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Get a personal rate of return yearly

Get a personal rate of return yearly

October 23, 2014

The simple question investors have about their investments is how did they do? Investors want to know how much they invested, what it is worth now and what was the return on their investments.

Knowing your rate of return is critical for ensuring you are on track to meet your financial objectives. Without a performance number you are not able to monitor your progress towards that objective.

Consider the return on investment number as the speedometer in your car. If your trip calls for a speed of 100 kilometers per hour and you drive slower, you will not reach your destination at the estimated time.

Financial objectives should have a specific target. You want to have a certain amount of money available for those payments when a child is ready for their post-secondary education.

The same logic is true for retiring. By the time you retire you want to have a certain amount of cash available to support your desired lifestyle. The amount accumulated will be a combination of what you saved and the return on investment earned.

If your target return is say six per cent and the return on your investment is under six per cent, you will fall short of what you had hoped to accumulate. Therefore, understanding the performance return on investments is critical.

We strongly suggest you don’t just review how the mutual funds that you are invested in performed during the year. Our recommendation is that every year you request a personalized rate of return from your advisor. This data may not be the same as the mutual funds’ overall yearly performance.

Published rates of return are for the entire year. They are not meaningful to you unless you were invested for the full year with no new contributions or withdrawals.

It is your specific return on investment based on when you invested or withdrew funds that will allow you to accumulate the correct value; not just industry averages.

Once you have your individual return figure you can then determine if you are on track to meeting your objective. Here is where you intervene to ensure you are successful in accumulating sufficient funds.

If you are slightly below your target return then you know you will accumulate slightly less than expected. You can accept this or increase the amount you save to make up the shortfall.

If you are significantly below your target return, then better to face reality now than just waiting and doing nothing. Adjusting your action to new realities is what makes some people more successful.

Learn from what has happened and go forward with a new strategy. Making adjustments as you go is better when you still have time to recover.

Navigating your investments without a speedometer that tells how quickly your investments are growing is a mistake. If a financial objective is important then how you monitor your progress towards achieving that objective is also important.

Understanding your personal rate of return on your investments allows you to monitor your success and adjust along the way if your investment performance is below target.