by Salman Ahmed
Lunch at my junior high school was an exciting affair. Picture dozens of teens playing a single game of basketball, soccer, or football – depending on the time of year, of course. Anyone who wanted to play could join, as long as they could tolerate one thing: trash talking. It was intense and nonstop. Sometimes it felt like the game was merely a sideshow, with trash talking as the main event.
I loved playing, but hated the chest thumping - I sucked at it. Great comebacks would only appear to me 10 minutes too late. I looked forward to adulthood when sharp retorts would be unnecessary.
But here I am, and I still see trash talking everywhere. It isn’t filled with the creative insults heard on school playgrounds, but the intention is the same – to make you feel inferior.
For investors, it often happens at a casual get together. Investing comes up and someone loudly proclaims their portfolio made 30% last year. Of course, all because of a brilliant decision to buy a specific stock or hire a certain investment firm. You immediately recall that your portfolio made significantly less. Rather than fall victim to this adult trash talking though, be armed with some quick questions.
- How do you keep track of your returns? The reality is, most investors have no idea what their returns are. It is hard to track if you do your own investing. If they use an investment advisor, it was only in 2017 that the provider was compelled to provide this transparency. And many only provided 1-year returns.
- Are you talking about your entire portfolio or just one holding/part? Investors tend to remember the good decisions they make and forget the rest. It’s why we encourage all investors to track the returns of their entire portfolio.
- What is your 5-year return? The performance in any one year may be great, but it doesn’t mean it’s been so every year (in all likelihood, it hasn’t). In the same way your boastful friend might be recalling only top performers, he may also be telling you about the one good year and not all the bad ones. For example, a braggard holding just Canadian stocks may have made in excess of 20% in 2016, a year when the Canadian stock market soared, but lost money in 2015 when the market was down.
- What is your asset mix? The mix of stocks and bonds, or what’s known as an asset mix, is what drives much of your returns. A lofty one-year return can be the result of an aggressive mix with large potential swings in performance, whereas the goals for your portfolio might call for more moderate risk. Don’t be surprised if this person has no idea what his mix is to begin with.
Returns always need some background. That’s what these questions are meant to provide. You shouldn’t take grand claims seriously without understanding how they were achieved. Just like on the playground, you ignore the loud mouths unless they can back it up.
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