How many times has this happened to you? You're at a social function and
conversation turns to investing. Pretty soon, people are comparing how well their investments are doing. As you might imagine, being an investment advisor this happens to me a lot. However, I recently had an experience with it that startled me.Bob, one of guys I was chatting with at a party, asked what kind of returns I had made for my clients with my methodical no load mutual fund strategy during past year. I replied that they had unrealized gains of slightly over 29%, after management fees, for 8 months that we were invested.
Bob countered with a smirk that he had made a 40% return. I raised my eyebrows and told him that was darn good—and suggested that maybe he ought to be managing my money. At that point we were interrupted and, as evening went on, I began to wonder exactly how Bob had gotten his great return.
I cornered him a little later on and, upon digging a little deeper, story looked somewhat different. Yes, he had made a 40% return on a mutual fund he had some money invested in, however, we were comparing apples and bananas.
He had a total portfolio of $100k. Being cautious, he had invested only $10k into a mutual fund, from which he profited $4k after he sold it. The balance of his portfolio ($90k) was sitting in a money market fund earning some 0.35% per year.
So, while he had made 40% on 10% of his investment, he had only made 4.35% on his whole portfolio. My methodology was also focused on protecting my clients' investments and it had increased their entire portfolio 29% (unrealized). That would be an apple to apple comparison when measuring my returns against his. Bob's one fund realized 40% return. However, had I approached it same way Bob had, I could have described one of funds I used that had realized over 49% for same period.
