One day as I was doing my usual perusing of the world wide web, I came across a posting about DRIP investments. What caught my eye had nothing to do with DRIP investments but more about a comment made at the end of article that really had me thinking. It said:
“…Investors should be focussing their attention to more important investment decisions that are likely to have a bigger impact on overall success (such as savings rate, expenses, risk, fees, taxes, and behaviour)…”
Make no mistake, these are important factors in developing your investment ideology or strategy, however these elements just get you into the game of investing and on their own are not going to guarantee you will be successful. You can setup an RRSP and put your savings into low cost bond and low risk, blue-chip equity ETF’s that are tax efficient, but if those investment don’t generate the returns you need, it really doesn’t mean much. Performance is the ultimate metric we need to be constantly looking at, otherwise, why do we bother investing?
The one factor I’ve noticed that is rarely discussed about in the investing community (at least the online blog community) is the actual performance of investment products. What about return on those savings? What is the level of income (be it from capital appreciation, interest payments, or dividend payments) that I should expect to be derived from that investment decision I made? It seems everything you read in blogs or financial journals or in the media revolves around saving money and keeping costs low and it’s important. I find it really interesting that we never hear anything about performance, except the ivory tower line which I myself have cited numerous times that 70-80 percent of actively managed funds fail to earn a market rate of return or higher. As long as you follow strategy X, you will be successful is the mantra but we never see the outcome of that strategy.
Why are we obsessed with cost? Because it is a lot easier and tangible to say product x is better because it is cheaper than it is to say product X is going to give you a guaranteed return of X. Making that concept of performance tangible and with certainty is much harder, because you really don’t know what the expected outcome of the investment will be. Costs are predictable and much easier to describe.
A great example is the emergence of robo-advisers services that will use software and algorithms to design, setup, and manage your savings automatically. There have been a lot of wonderful blogs commenting on the benefits of these services and most of those benefits revolve around the same cost saving premises (low fees, low maintenance, access to a professional back office). What we hear nothing about is how well these types of portfolios perform? The reason is we just don’t know as these types of services have no performance history, other than again empirical evidence that passive portfolios perform better than actively managed ones.
We shouldn’t be investing as part of a civic duty to keep financial companies back offices sustainable. We shouldn’t be investing to get stickers proclaiming we paid the lowest in fees or saying we invested in product X.
We invest to…get ready for it…to make money! As much as we can develop great habits for saving, if we just save and do nothing with it, you will be eroding your purchasing power as prices rise. We need to protect our purchasing power from future price increases by allocating our savings to investments that will provide enough return at a certain risk profile we are comfortable with that will protect our future purchasing power.
Same thing goes with buying the lowest cost investment product. While that ensures that more of our capital invested is staying in our pocket, if the investment at the end of the day doesn’t generate a meaningful return to support our long term financial goals, it really isn’t that great a product. No one is going to care that you found an ETF that charges an MER of 0.01% if it is generating sub par returns.
Again….just so we’re all clear in our intentions. Why do we invest?….to make money! Performance is ultimately going to determine your ability to meet your long term financial goals and you need to always take a results oriented approach and ask yourself or an advisor that you are working with whether an investment is going to make you the money that you need.