Quarterly Investment Foundations Second Quarter 2024

Mastering The Subject

What's My Return Anyway?

Most, if not all, decisions in life come with trade-offs. Some are small, and some are large and have a greater impact on your life. For important decisions, it is helpful to measure our choices to make sure we stay on track. Investing to grow wealth is an important decision that should be tracked to make sure that you are securing your future. Investment performance is measured by a return. Return is measured to help you make the right investment decisions throughout your lifetime.

How to Measure Return

The total return of an investment is the best way to track your progress. The total return is the change in the price of the investment plus all dividends or interest and minus all fees that are paid. Seems straightforward, right? Almost. There are two types of ways to measure total return – time-weighted and money-weighted.

Time-weighted return measures the total return of an investment from the initial purchase. The timing of future purchases or sales are not included in calculating the total return. When comparing two different investments, it is best to use time-weighted returns – this creates an apples to apples comparison.

Money-weighted return measures total return of an investment inclusive of all purchase and sales. Using money-weighted return provides a more accurate measurement of an investor’s results. It is more accurate because it measures the timing and size of each cash flow of the investment, and this is specific to each investor. However, the money-weighted return may not be the best at evaluating the quality of an investment decision – it can be an apples to oranges comparison.

At Grand Wealth, we use time-weighted returns to measure investment performance. This is because it is best at measuring how your investment decisions have performed. Time-weighted return filters out the contributions and distributions from your portfolio – of which the timing cannot be controlled - and instead measures your return based on your asset allocation and investment selection. You can then compare your portfolio to a benchmark, apples to apples.

Reading the Numbers

The question remains, how can you find the right portfolio return information? On your Grand Wealth client portal, we report to you the time-weighted total return. On the Portfolio Dashboard, you will see the total average annual return for your portfolio.

You can also access return information through the Fidelity or Charles Schwab websites. However, the information that Fidelity and Charles Schwab provide is incomplete. They report the change in value of what your portfolio currently holds, which is measured as a percentage and dollar value. The change in value is incomplete because it does not include dividends and interest that each investment pays. Change in value is based on the timing of purchase and sales of each investment and does not represent all your portfolio return, nor your total portfolio’s historical return.

Measuring a Lifetime of Decisions

Investing to grow wealth is a lifetime endeavor that requires consistent monitoring and attention. Knowing how to measure the quality of your decisions is important so that you understand the path you are on. By comparing your investment returns - apples to apples – you can see the progress you have made towards your financial goals.

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Market Check-In:

- A Pause: On the heels of good economic growth in the US and abroad, inflation remains above the Federal Reserve’s 2% target after the first quarter. Forecasts for the Federal Reserve rate cuts have moved from three to two in 2024. Job growth is still strong, and manufacturing has reached the highest level of growth in 18 months. These factors help make the case that interest rates should remain at current levels because inflation has not yet reached the Federal Reserve’s target and a recession is not on the horizon.

- Stock Valuations - Opportunity Remains: In the first quarter of this year, US stocks returned 10.56%. However, this return was mostly concentrated in the top 10 US stocks and these stocks have become over valued compared to historical averages. International developed markets had returns of 5.59% and Emerging Markets returned 2.37%. Despite the recent run, opportunity to find fairly priced stocks remain within the US and international markets by pursuing stocks with lower price to earnings ratios and more profitable companies.

- Bonds Step Back: As data on inflation and job growth showed economic strength and a slowing of decreases in inflation, bond returns were negative for the first quarter. In the US, bonds returned -0.78% and globally, -2.08%. While interest rates on bonds are between 3-6%, as expectations for lower interest rates have been paused, prices of bond have gone down. Going forward, the upside potential for bond returns is greater than the downside because any price decreases would be partially offset by interest rate increases.

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_{Disclosure:
This newsletter is for informational purposes only and does not constitute investment, legal or tax advice and should not be used as a substitute for the advice of a professional legal or tax advisor.  Information was obtained from third party sources which we believe to be reliable but are not guaranteed as to their accuracy or completeness. GWM is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about GWM including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request.}