Monday, February 21, 2011

Personal Rate of Return

I'm reading an interesting book by David Trahair called Smoke & Mirrors: Financial Myths That Will Ruin Your Retirement Dreams. Even with all the financial reading I've done, I'm learning quite a bit. Anyone who has a financial adviser paid by commission or one working at a bank needs to read this book.

One of the first things I was interested to read was that I can calculate my personal rate of return on my investments using Excel! It has a nifty formula called XIRR. You plug in all your dates of investments and their cost and then the existing value of your portfolio on this date. It spits out your annualized rate of return over that period. I decided to take this on.

I'm currently doing an analysis of what approach is better. The one he espouses in his book, or the one we're currently following. Currently we invest in RRSPs and put extra money on our mortgage. Kind of a compromise. He recommends not putting any money into RRSPs until ALL your debt is paid down, including mortgage. The argument is that paying down debt is a guaranteed rate of return. So I'm doing what I always do in these cases and running complicated financial projections on Excel that will take me close to 2 hours, probably just to find out I don't want to change what I'm doing. Why do I do this to myself? Is there a disease label for people who overanalyze everything?

Anywho, I was delighted to calculate my personal rates of return. It was a pleasant surprise given the hammering our funds took last year.

In my RRSP, since about 3.5 years ago, we have an annualized rate of return of 6.5%. My portfolio is 37.5% Canadian, 25% International, 25% Fixed Income, and 12.5% US. Comparing that rate of return to a similar portfolio made up of the indexes shows that I'm handily beating the index which sits at a 3-year annualized return of 0.54%. Since my portfolio is constructed entirely of TD e-series Index Funds most of that difference is likely due to dollar-cost averaging. We kept investing the same amount even when the market was in the dumps.

Other rates of return:
Sarah's Spousal RRSP: 3.0%; not as great but dragged down by early mistakes
Sarah's Personal RRSP (invested way back when we were students and had some extra money around): 1.3% That's the value you get from banks my friends.

Sacha:15.5%. Wow. He benefited from us starting this right when the market was at its lowest. Not on purpose, just lucky.

Kees: 16.79% Again. Wow. Sure shows the value of timing considering the asset allocation in my fund and the boys RESPs is the exact same.

Oh, and just for funsies, of the 1003 mutual funds GlobeFund lists as Global Equity Balanced (that is, roughly similar portfolio allocation to me), only 3 bested me on 3-year annualized return. And of those 3 none of them had Canadian assets. Of the funds with Canadian assets, NOT ONE returned higher than me. And I'm not even getting paid to do this. Nor should I. It's really not that hard. That's the thing that makes me sick about the investment industry. A bunch of people getting paid too much to take too much from you and turn it into too little.

Do yourself a favor. Pick up this book and use it as your starting point to educate yourself about personal finance and investing. Yes it will take some time but you'll save yourself a bundle. At the very least, find a fee-only financial planner. Ditch your banker.

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