path for everyone. There may well be good reasons for some investors to pursue a lower volatility strategy, a higher income strategy, or whatever. But it is still useful to compare the total return on our own portfolios against those of low-cost, market index ETFs.

Robo-advisors are trying to bridge the gap between the advisory space & DIY, typically for about a 0.5% fee premium, in addition to ETF fees. I love the idea but it feels like you’re paying the added fee for the robo to pick the same ETFs that are in the all-in-one ETFs. Like some human services, they can fancy it up with one or two more esoteric picks. So you feel like you’re getting something extra for your money. But you generally won’t get the more valuable hand-holding that comes with the more expensive advisory services. Maybe AI will help with this down the road. But AI has been around for a lot longer than current market noise suggests & it hasn’t happened yet. Some robo-services do include human phone support. That might develop & grow into something more valuable going forward.

Isn’t there scope for fee reduction on the human advisory side too? Or for a service with a far more rapidly declining tiered fee-structure for larger portfolios? Are there any low-cost advisors out there? Shouldn’t there be more advisors competing with the 0.5% fees of the robo-advisors. Simpler portfolio advice & management should come with lower fees, no? I’m okay with portfolios constructed with low cost index funds. For some investors, the greater value may be more in managing asset location (what ETF goes in which account) & retirement cashflow. Some advisors include financial planning, a valuable service too. But can it be done for a 0.5% fee? Or less?

I realise that someone else’s job always looks easier than it really is from the outside. But I think financial advisory (& real estate) fees are very expensive in Canada. Particularly for the cookie-cutter portfolios offered by some companies. I’m totally okay with the right cookie-cutter portfolio, I just don’t want to pay through the nose for it. High fees are an ignorance premium being levied on a population that didn’t get this kind of knowledge coming through our educational system. And our schools still don’t prepare kids for the digital environment that now makes it far easier for the DIY investor to learn things the hard way. Fees will likely drop over time, as education & AI combine to work at improving the competitive landscape. Though in traditional Canadian fashion, it’ll probably drag out for a long time yet. And some of us older folk might not live long enough to benefit! 🤪

Regardless of the path we choose, it’s worth occasionally benchmarking our portfolio performance against a low-cost, well-diversified, ETF portfolio. One that approximately matches our portfolio’s asset allocation. Benchmarking can provide insight on how decent a job we’re doing with our investing strategy. And if we’re not doing such a good job ourselves, it may be worth talking to a financial advisor. But if you still find the idea of paying an advisor distasteful, then you’d better figure out how to learn to do it better on your own. Or maybe just use the benchmark ETFs instead!

If you want to learn more about saving & investing from the ground up, I’d like to suggest that you check out Double Double Your Money, available at your local Amazon store.

Important – this is not investing, tax or legal advice, it is for entertainment & conversation-provoking purposes only. Data may not be accurate. Check the current & historical data carefully at any company’s or provider’s website, particularly where a specific product, stock or fund is mentioned. Opinions are my own & I regularly get things wrong, so do your own due diligence & seek professional advice before investing your money.