Do You Know What Your True Return Is?

Factors to consider that may surprise you.

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With December 31 marking the end to the 2011 calendar year, many people take time to evaluate their investment rate of return over the past year. Performance is a hot topic of conversation for many people, and that sometimes leads them away from acting in their own best interests. Let’s look at some examples.

Only looking at the performance of some of their investments while ignoring others – This is common when you have some of your money invested in equities but don’t consider large cash balances or low-yielding certificates of deposit rates in the overall calculation of your portfolio’s return. In order to calculate the true overall performance of your assets you need to inventory all assets in your portfolio, not just the equities and not just some of the equities.

Failure to take into consideration various cash flows in and out of the portfolio – Examples would be interest and dividend payments, monthly withdrawals for income or perhaps even a contribution from an inheritance or some other source. While these types of inflows and outflows affect one’s internal rate of return, they do not affect what is known as a time-weighted return of a given portfolio. Calculating this on your own is very difficult. When comparing a money manager’s return, it is only fair that a time-weighted return be considered so that inflows and outflows to a portfolio do not detract from the underlying return of the investments. Understanding how these impact your return is important when doing your own comparisons. Mutual fund managers typically report returns as time-weighted. Another aspect to keep in mind when comparing returns is if the return is computed before or after fees. Most portfolio managers’ returns are calculated on an after-fee basis.

Not using a fair benchmark – Even after you have a valid rate of return for your portfolio, it has to be given a fair benchmark in order to analyze the return correctly. People often make the big mistake of comparing returns between mutual funds without consideration of the asset class it represents, causing them to chase returns. Compare funds in the same asset class to determine if your mutual fund is worth keeping.

What is more important is that an investor has a long-term written plan to reach their goals and continues to do the right things to help ensure success. Without a good coach, staying on course through tough times can be very difficult, and straying could impact your plans for retirement more than you know.

Will Your Money Last Through Retirement?

No one wants to run out of money. But without goals and a solid plan,
how can you know for sure whether you’re on the right track?

Will I be able to maintain my current lifestyle?

What will my monthly income be in retirement?

Can I protect my hard-earned savings and still
have the income I want?

Rodgers & Associates answers questions like these every day.

Get Personalized Answers
2025 Lititz Pike, Lancaster, PA 17601
Phone: 717-560-3800, Toll-Free: 888-876-3437