We’ve all heard of beginners luck. If you begin investing in a Bull Market, it’s pretty hard to suffer a loss unless you are taking on insane amounts of risk trying to get rich quick. Don’t get cocky and start thinking you are an investment genius or a “natural” until you’ve survived a correction or two. Overconfidence s a deadly sin on Wall Street; it may take a while, but it will get you eventually. The moment you deviate from your plan and make bold decisions based on your intuition is the moment when you are slaughtered.
The same applies to your assessment of your financial professional. You need to assess your portfolio’s performance based on benchmarks that represent your chosen risk profile no matter who chose the allocations. A common way to benchmark management performance is to create a paper portfolio of a stock and bond mix with the same risk profile of your portfolio. If you aren’t risk averse and are 75% in equities and 25% in bonds, then you can choose some benchmark ETFs and see how that portfolio did versus your actual portfolio.
If you are a real risk fiend and are willing to pay someone to pick individual stocks for a 100% equity portfolio, then you can benchmark it with the S&P 500 or a sector fund if it is a better match. The takeaway is that a quarterly statement does not give you any idea if your financial advisor is brilliant or just playing in a bull market. If your quarterly statement says you have made a 9.6% return for the past year, it tells you very little. If your benchmark of a couple of ETFs tracked over a year made 12.9%, then your advisor has some explaining to do. This could be a passing issue, but after a few years, there is a definite pattern.