For the average investor, investment returns are one of the most difficult concepts to get your arms around. That’s because what seems so simple – how much a given investment of money returned during a specific time – is, in fact, much more complicated than meets the eye.
This is because the most common way investment returns are measured – how a stock, bond, mutual fund or other investment performed during a specific period of time – doesn’t reflect how your particular investment performed. And, it may have very little to do with the results of your investment portfolio even when compared to the numbers you see associated with the specific investments in your portfolio.
That’s why so many investors are downright bewildered by their financial advisors because the results of the advice, usually investment returns, don’t add up with the returns they see in their investment portfolios. At an intuitive level, it doesn’t make sense that if you were invested in a group of investments that performed at a certain level, that your actual results in no way, shape or form, reflected that reality.
The reality is that most financial advisors actually fail what they advertise as their preeminent job: increasing their client’s wealth. Instead, most advisors are focused on managing investment returns. Here are four reasons why, which are also fundamental truths about investment returns and something to think about when you, the newly independent woman, is seeking a financial advisor who will help you truly manage your wealth.
- Most investment returns are stated in relative terms: Most financial advisors explain investment returns as they relate to investment benchmarks. Investment benchmarks are indexes such as broad stock market indexes, including the S&P 500, that measure how a particular group of securities performed during a certain period of time. So, if the market (as measured by the S&P 500) was down 20 percent in a year and your investment “only” lost 18 percent, your financial advisor would be boasting to you that your investments “beat” the market. You may not be impressed, and rightly so, because your investments actually lost 18 percent during that year.
- Investment returns are not the be-all-and-end-all of wealth management: In fact, investment returns are a very small part of wealth management. Wealth management involves financial planning, risk assessment, retirement planning and much more. A true wealth manager seeks to establish a relationship with a client in an effort to assess her financial situation and goals so as to help her manage her financial resources in such a way to achieve her individual financial and personal goals.
- Absolute returns matter: Most financial advisors don’t like to acknowledge this reality, but it is true. Absolute return – that is, the actual percentage returns of an investment portfolio – matters far more than relative return. That’s because your wealth will rise and fall based on what the individual returns of your portfolio are, not on how it did relative to the market. So, using the previous example, your 18 percent loss may have outperformed the market in a given year, but if the value of your $750,000 portfolio fell by $135,000, the fact that you outperformed the market isn’t going to be much of a consolation to you.
- Dollar weighted returns reflect true wealth management objectives:Dollar weighted returns, which measure investment returns in terms of when dollars flow in and out of a portfolio, measure returns far more accurately than time-weighted returns. Time weighted returns are a far more common, but much more flawed, measurement. For you, the newly independent woman, the fact of the matter is that dollar weighted returns are much more significant because they reflect your choice of when to make an investment and when to make a withdrawal as well as how the actual investment performs.
The bottom line: As far as wealth management is concerned, there is much more to the relationship between a wealth manager and a client than the traditional definition of investment returns. Contact me today if you’re interested in learning more about how a true wealth manager can help you set and execute true financial and personal goals.
This e-mail does not constitute a personal recommendation or take into account the particular investment objectives, financial situations or needs of individual clients. Past performance does not guarantee future results. Wealthcare Capital Management’s disclosure document ADV Part 2A can be found here.