By Aman Raina, Sage Investors
Special to the Financial Independence Hub
One day as I was perusing the world wide web, I came across a posting about DRIP investments, which ran in the new blog by PWL Capital’s Justin Bender.
What caught my eye had nothing to do with DRIP investments but more about a comment made at the end of article that really got me thinking. It said:
“…Investors should be focusing their attention to more important investment decisions that are likely to have a bigger impact on overall success (such as savings rate, expenses, risk, fees, taxes, and behaviour)…”
Make no mistake, these are important factors in developing your investment ideology or strategy. However, these elements just get you into the game of investing; on their own they are not going to guarantee you will be successful.You can set up an RRSP and put your savings into low-cost bond and low-risk, blue-chip equity ETFs that are tax efficient, but if those investment don’t generate the returns you need, it really doesn’t mean much. Performance is the ultimate metric we need to be constantly looking at; otherwise, why do we bother investing?
Performance rarely discussed
The one factor I’ve noticed that’s rarely discussed in the investing community (at least the online blog community) is the actual performance of investment products. What about return on those savings? What is the level of income (be it from capital appreciation, interest payments or dividend payments) that I should expect to be derived from that investment decision I made?
It seems everything you read in blogs, financial journals or the media revolves around saving money and keeping costs low and its importance. I find it really interesting that we never hear anything about performance. The exception is the ivory tower line that I myself have cited numerous times: that 70 to 80 per cent of actively managed funds fail to earn a market rate of return or higher. The mantra is that as long as you follow strategy X, you will be successful but we never see the outcome of that strategy.
The obsession over costs
Why are we obsessed with cost? Because it is a lot easier and tangible to say product X is better because it’s cheaper than it is to say product X is going to give you a guaranteed return of X. Making that concept of performance tangible and with certainty is much harder, because you really don’t know what the expected outcome of the investment will be. Costs are predictable and much easier to describe.
A great example is the emergence of robo-adviser services that use software and algorithms to design, set up, and manage your savings automatically. There have been a lot of wonderful blogs commenting on the benefits of these services. (Also run on the Hub here: Ed Note) Most of those benefits revolve around the same cost-saving premises (low fees, low maintenance, access to a professional back office).
We hear nothing about how well these types of portfolios perform. The reason is we just don’t know, because these types of services have no performance history, other than empirical evidence that passive portfolios perform better than actively managed ones.
Why we shouldn’t invest
We shouldn’t be investing as part of a civic duty to keep financial companies’ back offices sustainable. We shouldn’t be investing to get stickers proclaiming we paid the lowest in fees or saying we invested in product X.
We invest to … get ready for it … to make money! As much as we can develop great habits for saving, if we just save and do nothing with it, you will be eroding your purchasing power as prices rise. We need to protect our purchasing power from future price increases by allocating our savings to investments that will provide enough return at a certain risk profile we are comfortable with that will protect our future purchasing power.
Same goes with buying the lowest-cost investment product. While that ensures that more of our capital invested stays in our pockets, if the investment at the end of the day doesn’t generate a meaningful return to support our long-term financial goals, it isn’t that great a product. No one is going to care that you found an ETF charging an MER of 0.01% if it is generating sub par returns.
Again … just so we’re all clear in our intentions. Why do we invest? … to make money! Performance is ultimately going to determine your ability to meet your long-term financial goals. You always have to take a results oriented approach and ask yourself or your adviser whether an investment is going to make you the money that you need.
Aman Raina, MBA is an Investment Coach and founder of Sage Investors, an independent practice specializing in investment coaching and portfolio analysis services.