Monday, November 24, 2014

What has the BIGGEST impact on your portfolio returns? The answer might surprise you

What has the BIGGEST impact on your portfolio returns? The answer might surprise you

In my last column I made the case for why it’s such a terrible idea – a lost cause, even – for trying
to pinpoint the best times to get in and out of the stock market. I’m hoping I was able to convince you to take that impossible, wealth-eroding enterprise off of your must-do list.

Today, I want to continue that discussion, but from a slightly different angle: By how much would you enhance the returns on your portfolio if you were able to perfectly time the stock market’s movements?

I must point out that we both already know this isn’t possible, but for the sake of this discussion, let’s say you or your financial advisor somehow had the proverbial crystal ball.

I think it’s a fantastic question, because the answer will really help you to decide whether it’s even worth the effort. At the end of the day, what it all comes down to is getting a good return on your savings, period.

According to the widely used Brinson, Hood, and Beebower (BHB) study into what really makes up the returns on a portfolio, here’s how an investment portfolio’s return breaks down:

  • Market timing: 1.8%,
  • Stock selection: 4.6%,
  • Other factors: 2.1%,
  • Asset allocation: 91.5%.
So say that a given portfolio earned 10 percent. Market timing will have contributed 0.2%, stock selection 0.5%, other factors 0.2%, and asset allocation 9%.

Now let’s put things into perspective. All things being equal, if you (or your financial advisor) were able to perfectly time the market by accurately predicting its exact movements with no error whatsoever, choose the right stocks/bonds, as well as arrange every other detail you feel is essential for the perfect portfolio investment, but got your asset allocation wrong, you’d have ended up with only a 1% return.

On the other hand, if you nailed your asset allocation (the broad proportionate mix of equities/bonds/cash) but botched the other three areas – including market timing, because you went about your daily business without constantly trying to predict what’s going to happen in the market on the next day – you’d have earned 9% out of the 10% return in this example.

So, my friend, you’ve got to focus on where the money is really going to come from – your broad asset allocation strategy – instead of wasting your time, energy, and emotions trying to time/predict the market for negligible results. And while on the subject, let me remind you once again that you shouldn’t allow the talking heads on TV, radio, or in print media to take you on a rollercoaster ride that could potentially rob you of what matters most.
Want an independent assessment to confirm that you are on the right track when it comes to saving for your retirement, including the money you will leave to your heirs? Come in so we can help you to  objectively evaluate your current approach. Visit or call 877.656.9111 right now to book your complimentary session

1 comment:

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