Benchmarking in Investing: Tools to track relative performance

 Ever wonder how to know whether your portfolio is performing well?  Some people will simply look at the overall return, and if it’s higher than their neighbor’s, they figure they are doing well!  However, simply looking at the bottom line rate of return doesn’t tell the whole story because returns are directly related to how much underlying risk you have taken in the portfolio. To an amateur investor an annual rate of return of 7-8% might feel good, but a professional looks at how much risk you had to take to achieve such a result.  One method everyone should use to better understand the relative performance of an individual portfolio is referred to as “benchmarking”. 

Performance tracking methods

A few commonly used benchmarks for large U.S. stocks are the Dow Jones Industrial Average and the Standard & Poor’s 500 index (more commonly known as the S&P 500).  You will hear these two indexes referred to constantly in the news. If you hear the Dow was up 100 points, you may find yourself checking how your portfolio’s performance compares.  The problem with this is that you might not own anything in your portfolio that looks anything like the Dow Jones Index. This is why you need to understand what makes up your portfolio and what indexes to track to understand relative performance. 

Benchmarking Best Practices

Hypothetically, let’s say you have a portfolio that looks like this:

30% Large International Stocks

30% Large U.S. Stocks

40% highly rated U.S. corporate bonds   

You look at the annual return for the Dow Jones, see that this particular index was up 9% at the end of the year, and then check your portfolio’s overall return to see that it was only up 4%.  Before you rush to the phone to fire your financial advisor, first get the full picture!  Your portfolio only has 30% of the money invested in Large U.S. companies and 70% of the money invested elsewhere. To expect 100% of the money to perform the same as the Dow Jones is highly unrealistic.  Instead, you should look at a few other “benchmarks” that are commonly used in financial circles to track different types of stocks and bonds.

Here is a list of benchmarks to track different asset classes to help you make a fair comparison about your portfolio’s performance compared to the types of risk you took:

S&P 500-  Large U.S. Stocks

Russell 2000- Small U.S. Stocks

MSCI EAFE- International Stocks

Barclays Aggregate U.S. Bond Index- U.S. Bonds

Back to the example, our hypothetical investor decides to look up the returns for the Barclays Aggregate Index and MSCI EAFE since he has money invested in those types of asset classes as well as Large U.S. Stocks.  Our investor sees that bonds actually had a negative 2% rate of return for the same time frame, and that the MSCI EAFE was essentially flat.  So 30% of his money he expects to be up somewhere near 9%, 30% of his money he expects to be right around 0%, and 40% of his money he expects to be down 2%. 

Putting Performance Benchmarking to Work

If our investor had $100,000 at the beginning of the year invested in our hypothetical portfolio here’s how it breaks down:

Add it up and the ending portfolio balance is $101,900 or a rate of return of 1.9%.  When you understand the whole picture, you might be more satisfied with a 4% return knowing that a portfolio with very similar holdings should only be up about 1.9% according to the benchmarks.

Talk to your financial advisor to find out what makes up your portfolio and what benchmarks to use for your particular situation.

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. The Dow Jones Industrial Average is an unmanaged index of 30 widely held securities. It is not possible to invest directly in an index. C14-038979

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Slightly Off-Center: Who’s your favorite superstar?

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 There’s a lot you know about our team at The Center … but we’ve dug up answers to some questions you might have never thought to ask.

Who's your favorite superstar?

Warren Buffett(!)…smart, irreverent, independent-thinking. –Dan Boyce

Oprah of course! –Gerri Harmer

Mariah Carey, of course –Kali Hassinger

Superman and Clark Kent –Matt Chope

Pavel Datsyuk – in my opinion, the best hockey player in the world right now – the things he can do with the puck is amazing –Nick Defenthaler

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Capital Gains: Minimizing Your Tax Drag

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The difference between the tax man and the taxidermist is the taxidermist leaves the skin."  Mark Twain

As the bull market marches on, many investors find the capital losses they have carried over since 2008 are gone.  Likewise, many investment companies that have earned 5 years of steadily positive returns are finding themselves in the same situation. While these positive returns have had meaningful impact on achieving our financial goals, we are going to start feeling them in the checks we have to write to the government. 

According to a Morningstar and Lipper study, the average annual tax drag on returns for investors is .92% for owners of U.S. equities.  This means that if you average 10% a year returns in your equities, the amount you put in your pocket is 9.08% after you pay the government its share.  From 1996 to 2000, during the extreme run up of the tech bubble, the average tax drag per year was 2.53%1.  This can happen when there has been no bear market or correction for many years.  We would argue it is happening again now.

4 Tips for Managing Taxes

Perhaps the key at this stage of the game is not to avoid taxes but to take many small steps to manage them.  There are several key steps that we utilize in managing portfolios to also minimize taxes.

1. Asset Location:  Place your least-tax-efficient, highest returning investments in your IRA or 401(k).

2. Loss Harvesting: Continually monitor your taxable accounts for losses to harvest rather than only looking in the last quarter of the year. 

3. Maximize contributions to tax-deferred retirement accounts:  This directly lowers your taxable income when maximizing your contributions to 401(k) plans at work.

4. Harvest gains:  In the long run, taking gains during years your income is lower than normal can potentially reduce the amount of taxes paid to the government over a lifetime.

While paying attention to expenses always seems to top the headlines, taxes are just as big of a drag to long-term investor returns. Consult a tax advisor about your particular tax situation.

Angela Palacios, CFP®is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.

1:Source: http://www.lipperweb.com/docs/aboutus/pressrelease/2002/DOC1118788693610.doc

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Raymond James does not provide tax advice. C14-036848

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Awards & Inspiration at the RJ Women’s Symposium

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From helping families prosper to the art of negotiation, the 20th annual Raymond James Women’s Symposium was packed with great insight and inspiring speakers. Marilyn Gunther, Melissa Joy and Laurie Renchik recently traveled to St. Petersburg, FL for the opportunity to take part in thought-provoking education sessions and mingle with other women advisors in the Raymond James family.

The trip this year was especially exciting because The Center’s own founding partner Marilyn Gunther received the Raymond James Network for Women Advisors 2014 Women of Distinction award.  She was presented with the award by the President of Raymond James Financial Services at an opening night awards dinner.  This award is given to women advisors with Raymond James who are exceptional in both their professional and personal contributions.

These are our Top 5 ideas we brought back to Michigan:

  1. Susan Bradley from the Sudden Money Institute talked about recognizing the role of money in all of the transitions of life.  We have come a long way from thinking about money as the accumulation and distribution phase.

  2. The number of RJ upper management team attending was an acknowledgement of the increasing and effective role of women advisors and women leaders.  We have a long way to go, but it is a start.

  3. Author and former sports agent Molly Fletcher shared her insights about the art of negotiating with an emphasis on belief in what you do and not being afraid to ask the tough questions.

  4. In the workshop, “The Estate is Set, But Are Families Prepared?” we learned more about helping families thrive and prosper from one generation to the next with family meetings designed to help prepare the next generation for financial and non-financial aspects of wealth transfer.

  5. On the topic of Women and the World of Finance, Sallie Krawcheck drew on her Wall Street experiences as well as current research to illustrate how companies that embrace gender diversity on their boards and in management often see improved performance and profitability as a result.   

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed web sites or their respective sponsors. Raymond James is not responsible for the content of any web site or the collection or use of information regarding any web site’s users and/or members. C14-038768

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Unrealized Capital Gains? Consider Gifting Stock Instead of Cash

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One of the most tax-efficient ways to give a financial gift to your favorite charity is with long-term appreciated securities.  While gifts of cash are easy to make by simply writing a check, don’t overlook the potential benefits of gifting stock that has gone up in value.  By considering both options, you may be able to increase the tax benefit and make the most of your year-end tax planning and gifting goals. 

Here are four tips to consider:

  1. If you own stock investments (held longer than 12 months) with unrealized capital gains, the best way to give may be with a portion of stock rather than an all cash donation.  By gifting stock, you receive a deduction for the market value and reduce future capital gains tax liability.  

  2. If you own stock with short-term gains (owned for less than 12 months) the strategy is not optimal because your tax deduction will be limited to the amount you paid for the shares. 

  3. If you think the gifted stock still has upside potential, you can use the cash you would have otherwise donated to replace the shares of stock you donated.  This will reset the stock cost basis to the current market value, reducing future capital gains tax liability.

  4. If you are holding taxable investments that have lost ground, it may be preferable to sell the investment, claim a capital loss, take the charitable deduction and gift the cash.  In this scenario, the combined tax deductions may make this strategy a winner.

Making the Call between Gifting Cash or Appreciated Stock 

If you are looking to support organizations important to you and maximize your tax benefits, it is important to consult with your tax advisor and include your financial planner to make the most of your tax planning and lifetime gifting goals.  

Laurie Renchik, CFP®, MBA is a Partner and Senior Financial Planner at Center for Financial Planning, Inc. In addition to working with women who are in the midst of a transition (career change, receiving an inheritance, losing a life partner, divorce or remarriage), Laurie works with clients who are planning for retirement. Laurie was named to the 2013 Five Star Wealth Managers list in Detroit Hour magazine, is a member of the Leadership Oakland Alumni Association and in addition to her frequent contributions to Money Centered, she manages and is a frequent contributor to Center Connections at The Center.

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. C14-036845

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Capital Gains: 3 Ways to Avoid Buying a Tax Bill

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Many asset management firms have started to publish estimates for what their respective mutual funds may distribute to shareholders in short- and long-term capital gains. Moreover, early indication is that some firms will be paying out capital gains higher than recent years. As you may be aware, when a manager sells some of their holdings internally and realizes a gain they are required to pass this gain on to its shareholders. More specifically, by law and design, asset management firms are required to pay out 95% of their realized dividends and capital gains to shareholders on an annual basis. Many of these distributions will occur during November and December. Remember this is only relevant for taxable accounts; capital gain distributions are irrelevant in IRA’s or 401k’s.

Capital gain distributions are a double edged sword.  The fact that a capital gain needs to be paid out means money has been made on the positions the manager has sold. The bad news – the taxman wants to be paid.

What can we do to minimize the effect of capital gain distributions:

  1. We exercise care when buying funds at the end of the year to avoid paying tax on gains you didn’t earn, and in some cases hold off on making purchases.

  2. We may sell a current investment before its ex-dividend date and purchase a replacement after the ex-dividend date.

  3. Throughout the year we harvest tax losses, when available, to offset these end of the year gains. 

As always, there is a balance to be struck between income tax and prudent investment management.  Please feel free to contact us if you would like to discuss your personal situation.

This material is being provided for information purposes only and is not a complete description of all available data necessary for making an investment decision, nor is it a recommendation to buy or sell any investment. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, tax situation and time horizon before making any investment decision. Any opinions are those of [insert FA name] and not necessarily those of Raymond James. For any specific tax matters, consult a tax professional. C14-040561

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Slightly Off-Center: Best Way to Spend a Saturday?

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There’s a lot you know about our team at The Center … but we’ve dug up answers to some questions you might have never thought to ask.

Best Way to Spend a Saturday?

On the Golf Course!-Angela Palacios

S-H-O-P-P-I-N-G; I repeat S-H-O-P-P-I-N-G–Amanda Toia

Playing tennis in the morning, making good music with friends in the afternoon, going out to a nice place for dinner, concert or show in the evening. –Dan Boyce

Hanging out with family or watching a football game –Gerri Harmer

Outside enjoying sunny weather –Jaclyn Jackson

Laying poolside reading every trash magazine I can lay my hand on! –Jennifer Hackmann

Relaxing with a good book and then dinner out in the evening –Laurie Renchik

Playing sand volleyball with great friends –Matt Chope

Waking up early, cup of coffee in bed while catching up on some reading on my IPad, nice long walk with my wife, Robin and our black lab, Jax, an afternoon playoff hockey game on TV and wrap up with a barbeque with friends and family in the evening –Nick Defenthaler

Best way to spend a Saturday is to travel to Kansas to watch Matt play football or to Albion to watch Jack play baseball or to one of Kacy’s swim meets. –Tim Wyman

It’s finally fall, my favorite season! So the best way to spend a Saturday is with my hubby at the orchard or cider mill, carving pumpkins, or taking the dogs for a long walk and enjoying the fall scents, scenery and weather. –Melissa Parkins

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The 2014 Movember Challenge: Changing faces at The Center

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Who doesn’t love a good beard or mustache?  I think you’d be hard pressed to find many people who don’t enjoy the look on us guys.  Heck, Dan Boyce has been rocking a mustache since our firm came into existence almost 30 years ago!  Over the last few years, November has become the month dedicated to growing out your facial hair, otherwise known as “MOVEMBER”.   What many people don’t realize though, is that Movember is actually dedicated to raising money and spreading awareness for prostate cancer, the second leading cause of cancer-related deaths in men in the United States.  To find out more about the foundation that’s changing the face of men’s health, check out movember.com. I think it’s a fun thing to do each year, switch the look up a little bit and save some time and money with your shaving supplies while hopefully donating some of those savings to prostate cancer research.   

Throwing down the Movember Gauntlet

This year, Matt Trujillo and I took the Movember challenge and have had an ongoing facial hair battle all month. You can check out our hairy progress on The Center’s Facebook page.  When I decided to partake in Movember once again this year, I started thinking about the “skillset” that it takes to grow an amazing beard/mustache.  When I really took a step back, I realized how much it had it common with investing -- as crazy as that may sound! Consider these hair-raising similarities to investing:

Patience – Not everyone has the genes for growing good facial hair – like me for example.  I have what many deem as a “baby face” and have a hard time filling in the gaps in certain areas, but hey, I’ve seen way worse. Have you ever seen Justin Bieber’s attempt at a mustache?  If not, take a look because it makes me feel better. But the one thing I do have in my favor is patience.  I know it will take longer than most to get a decent beard/mustache going, but I’m in it for the long run. 

Persistence – As every man can attest, you will come to a point where your facial hair drives you crazy.  This is typically about 1½ – 2 weeks into the growing cycle and is when the itchiness and overall feel starts to really get to you.  Although this growth period is tough to push through, persistence is essential and is necessary to prevail.

Consistency – You have to stick with it!  If you want good facial hair, consistency is key.  You have to know going in that the process won’t be easy. Being consistent and keeping up with the general maintenance of having facial hair, along with fighting the countless urges to shave that lip sweater off your face, is what separates the men from the boys.

Movember & Investing Parallels

Can you see how these three attributes required to growing facial hair can play into investing too? The most successful clients we’ve worked with started saving at a young age and did so over the course of their 30+ year working career. That required discipline and patience.  They’ve seen the market go up and down along with their account balances; however, they’ve stayed the course and are now enjoying a very comfortable retirement.  Investing with persistence, in my opinion, means staying true to your personal goals and maintaining a diversified portfolio. Instead of following “new” or “hot” investment crazes. Keeping it simple and using asset allocation has led to countless success stories for our clients.  Finally reaching your goals takes consistency, which if you ask me, is the number one key to investor success.  Consistent saving at a reasonable rate, no matter what the market is doing, can reap monumental dividends over the course of 40+ years. 

Matt and I have had a lot of fun the past few weeks partaking in Movember and know the office has also enjoyed our evolution into our “business professional cave man” look.  However, what we can’t forget is the true purpose of growing our facial hair– prostate cancer awareness.  We all know someone who has been affected by cancer and if trends like Movember can help to ultimately fight the cancer battle, I’m all for it.  Happy Movember, from everyone at The Center! 

Nick Defenthaler, CFP® is a Certified Financial Planner™ at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. C14-039023

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Do You Have Warren Buffett’s Stomach for Volatility?

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It is rare that I don’t agree with advice from Warren Buffett, but earlier this year we took different sides of a debate. His recommendation for a simple, flawless investment strategy was putting 90% of your assets in an equity fund designed to mirror the performance of the S&P 500 and 10% in cash.

This sounds great if you have nerves of steel and can make it work. But most people can’t stomach it.  Buffett is an amazing investor who understands his emotions and has a great ability to see the value of companies and what he owns.  But we’re not all Warren Buffett.  That is one of the reasons there are financial advisors in the world who help people understand appropriate volatility in their portfolio and what to do when that volatility spikes. 

Your Own Risk Tolerance

One common question I got during the downturn five years ago was when do we stop the bleeding?  One client said to me, “I had $1,200,000. Now I have about $1,000,000 due to the financial crisis and the market falling.  When do I do something?” To determine a time to sell really takes two correct decisions.  When to sell and when to buy back in. It is almost impossible to be right twice consistently.   

These difficult questions were most prevalent during the final weeks of the financial crisis in January to March of 2009.  And there was a lot more bad news to come. GM’s pending bankruptcy was front stage in the spring of 2009.  If someone was to try and time the exit and reentry during this period, it could have been devastating. Actually, the S&P soared over 30% from March to June in 2009 in the face of such horrible news and if someone sold out, it would be almost impossible to buy back in without paying more.  And those are the people on the sidelines that missed one of the greatest markets in history.

Nerves of Steel or Appropriate Allocation?

No one knows when a market downturn will occur or for how long it will go. More importantly to reap the benefits of long-term equity returns we need to be in to win.  Even more important, we need to have the right amount allocated so that we can withstand any type of downdraft and wait it out.  

So, while Buffett and his steely nerves might be able to stay invested through thick and thin with 90% of his wealth in the stock market, most people need less volatility to stay the course.  Buffet realized the value of companies when they were extremely cheap in 2009, while most investors could only see the losses from the past. Through those challenging times when people kept asking if it was time to do something, many investors benefited from staying the course through the last market cycle and went on to reap the benefits of this bull market.  I believe some nerves were enforced with regular meetings, appropriate plan design and investment portfolio allocation.

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc. Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions. In 2012 and 2013, Matt was named to the Five Star Wealth Managers list in Detroit Hour magazine.

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Holding stocks for the long-term does not ensure a profitable outcome. Investing always involves risk and investors may incur a profit or loss regardless of strategy selected. Inclusion of any index is for illustrative purposes only. Individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. C14-036847

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