Lately, we’ve been getting several questions from clients regarding the performance of our taxable accounts. While we can’t publicly publish performance numbers due to legal constraints, we are always happy to walk you through your portfolio’s performance in detail! Just contact your lead advisor if that is something that interests you.
In the meantime, we can share our approach to structuring our taxable accounts: our tax-sensitive, wide mode, and builder strategies, to be exact. Now, you’ll have a line of sight into what goes on behind the scenes with your money.
Full warning, this is going to be a deep dive! We’ve done our bests to make these concepts graphics-oriented, but this topic does require a fair amount of data and tables. So hang with us.
How We Measure Performance
To start, let me set the stage that all the numbers you’re about to see are based on hypothetical accounts. Everyone’s account won’t always reflect these traits; they are simply the theoretical models to evaluate performance against benchmarks. That way, if our portfolios aren’t tracking the way we expect, we will know why.
How do we monitor our account performance? We’ve made it simple with the acronym S-A-M-U-R-A-I:
Specified in advance
Appropriate
Measurable
Unambiguous
Reflective of current investment options
Accountable
Investable
Throughout this blog, we’ll walk through examples of how we monitor performance — using only the highest Chartered Financial Analyst, CFA, standards.
Manager Selection
Regarding manager selection, our approach is generally to ask, “Did you beat your benchmark or not?” And, more importantly, “What benchmark did you choose to measure it against?”
Any easy way to think of this concept is pictured above. Look at the big box (above) as our benchmark, with increasing performance and excess return. The excess return can either do better or worse than the benchmark. For example, over the last five years, there has been a negative access return.
Asset Class Domes
Asset class domes are the mix of stocks and bonds in your portfolio. These can exist across all asset classes, but the math gets more confusing each time you add additional asset classes. For this example, let’s consider a 60/40 portfolio.
At GWS, we generally recommend overweighting equity and underweighting fixed income, especially given today’s inflation risk. If you’re in bonds, you risk eroding your principal and purchasing power.
So, if you had a risk profile that suggested you should be a balanced investor, GWS would likely recommend an 80-20 allocation but measure it to a 60-40 benchmark. Then, you have precise data to use to analyze if our active weights helped or hurt performance.
Another way to look at this is with a bar chart. On the left, you have stocks, where we have 80% vs. 60% in the benchmark and 20% bonds vs. 40% bonds. Then, if you get into more detail, you can see the net difference of 20% positive and negative. That’s the way we look at portfolios; what’s the net relative to the benchmark?
Now let’s look at the effects of performance. For example, we have stocks performing at 12% and bonds performing at 4% in our hypothetical with weights.
We would say stocks multiplied by 60% equals an 8.8 in benchmark between the stocks and the bonds. But 7.2% of that 8.8% was attributed to equity performance. Then, if we look at bonds, we get 160 basis points.
Now, let’s look at our 80-20 allocation. We added 20% extra to stocks, resulting in a 9.6% return for our equity position and 0.8% for our bonds. That’s 10.2 vs. 8.8 — meaning investors are pretty happy relative to their benchmarks.
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For detailed performance metrics, please don’t hesitate to contact your lead advisor. And, in the meantime, be sure to keep up to date on Gatewood Wealth Solutions through our daily 3x3s and our weekly market insights on our YouTube, LinkedIn, and Facebook accounts.
Disclosures:
All examples are hypothetical and are for illustrative purposes.
The opionions voiced in this material are for general information only and are not intended to provide specific advice or reccomendations for any individual. All performance references is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Securities and advisory services are offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.