I’m recently divorced and retired. My ex-husband previously handled our finances. In early 2017, after my divorce, I hired an investment manager to handle my investments. Since my personal experience spans less than two years and I’m new to this, I’m wondering how to evaluate my portfolio’s performance compared to averages?
As my colleague already explained well, the best “averages” are the indices. An index is a collection of stocks or bonds, usually hundreds or thousands. You can’t directly trade an index, however there are numerous index funds that mimic an index by holding the same securities as the index. The question really is figuring out to which index (or indices) you should be comparing your portfolio. And that’s difficult to answer without knowing your portfolio asset allocation. If you only own domestic large cap stocks or funds, then maybe the S&P500. Or if you are very well diversified in the US equities market, then maybe the Russell 3000.
However, if you are already paying an advisor to manage your investments, he/she should already be able to tell you how your portfolio is doing by comparing your returns to an index (or to a blended index) that best matches your asset allocation. This is something that every advisor should be capable of doing. Make sure you then follow up by asking why he/she is using those specific indices as the comparison for your portfolio.
While you are on the topic of your portfolio returns with your advisor, that may also be a good time to ask about the fees (if you haven’t already). Fees and costs can squander returns. Minimizing how much you pay is something that you can control and is a key investment principle. For example, are you being charged commissions or is it based on AUM (assets under management)? AUM fees above 1%, in my opinion, are suspect, and you can usuallly find reputable advisors who charge much less. If not based on AUM, how much do you pay in commissions? If you are being charged commissions, you are probabily advised by a broker rather than by a fiduciary investment advisor. What about mutual fund expense ratios? With access to cheap index funds, there is no reason to pay for actively managed funds that cost much more. If your advisor doesn’t use index funds, ask why not? I hope that begins to explain averages, along with suggesting few other things to consider. If you have a follow up question, please feel free to reach out again. Good luck.