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Performance Monitoring

RMI will also monitor investment performance for a fee.  No one can control the investment process if your results aren’t measured properly.  As the well-known scientist, Kevin Celsius once stated, "If it can’t be measured, it doesn’t exist."  For investors who want complete control over investing their assets, but lack the resources to calculate the actual performance of their portfolios, RMI offers this service for a fee.

RMI will monitor asset performance, benchmark returns and track your objectives.  We also include gain/loss reports, track basis and state income from dividends and interest.  Stating objectives, developing a portfolio, and implementing that portfolio are only a part of the process of investing - monitoring the performance is also a key element the public either simply ignores, or makes false assumptions about.  In fact, there are a number of investment advisors, who don’t even provide this information.

Understanding the Problem

Investors are bombarded with a wealth of information about performance regarding mutual funds, stocks and bonds.  One can find this information in the newspapers, periodicals, magazines and various websites.  But having the performance of an individual security or fund doesn’t necessarily reflect what you, as the investor experience.   Posted returns are only valid if you bought or sold your investments exactly on the same date as the investment returns were calculated.  A few days can make a huge difference.  Additions or withdrawals to a portfolio can also distort returns.

The ability to track the performance of a great many assets possibly purchased and/or sold at various times with a variety of cash flows increasing and decreasing over time is a daunting, if not impossible task requiring expertise beyond the grasp of the average investor.  RMI can provide this important feedback to help you make better investment decisions, understand fully the impact of taxes, and help you during tax season.

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Returns

There are two basic methods of calculating returns.  The first is called the internal rate of return (IRR) and the second time-weighted return (TWR).   Each method has a different purpose and sometimes a different result.

The internal rate of return is the average rate earned by each and every dollar invested during the period. This rate is influenced not only by the movements in financial markets and decisions made by portfolio managers, but also by the timing and size of the cash inflows and outflows and the beginning and ending book or market values.  In other words, if one invests more dollars into a fund or portfolio as the market is experiencing greater returns, the IRR will be higher than if the opposite occurs.  Cash flow matters with the IRR calculation.

IRR is sometimes referred to as the "investor return" - what your portfolio experiences in the real world.  This is not a good measurement to compare against benchmarks, such as the S&P 500 Index, as the benchmarks are always calculated without cash flows.

Time-weighted returns do not take into account the amount and timing of cash flows.  Since the returns for each sub-period are equally weighted with each return calculation, cash flow has no impact on the return.  Since investment managers have little control over cash flow, time-weighted returns are an appropriate method of analyzing the manager's performance.

We can show either the IRR, TWR, or both, depending upon the demands of the client.  Normally, we choose TWR, as this is the preferred method when comparing performance against a stated benchmark, as benchmarks do not have any cash flows.

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Benchmarks

The art of benchmarking a portfolio has its own challenges.  For example, how does one track equity performance?   Does one create a blended portfolio of several different benchmarks (i.e. the Russell 2000, the S&P 500 Index, and the MSCI EAFE index), or does one use a single benchmark for all equities (the Wilshire 5000)?  RMI can help you clarify your goals and objectives in setting standards.

How does one compare the results of various sub-asset classes; for example, do you want to know the performance of small-cap value stocks, or international small cap stocks?  We can assist in this area as well.

RMI can tailor a benchmark to meet your needs and also help define your investment objectives with an Investment Policy Statement (IPS).

Relative Returns versus Absolute

You might want to achieve an absolute 8% return over the next 10-15 years.  RMI can graphically track your portfolio against this absolute return from the very beginning, or inception of our reporting.

Perhaps, you would like to know the relative performance of your portfolio, for example, how well you are doing, versus inflation over time.   Does it make sense to target an 8% rate of return if inflation averages 5%, as that represents a real return of only 3% (8% nominal return minus a 5% inflation rate)?