What makes a good benchmark? Part 1: Investments

Rule No. 1: Never lose money;
Rule No. 2: Don’t forget rule No. 1
– Warren Buffet

Of course it’s impossible to never lose money, but working with an accredited financial advisor to manage risk and protect the wealth you’ve created is a good place to start in making sure loss is minimized. I think Warren would agree.

To date, I’ve talked about some essentials for managing risk in your financial plan to help minimize loss.

build a comprehensive roadmap
manage risk
implement action with discipline
protect your assets

But there’s something else you need to consider. An effective, risk-managed plan needs to be measurable so selecting the right benchmark is also essential. Ultimately, a ‘good benchmark’ is one that lets you measure success from a risk management standpoint.

If done properly, it should allow for an evaluation of performance in terms of both risk and return. A best-in-class firm will do this quarterly with clarity, transparency, and compliance to accredited standards.

Since the approach to benchmarking differs slightly from financial planning to investments, I’ll focus on the latter here and reserve the former for my next piece. Your investment benchmark should primarily evaluate two things:

Performance Measurement
On the investment side of the ledger, you should be reviewing your performance on a quarterly basis for each asset class measured against an appropriate benchmark.

Working with an accredited counsellor who follows the Global Investment Performance Standards (GIPS) as outlined by the CFA Institute will ensure you obtain the clarity and transparency needed to make accurate and informed investment decisions with your planner. Firms, such as T.E. Wealth, which adopt these rigorous investment standards can mitigate risk associated with bias, calculation methods, composite construction, disclosures, and presentation and reporting.

The MFDA’s proposal to mandate performance and cost reporting to clients will have a significant impact on firms not yet following these standards. Under this new mandate, they will also be required to provide full disclosure of service and transaction fees and charges. Self promotion alert: this is something T.E. Wealth has been doing since our inception in 1972. (Hmm, I wonder what else we’re ahead of the curve on?)

Cost Measurement
For investment funds, good benchmarking means reviewing your costs against other options in the industry. Long-term performance tends to go to the middle so, generally, what wins out is low cost and discipline. See more on Mean Reversion at Credit Suisse Global Investment Returns Yearbook 2013.

There’s a common perception that better managers charge higher fees – but that’s not necessarily the case. While you may get a better dining experience by doling out more money for a meal, paying higher fees for a money manager doesn’t always ensure better returns (especially in light of the above study). A disciplined approach including rebalancing and control of costs will make all the difference.

Wondering if you’ve got the right investment benchmarks in place? Let’s find out.

Scott McKenzie has more than 23 years experience advising executives, athletes and entrepreneurs. He provides multi-family office or direct financial counsel in the areas of financial planning, wealth management, investment counselling, investment management, tax planning, tax preparation, income and expense, retirement planning, estate planning, wills, and power of attorney.


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These articles are for general informational purposes only. Please obtain professional advice before taking any action based on this information. No endorsement or approval of any third parties or their advice, information, products or services should be implied by any references to third parties contained in any article. Trademarks cited in these articles are the respective properties of their owners.

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