Are your investments working hard enough for you?

Hi

This newsletter concludes the three part exploration of how the start of a new financial year is a great time to reflect, review and reset our plans for financial independence. (If you missed the articles you can read Part 1 here, and read Part 2 here.)

Are you getting bang for your buck?

I encourage you to take the time to assess if you are getting value-for-money from your investments. If you are not receiving value-for-money you could be costing yourself future lifestyle if you do nothing about it.

The value-for-money equation for investments is often determined by the investment returns that you receive for the management fees that you pay. Whilst management fees (reported as MER) do vary, the investment returns generally vary much more. Therefore comparing the investment returns to a relevant benchmark is a great place to start your analysis.

What is good?

If your portfolio returned 15% in the last 12 months you may be quite happy and think that’s pretty good. But if the market averaged 25% over that same 12 months then 15% is actually disappointing. Your investments under-performed and possibly didn’t deliver value-for-money.

Therefore, if your statement showed 15% and you choose to file it away and make no changes based on thinking that was “good” you may be costing yourself a lot of money. Money that could buy your desired lifestyle.

Benchmark your investments

There are plenty of possible benchmarks, but a great place to start is to compare your investment performance to the average of the market. You do this by:

1. Working out in which markets you are invested. This is also known as asset classes. (For example: Australian shares, International shares, Listed Property, Fixed Interest)
2. Calculate the proportion of your investments in each asset class. This is known as asset allocation.
3. Find the average market performance for each asset class. These are also known as market indices. You can find these on my website.
4. Calculate the benchmark return for your overall account by proportioning the market index returns to your asset allocation. (Calculation tool)
5. Compare your actual investment return to the benchmark return

If that all sounds too hard I beg you, please don't toss it in and go back to ignoring your superannuation. The simple solution is to ask your financial planner to do it for you. And if you've been paying them fees it is a very valid question to ask. (By the way the question to ask is "Can you please send me a comparison of the investment performance of my account to the average market performance?")

If you’re superannuation is in a current industry fund don’t believe the current suite of advertising. All industry funds are not the same. Some may have lower fees (“compared to what?”) but their performance varies greatly. Some perform well, but many perform below the market index (just like retail funds also do).

So, whether you’re in an industry fund, employer fund or retail fund you need to complete this benchmarking exercise to ensure your low fees are not coming at the cost of performance.

An example

• Sample asset allocation table, which may be found on your statement
• Sample performance table, also found on your statement
• Links to market performance figures
• Sample calculation
• Downloadable calculation tool (spreadsheet)

I wish you a wonderful journey through the coming financial year.

Warm regards

Matt Hern
Certified Financial Planner

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Matt Hern trades as FINDRE
(Empowered Wealth Pty Ltd t/as)
ABN: 21 592 525 720

Phone: 08 9467 7320, Fax: 08 9463 7848
PO Box 259, Bull Creek, Perth, Western Australia 6149, Australia
Website: www.MattHern.com.au Blog: www.Money-Guide.com.au

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