• Rates of Return

Is Your Portfolio Pulling Its Weight?

Hang out at a gym for long and, someone will probably ask you: “How much can YOU bench press?” Or is that mostly a guy thing? In any case, investors have a similar custom. Of course we want to know our own rate of return. I showed you how to calculate that in my last blog/video, using a Modified Dietz Method on a Questrade ETF portfolio to illustrate. But just like in the gym (if more relevantly), we also want to know how our performance stacks up against “the norm” of an appropriate benchmark.

So, as promised, we’re back. This week, I’m going to show you how to compare the return you calculated last week to an appropriate benchmark – specifically, to the performance of a portfolio consisting of the same ETFs you held over the same timeframe. You can read on, and/or check out the video version of the same.

 

In our example, we’ll assume you deposited $5,000 into your RRSP account at the beginning of 2017, and promptly invested it into the following ETFs:

SecurityTickerAllocationAmount
Total100%$5,000
BMO Aggregate Bond Index ETFZAG40%$2,000
Vanguard FTSE Canada All Cap Index ETFVCN20%$1,000
iShares Core MSCI All Country World ex Canada Index ETFXAW40%$2,000

 

You then contributed $500 monthly into your RRSP account throughout the year, investing the new money into the same asset mix. After using last week’s Modified Dietz method to calculate your 2017 rate of return, you determined your investments had earned 8.94%.

 

Not bad, but is it in line with what it should have been for the kinds of investments you made? For that, you can compare your rate of return to the weighted-average return of your ETF holdings. In theory, if you avoided the temptation to time markets or pick individual stocks, your return should be very similar to this benchmark return.

To verify that, visit my website at canadianportfoliomanagerblog.com, hover over the DIY Investor’s Toolkit at the top of the screen, and click on Calculators.

 

Scroll down the page until you find the Benchmark Your Portfolio Calculator, and then click on the download button.

 

On the spreadsheet, you’ll find a list of plain-vanilla ETFs, as well as their rates of return in Canadian dollars for the most recent calendar year. In this illustration, that’s 2017.

In the Target (%) column, type in the target allocation to the right of each ETF in your portfolio. In our example, we’ve typed in 40% next to ZAG, 20% next to VCN and 40% next to XAW.

 

The spreadsheet generates a weighted-average annual return of 8.96% for the 2017 calendar year. That’s nearly identical to the Modified Dietz return of 8.94% for your own portfolio. Bravo! You’ve done an incredible job sticking to your investment plan.

In real life, the comparison isn’t always as neat and tidy. For example, if you had made a relatively large deposit or withdrawal during the year (say, 10% or more of your total portfolio) and the market happened to be particularly volatile, your numbers might not align as perfectly. But it’s still as close as you can get to an accurate comparison without having to do all the heavy lifting on your own. I’ll be updating this spreadsheet each year, so please feel free to drop by and benchmark your returns as part of your annual portfolio check-up. As a bonus, that will leave you more time to pump it up at the gym.

 

By | 2018-04-26T17:25:52+00:00 April 30th, 2018|Categories: Rates of Return|6 Comments

6 Comments

  1. Pete May 13, 2018 at 9:26 pm - Reply

    Hey Justin,
    What GICs do you include in the fixed income portion? Thanks

  2. skube May 2, 2018 at 12:18 pm - Reply

    I’m still a little confused as to which method one should be using for calculating rate of returns. In one of your blog posts, you state: “…I explained that the Modified Dietz rate of return gives a decent estimate of the money-weighted rate of return (MWRR). However, both types of returns are not ideal choices for investors who are interested in benchmarking their performance against appropriate indices.”

    But then in this post, you use the Modified Dietz method, which to me, contradicts that last sentence.

    • Justin May 7, 2018 at 2:21 am - Reply

      @skube: The Modified Dietz method (without geometric linking of monthly returns) approximates the money-weighted rate of return. If you calculate the Modified Dietz return over monthly periods and geometrically link them together (which is how it is usually calculated in practice), this return will approximate a time-weighted rate of return.

  3. Billy April 30, 2018 at 4:35 pm - Reply

    Hi Justin,

    I’m sure you’ve answered this before, I just haven’t read all the comments at the bottom of your blogs (I have read all the blog entries now), but I’m curious what is in this for you/CPM? I really appreciate all the work you put into the ETF portfolio, calculators, spreadsheets etc. and I know others do as well, but why make it public knowledge for free?

    I’m not complaining and I hope you keep the information coming, but I’m just curious.

    On another note, are there any individual stocks that you invest in on the side (or sector ETFs like just utilities, weed, communications etc.)? Do you have a small percentage of your portfolio that you speculate/gamble with, just for fun? Or do you stay ultra conservative and mitigate your risk with just the model portfolio ETFs? For those that have large portfolios ($100,000+) that choose to let CPM manage the portfolio for them, how different would these look from the model portfolio you have made public? You don’t have to provide specifics, I’m just wondering what the advantage would be for someone to invest with CPM, instead of doing it themselves?

    Thanks again!

    • Justin May 7, 2018 at 2:17 am - Reply

      @Billy: For investors that do not want to manage their own portfolio (which is the majority of investors), our team offers managed portfolio and financial planning services (so the CPM blog brings in additional clients that may not have heard of us otherwise).

      I don’t invest in any single security stocks (except for some private PWL stock) – I save the gambling for Las Vegas 😉

      The portfolios that we manage are very similar to my model CPM portfolios (other than we will generally include GICs in the fixed income portion). There’s no secret sauce on the portfolio end of things.

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