What does one do if they really want their investment portfolio to do well but they really don't care for all the numbers and complexities of investing? Well, for one, if you can't take a bit of time to educate yourself on one of the most important financial decisions in your life, than I have no sympathy for you if your retirement goals come crashing spectacularly down when 60 rolls around. And if you think just having your bank advisor take care of everything will solve your problems, think again. If you are wise enough to have a professional fee-only advisor managing your investments, than you can probably rest easy. But for the rest of you, buyer beware if you are not educated.
The beauty is, very little education is necessary to give you the tools you need to ask smart questions. And smart questions often lead to dumb answers. And dumb answers lead to fired advisors which leads to better served investors. Read on to find some excellent places to start and then to read a great list of simple questions you can make your advisor sweat with.
First read this post on the 7 Most Common Investor Mistakes. It is great. Educate yourself further by reading books like The Wealthy Barber and Millionaire Teacher. They're accessible and fun. If you want just as excellent information but maybe in a less jovial presentation check out some stuff by David Trahair and The Little Book of Common Sense Investing. And if you want to completely immerse yourself, try a subscription to Money Sense. One issue will give you more financial knowledge than you've possessed in your entire life.
And start questioning your advisor. Ask him things like "Well, if you were so confident of these funds last year, why are you moving me this year? I trust your decisions and I would rather we stick with your first instinct." Make them develop an asset allocation that fits your needs and ensure they review your current portfolio status at least once a year to see if it aligns with your planned asset allocation. If you have more than 5 funds in your portfolio, start to ask some serious questions. If your advisor is contacting you more than once a year to change your fund purchase allocations, get a new advisor. They are churning your portfolio to get rich on commissions and aren't worth your time. It's not illegal but it sure as hell should be.
Some other questions to ask your advisor.
1. What is my internal rate of return over the last 1 year, 3 years, 5 years, since inception?
Any advisor worth their salt should be able to give you this information. If they hesitate, fire them. If they don't know what you are talking about, fire them and then tell all your friends to avoid them like the plague. In fact, post that on their door.
2. What is the aggregate MER of my mutual fund portfolio? Anything over 2% is seriously questionable and you best be seeing some absolutely mind blowing answers to the following questions to justify that charge.
3. Am I in any load funds?
Answer should be No. If even one answer is Yes, get out. You will likely be locked into those funds for 7 years without taking a penalty on sale of the units, but get rid of this advisor immediately. There is absolutely no justification for selling load funds.
4. Am I in any funds-of-funds? If the answer is yes, seriously reconsider this individual or institution. If they answer No to the following question, proceed cautiously but they can live another day. And that question is "Are the MERs of the underlying funds charged to the unitholders of the overlying fund?" If the answer is YES, get the sam hell out of there. You are getting charged TWICE.
5. How long have my funds been around? I once had an advisor try to sell me a fund showing me a performance chart from 2008. It looked like roses. Of course it did. The fund was born when the market was at its lowest point in decades. Everything has looked like roses with 2008 as a starting point. You should ideally be invested in funds that have 10 years of performance data. Leave plugging millions of dollars into shiny new funds to the other suckers out there. You are not one of them anymore.
6. How have my funds performed compared to their benchmark? If the benchmark is some really complicated name, be skeptical. If it is a big benchmark like the S&P 500, MSCI EAFE, TSX 60 or TSX Composite, then great. If they are underperforming their benchmark by anymore than 1%, they cannot possibly be justifying the expenses they are charging you. If they can't provide that info, that is terrible. Because you can get it for free at Globefund.com by comparing your funds performance to the index and comparing it to any index. So check it anyways for your interest. And then fire them. Conversely, you could check the numbers based on your last statement and then come in with a barrage of really tough questions about your fund performance. Ooh, that would make them sweat!
7. How could you assist me in constructing a portfolio of low-cost index funds or broad market ETFs? If they start going on about the pitfalls of index funds and ETFs and how they won't do it because it will hurt your investment outlook, get out now. If they are honest with you and say they recognize the strengths of those approaches but their company requires they sell their mutual funds in order for the "free" advice they provide you, then go ahead. Again, the key here is consistency. If you like and trust this person and they have you in a simple mix of broad based equity and fixed income funds and they don't stray from that approach, then you could do worse than to just stick with them.
As always, if they looked totally stunned, confused, blank, or otherwise threatened or frightened by your question, you should seriously consider leaving them. And I'm not joking. And I cannot emphasize enough that if you have an advisor selling you load funds, you need a new advisor.
In the end, if you feel too overwhelmed by the whole process but are very seriously concerned about the performance of your portfolio and you reaching your retirement goals, consider professional advice from a second party. Companies like Weigh House Investor Services offer services like PortfolioCheck where they look over your existing portfolio and give objective advice....well, basically on how bad it looks. They charge for the service of course, but if you are interested in leaving your existing advisor, they will also help point you in the direction of an investment manager they trust that will serve your needs better. Again, you will pay a bit out of pocket up front, but your long term returns will be substantially higher and compounded over your working life will mean a substantial increase in the size of your retirement fund. As a last resort of course you could e-mail MoneySense magazine and come grovelling on your knees requesting a Financial Makeover. You'll get all these experts pouring over your portfolio for free!
Please feel free to contact me with any questions. I am not a certified expert but I can often point you in the right direction.