Our 2012 client survey profiled the need to help clients to understand better their investing world… starting with the information that appears in their Annual Report

What is the purpose of an Asset Allocation Plan, and where does it come from?

We think asset allocation is the most important thing. It quantitatively speaks to your risk profile. In the longer term, the returns you earn should correlate with the risk profile you choose to take. You may choose to change this Plan over time in consultation with us. The Plan is documented and signed off by you in our client agreement forms. For many people, the Plan comes from a detailed long term Financial Plan, which they may have done with us or elsewhere. Otherwise, it is derived from conversation with you and from soul searching your own attitudes towards money and considering what the money is for.

How do you calculate my rate of return? And what does it include?

Your return is calculated by the fraction of the income earned in the portfolio divided by your “invested capital”. The income includes dividends and interest. Some of the interest is received in cash and some is “accrued” into the growing value of a strip bond. The income also includes appreciation or depreciation in the value of your holdings, whether those were realized through a sale or remain “unrealized” on paper. Your invested capital starts with the opening invested amount and time-adjusts through the year for any contributions or withdrawals of funds.

What does “compound return” mean?

This is the average return PER YEAR that you have made for some period of time, eg 3 years, 5 years, etc. It is algebraically derived from the collection of past “simple” returns.

Your compound return is a function of your Asset Allocation Plan, the vagaries of the market, the period measured in the compound calculations and the specific holdings and stewardship of your portfolio.

The longer the compounding period, the more relevant it is to your investing success.

The Historical Returns graph in your report tracks your simple and compound returns across the years.

What is a good compound return?

We report to you the compound return since you started with us. If you have had a long term Financial Plan prepared, then there is a long term rate-of-return implicit in that Plan that helps you live out your life to a desired standard. We believe that a good compound return is one that approximates, or exceeds, the return implicit in your Plan. If your spending habits also approximate your Plan, then life should play out nicely. Ideally, such returns could also be benchmarked against some external index. Practically though, it is difficult to construct a benchmark which fairly stacks up against one’s own portfolio.

So…what’s important for me to know?

That’s up to you and your individual choice. At minimum, we want you to know how your money is doing—and that is told by the rate-of-return information we give, including, most importantly, your long term compound return.

If you are interested further, you can drill down to every level in your report that we drill down to in managing your money…right down to the annual and compound returns of every equity you own.

What are all of those return rates on my fixed income portfolio?

When you first buy a bond, you have locked in a guaranteed return rate for the life of the bond. This is the “yield-to-maturity”. We perform calculations that determine what your average yield-to-maturity is across your entire bond portfolio. This is useful in assessing what the “safe” part of your portfolio is giving you.

In the marketplace, the value of your bonds are constantly changing in response to present-day interest rates. Thus, the return for a single year (which we call your “current” yield) likely will be different than the yield-to-maturity. Again, we perform calculations that determine what your average current yield is across your entire bond portfolio. In some years, this return can be much higher than your yield-to-maturity, and this may be the backbone in your portfolio in a year when the equity markets are suffering.

What is the point of the information related to “sector” and “international allocation” percentages?

It’s that D-word-diversification. We have monitoring systems that track how your equity investments are distributed, and this system tabulates a summary which we include in your Annual Report. The sector analysis tells us how you are exposed to the different industry categories that make up the business world. Different sectors shine at different times, and so we want to be sure you are minimized when bad times hit and will also be there to enjoy good times. The international allocation attempts, albeit a bit crudely, to track how your money is participating in the different world economies. As companies become more-and-more global in scope, then pidgeon-holing them based upon their head office or stock exchange listing locations becomes a bit arbitrary. That is why we reference “globally-distributed” in your report.

What are “funds”?

Funds are baskets of investments which allow an investor to get large degrees of diversification, even with small sums of money invested. Pretty much anything that can be bought one-off can be bought as part of a larger basket. These baskets can fulfill a multitude of investment objectives, including both “safe” investing (typically “bond funds”) and equity investing , either in a broad index (the 500 biggest companies in America) or specific niches, both sectorally (like the agricultural sector, gold, real estate) and regionally (Europe, Asia, Switzerland). Funds either come with active management (mutual funds) or passive management (exchange-traded funds).

What are the two lines on the Historical Returns graph?

One tracks your annual portfolio returns across the years, which we call “simple” returns. This number likely will bounce around a lot, reflecting the ups and downs of the markets. The other is a smoothing device which tracks the running compound return (see above) over your investing years with Trivest. This number will fluctuate much less and is a better indicator of how you are doing.

What does it mean at the bottom of the Annual Report “Planning-based investment counsel”?

Many of our staff are educated and certified as financial planners (“CFP”). Don has served on two National Boards in this field and is a national Fellow. He is also a registered Trust & Estate Practitioner. We believe (and according to our recent survey, so do you) that all of these fields of knowledge are necessary and important to manage money well. So, day-to-day, as we oversee your accounts, we are bringing these bodies of knowledge to bear, when and where relevant. Most of this happens invisibly and seamlessly to you.

Article published Jun 2012