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How to Track Your Pension's Performance

FUTURE PROOF: Use Morningstar tools to track the performance of your retirement portfolio and ensure you are on course for a healthy income from your pension

Adam Zoll 20 February, 2015 | 12:20PM
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Anyone who has ever been lost while traveling in an unfamiliar city or foreign country knows how disconcerting it can be. The same thing goes for retirement saving. While you probably have some idea where you want to end up in terms of a retirement lifestyle, you may not have a good idea of whether you're on track to get there.

Perhaps you've already taken the first steps, determining how much you already have saved up and whether your savings rate is sufficient. Next come decisions about how you want your retirement portfolio to look, in other words, its asset allocation and investment selection. But once these tasks are done, your job still isn't finished. You'll need to monitor your portfolio's performance over time to make sure you stay on track. But what's the best way to do this?  

Of course, you could always take the lazy way out--opening up your pension statements every three months, glancing at the total value of your holdings and comparing it with the quarter before. If the number is higher, you conclude things are going well, and if they're lower, you conclude they are not. But all that's going to tell you is whether your portfolio is heading in the right direction. And if you are still contributing to the account, that growth in asset size may be more attributable to new money you've added than to good investment performance.

Your workplace pension and SIPP statements also may include information on how the account or its individual holdings performed over a given period relative to a benchmark, such as the FTSE 100. But if you have a well-diversified portfolio that includes a large allocation to bonds and overseas stocks, comparing its performance with that of the FTSE 100 is a bit like comparing apples to oranges – or at least like comparing apples to a fruit salad in which apples are just one ingredient.

Tracking Target-Date Performance

A better benchmarking option is to use a target-date fund designed for investors with the same retirement time frame as you. Why? Because while the most widely used benchmarks focus on a particular group of stocks or bonds, target-date funds typically hold broadly diversified portfolios with stock/bond allocations considered suitable to the risk tolerances of investors of a given age. In fact, a quality target-date fund can serve a dual benchmarking purpose for investors, providing them with a yardstick against which to measure not only their retirement portfolio's performance but their asset-allocation decisions as well.

For example, if your retirement portfolio has a much higher or lower allocation to equities than an age-appropriate target-date fund uses and consistently lags, that may be a signal to you to revisit your allocation and/or investment selection.

Many pension plans include target-date funds in their fund options – and even if yours does not, you can always find performance information for target-date funds from various providers on Morningstar.co.uk.

However, even a good target-date fund might not be the best benchmark for your retirement portfolio. That's because target-date funds typically stick to the asset allocation the fund company thinks is best for investors of a certain age. This allocation is often backed by fund-company research but still can vary from target-date series to target-date series, meaning some may work better as a benchmark for you than others. 

Also, it's possible that no target-date fund's allocation will seem particularly relevant to you if your risk tolerance is unusually high or low. For example, you may think they all allocate too little to stocks, or too much.

Additionally, be aware that fund fees can eat away at performance. If you are benchmarking a portfolio made up primarily of individual stocks and/or low-cost index funds against a target-date benchmark that charges unusually high fees, you may come away with the impression that you are a world-class stock or fund picker when, in reality, a good chunk of your portfolio's outperformance is due to its built-in cost advantages over the pricey target-date benchmark.

That's another reason why a low-cost, index-based target-date fund often makes for a better benchmark than a more expensive target-date fund.

Building Your Own Custom Benchmark

If no target-date fund seems like a good benchmark for your retirement portfolio, perhaps because your allocation simply does not match up well with any of them, you might want to consider building and tracking your own custom benchmark.

You can build your own benchmark portfolio using a mix of low-cost ETFs (or index-based mutual funds) that mimic the same asset allocation used in your retirement portfolio. For example, if your portfolio consists of 60% U.K. large-cap stocks, 20% U.K. small-cap stocks, 10% overseas stocks, and 10% corporate bonds, you could set up a portfolio with a 60% exposure to an ETF that tracks the FTSE 100, a 20% exposure to an ETF tracking the FTSE Small Caps ex Investment Trusts Index, a 10% exposure to an ETF tracking the MSCI World Index, and a 10% exposure to an ETF tracking FTSE Actuaries UK Gilts Index.

Once you've chosen the pieces you want to use for your custom benchmark, you can use the Portfolio Manager tool to track the performance of your retirement portfolio against that of your custom benchmark. Just enter each portfolio separately, and then use the drop-down menu at the upper left to toggle between the two.

To keep your portfolio up to date, you'll need to enter any additional contributions or trades you make on an ongoing basis and update your benchmark accordingly. Morningstar Premium Members can use the X-Ray feature in Portfolio Manager to keep the allocation of their retirement portfolio.

Once you've arrived at an effective benchmark for your retirement portfolio and tracked the portfolio's performance against it for a while, you should have a better handle on how you're doing.

Perhaps you'll see no need to change a thing, or maybe there will be areas that aren't performing as well as you'd like and where change is needed. Or perhaps you'll discover that an index-based approach and/or using a target-date fund would serve you better in the long run. Whatever the result, finding out how your portfolio has been performing is key to staying on the right path to the retirement you want.

This article originally appeared on Morningstar.com. It has been edited to ensure suitability for a UK audience.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Adam Zoll  is an assistant site editor with Morningstar.com, the sister site of Morningstar.co.uk.