The TSX is a bad benchmark – Why are you using it as a measurement?

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The TSX is a bad benchmark – Why are you using it as a measurement?

I received a call from a client who was concerned about the markets. For some reason he suddenly started to listen to his neighbour and the press for the first time. Between the press and his neighbour he suddenly started to look at the TSX and decided that this index mirrored his performance.

There seems to be a need these days to measure your performance against some metric, regardless of whether it is a good measurement stick or not. The S&P/TSX is the favourite of investors in Canada. The vast majority of these investors don’t have an all equity, high risk portfolio, but want to measure against one. I see it as a two dimensional index in a multidimensional world.

He came in to my office with all of his statements since we started working together. His money was transferred to me in May 2008. This just about the worst time you could imagine; June 2008 was the top of the market. We did the math together and he had a return of 8.5% compounded rate of return since this market peak. He blew the TSX’s return out of the water with significantly less risk in his appropriately balanced portfolio.

Outperformed by 103.5%

To put this into perspective, if he invested:

$100,000 in the TSX index in May 2008 he would now have $91,500, a loss of 8.5%.

$100,000 compounded at 8.5% (as his portfolio earned) would be worth in excess of $195,000.

A return of $103,500 over and above the S&P/TSX, which has two thirds of its value in two sectors. It is a weighted index, which means that the large companies make up most of the value. Relatively few companies drive the direction of this index.

Short Term Volatility is here to stay

Of course it was the short term fluctuation and the external input that was getting him churned-up. He was concerned about the difference since his June Statement. He was down 1.6% while the TSX was down over 5%. Using the same start date the TSX had gone down over 13.5% before recovering part of the way back.

The bottom signals the start of a move up

The press always likes to look at the negative with statements like “most market bottoms are in September and October”. To look at it from the positive, you can state that more bull markets are started as a result of these bottoms being formed in September and October. It creates opportunities.

Markets are more volatile than they were and will give us these moments. The press will sensationalize them. I pointed out to my client that the press and his neighbour didn’t report that the recovery from this recent bottom was a 9% rally.

Your Independence Matters

If you want to see what a truly independent investment/insurance advisor can do for you, call me at 905-846-9060, ext.3838, email me at Terry.McIntyre@manulifesecurities.ca or visit my website at www.terrymcintyre.ca