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The Annual Performance Review: Returns and Risk

Written by Clark B. Hoover Level 13

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It's good practice for clients and their financial advisors to meet in the early part of the year for an annual portfolio review. This meeting, preferably conducted in person rather than by phone, can be a vital forum for clients to ensure that their advisors truly understand and address their investment needs.

It is common for performance to be a focus of the annual review clients have with their advisors, but risk exposure needs to be part of that conversation as well. 

For example, 2012 has been a very good year for large cap U.S. equities. (The S&P 500 Total Return Index is up approximately 16.3% for the year as of the Dec. 21, 2012 market close.) This means that a portfolio that includes bonds, which did not perform as well, almost certainly underperformed the S&P 500.

If your portfolio underperformed the S&P 500, which is likely in 2012, it does not necessarily mean that your financial advisor did a poor job. Why not? Because investing all of your money in the S&P 500 would have exposed you to a high degree of risk.

A good advisor manages risk. As such, investment portfolios will not increase in value every year. Similarly, not every investment within a portfolio will increase. However, over time, proper investment advice should lead to rising values and help clients achieve their financial goals. 

Here are some performance questions to ask your advisor:

  1. How did the investment portfolio perform?
  2. How does this compare with appropriate benchmarks?
  3. How did components of the portfolio perform?
  4. How did the performance of each component compare to its respective benchmark?
  5. How much risk was taken to generate these returns?

Disclosure: This material is for your private use and should not be construed as financial advice; nor is it intended as an offer or solicitation to buy or sell any securities. Acacia Blue does not provide tax or legal advice. Consult your tax or legal professional on any such issues.

Comment   |   Share This Guide   |  Dec 26, 2012 from Beverly Hills, CA