Do Your Portfolio Returns Measure Up?

STEVEN H. LEWIS

Most people prefer good news over bad, which may explain why you are more likely to check the value of your investment portfolio when the stock market is on an upswing, rather than during a downturn. But in some cases, you may be disappointed if you find that your portfolio’s value is not keeping pace with stock market gains. While that feeling is understandable, you also need to make sure you are measuring performance correctly.

Relative Performance

Investors typically own a diversified mix of investments, which may include domestic and foreign stocks, short- and long-term bonds, commodities, cash and alternative investments. Therefore, when measuring the overall performance of your portfolio, you first need to evaluate the performance of each component relative to its respective benchmark index.

For example, many actively managed U.S. stock mutual funds use the S&P 500 Index as their benchmark. Alternatively, a fund that invests in international stocks might benchmark against the MSCI EAFE Index, while a bond fund might use the Barclays Capital Aggregate Bond Index.

If you want to know how your fund has performed relative to its benchmark, examine its returns over various time periods, such as one year, three years, five years, ten years, or the life of the fund. This information can be found on the fund company’s website or in the fund’s prospectus and shareholder reports.

Keep in mind that, unlike passively managed vehicles, such as index funds or exchange-traded funds (ETFs), actively managed funds seek to outperform their benchmark index. Most funds will experience periods when they lag their benchmark due to the performance of individual securities or market sectors in which funds are over-or underweighted. But hopefully, the fund will outperform its benchmark over longer periods.

If you find that a particular holding has trailed its benchmark for many years, this may be cause for concern and for making a change. Similarly, if you own index funds or ETFs that are trailing their benchmark indexes by a margin greater than their expense ratios, a phenomenon known as “tracking error,” you may want to reassess that particular holding.

Absolute Returns

For many investors, evaluating the performance of their investments relative to other investments or a benchmark index is less important than understanding the bigger picture. They simply want to know how much the value of their portfolio has grown — a measure known as absolute return.

In fact, some financial advisors provide performance reports that show your absolute returns year-to-date and over longer periods. It is then up to you to decide whether your portfolio’s performance is meeting or beating your expectations. This will depend on your stated goals and risk tolerance. If your goal is to generate income, it may be less critical for your returns to keep pace with the stock market. On the other hand, if aggressive growth is your priority and your portfolio is lagging the broad market over long periods, it may be time to reassess your strategy.

View in Light of the Big Picture

If you have not measured your portfolio’s performance recently, be sure you keep the big picture in mind. Your financial advisor can offer perspective on the individual components of your portfolio and your overall investment strategy, and explain how to measure performance.

Till Death Do Us Part
Settling a Spouse’s Financial Affairs

Because the days or weeks immediately following the death of a partner are an emotionally charged time, new widows and widowers usually should avoid making any major financial decisions during that period. Eventually, however, the surviving spouse will need to get on with the job of settling the other spouse’s financial affairs.

Get Your Paperwork in Order

The first step is to access records that cover every aspect of your spouse’s finances. The records you will need include your spouse’s:

• Social Security number;
• Will and, if applicable, trust documents;
• Beneficiary designations for retirement accounts;
• Life insurance policies;
• Real estate deeds;
• Military records; and
• Statements for investment, bank, credit card and other accounts.

After you have collected these materials, create an organized filing system to help you keep track of everything as you move through the process of settling your spouse’s financial affairs.

You will also need to determine whether you or another individual is the executor or personal representative of the will and the trustee of any trusts. (If there is no will or trust, you will need to petition the courts to be named as personal representative or executor.) You may need to hire professionals to assist in the probate process or administration of any trusts and in the preparation of tax returns.

Another important step is to obtain certified copies of your spouse’s death certificate from your funeral director or your county or state government. You may need to provide copies to many organizations, so be sure to request an adequate number to cover all of your accounts and property titles.

Claim Insurance Benefits and Update Policies

If you are unsure about what life insurance policies your spouse may have owned, check bank statements for evidence of premium payments. (Note, however, that premium payments may not have been required in recent years for some policies.)

If you are the beneficiary of a life insurance policy, you will need to provide a certified copy of the death certificate to claim your benefits, which will typically pass to you income-tax-free. You may first want to consult with your tax advisor to determine whether, from an estate planning perspective, you should consider disclaiming any benefits so that they will pass to the secondary beneficiary.

Claim and Update Employee and Government Benefits

If your spouse’s employer-provided a pension, you may be entitled to benefits, as long as you are named as the beneficiary. Your spouse’s employer may also have provided group or individual life insurance and accidental death and dismemberment policies, so you will need to file a claim for these benefits to the extent applicable.

You may be entitled to any back pay or bonuses your spouse was due, plus the rights to company stock purchased through an employee stock purchase plan. If your spouse earned stock options or restricted stock, you may be entitled to those assets too.

If your spouse was receiving government benefits, such as Social Security, Medicare or veterans benefits, you will also need to contact those agencies to update their records and, where applicable, get your benefits adjusted.

Update Account Registrations and Property Titles

To update account registrations for assets held at banks, brokerage firms, credit card companies and titles for other property (such as cars and boats), you will need to provide a certified copy of the death certificate.

If the account in question was registered to you and your spouse, these changes should be relatively easy to complete. However, accounts that were registered in your spouse’s name only will require additional paperwork: You will need to provide proof that you are the rightful heir to the asset or are acting as the personal representative or executor of your spouse’s estate. This will require a court-certified copy of your spouse’s will. For assets that were held in a trust, only the trustee can direct (based on the trust’s terms) what happens to those assets.

For retirement accounts, such as IRAs or 401(k) plans, the beneficiary designation form, not the will, determines who inherits the assets, which in most cases is the deceased’s spouse (most 401(k) plans require a signed waiver to name someone other than a spouse). The IRS has rules that govern how these assets can pass from one person to another, and any decisions you make are irrevocable. If you make the wrong choice, you could incur unnecessary taxes and penalties, so work closely with your tax advisor.

Take One Day at a Time

It is difficult to focus on financial affairs while you are grieving. However, by taking a gradual approach, you will be able to make steady progress toward settling your spouse’s financial affairs while protecting your own financial interests. Consult your legal counsel and tax advisor regarding the legal and tax consequences of a particular strategy or investment, including any estate planning strategies, before implementing any course of action. 

Sidebar: Update Your Own Financial Plans

After you have settled your spouse’s financial affairs, do not overlook the need to reexamine your own plans. This includes your investment portfolio, retirement plan, estate plan and insurance coverage, such as health, disability and auto policies. If your spouse’s employer-provided your health insurance, you may be able to remain on this plan for up to 36 months under COBRA. But eventually, you will need to get your own coverage.

You should also update the beneficiaries listed on your retirement accounts and insurance policies because it is likely that your spouse was listed as your primary beneficiary. If you have minor children, consider naming a trust as a beneficiary. It is wise to speak with an advisor in this area before making any changes.