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:
|BMO Aggregate Bond Index ETF||ZAG||40%||$2,000|
|Vanguard FTSE Canada All Cap Index ETF||VCN||20%||$1,000|
|iShares Core MSCI All Country World ex Canada Index ETF||XAW||40%||$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.