Once you have determined an appropriate goal and dependable investment strategy to achieve that goal, it’s important to focus on tracking your financial progress. Your financial plan should be considered a “living document” which means it’s continually updated to reflect changes in your life or personal situations. When reviewing the plan, you should know if you’re experiencing:
- Surplus
- Generally, this means that you’re living with your means and will have available cash to direct towards other goals if possible.
- On Target
- You’re living within your means that you’re on target to achieve your goal. Keep doing what you’re doing!
- Shortfall
- With a shortfall, you’re spending more than you make. If you’re experiencing a shortfall, you have to cut your expenses, increase your income or make other compromises.
The plan should be based on your current standard of living. The slightest changes such as a minor change in cash flow could make the biggest differences.
Below is a general list of events that should trigger a review of your financial plan which we discuss in detail on our website.
- Marriage
- Divorce
- Birth of a Child
- New Job/Promotion
- Loss of a Job
- Moving to a different city
- Deterioration in your health
- Death
- Inheritance
- Achieving a Goal
When tracking your financial progress, we recommend that you review a number of important things to make sure that you’re on target
Goals
It’s important to review the type of goals that you have set. If you have many short term goals, as each goal is achieved, you need to review your financial plan. If there are long term goals, monitor the progress on achieving them. See what changes could be made if any. Remember to factor in inflation, especially for your long term goals as inflation diminishes your purchasing power.
Tracking Your Financial Progress: Investment Portfolio
When reviewing your financial plan, don’t forget to review the type of financial products that you have invested in. Reviewing your investment portfolio should occur more frequently than once a year, in addition to significant life events. We recommend that you review the fees, performance and suitability of your portfolio at least semi annually.
Portfolio Performance Measurement
Benchmarks
- Benchmarks are used to evaluate the performance of a portfolio over time. For example, the S&P/TSX Index may be used as a benchmark to evaluate a Canadian Equity Mutual Fund’s return performance. Benchmark are very useful when tracking your financial progress.
- The benchmark and portfolio must have similar characteristics in terms of investments, asset classes, currency and risk levels in order to have a true comparison.
Time vs Dollar-Weighted Return
- The dollar weighted return is equivalent to the internal rate of return (IRR), measuring the actual return earned on a beginning portfolio value and on any contributions made during the period. Dollar Weighted Return is affected by cash flows and deposits into the portfolio.
- Time Weighted Return (TWR) is equivalent to the annualized geometric return. It is not affected by cash flows. It measures the actual rate of return earned by the portfolio manager.
- When tracking your financial progress, it is wise to use the TWR because the portfolio manager has no control over deposits and withdrawals made by clients.
The bottom line is that it’s recommended to review your portfolio at least annually to make sure that your goals are on track. In addition, re-balancing every six month to your chosen strategic asset allocation will allow you to reach your goals faster and be within your risk tolerance. Tracking your financial progress shouldn’t be alone but with a financial advisor ready to answer any questions you may have.