Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a beginning or experienced investor, these weekly updates are designed to give you specific investment advice. Each Investor Toolkit update gives you a fundamental piece of investing strategy, and shows you how you can put it into practice right away.

Today’s tip: “When you see performance numbers issued by brokers, money managers and newsletter publishers, ask yourself just how hypothetical those figures might be.”

It pays to be skeptical of investment performance calculations that companies calculate for themselves. This includes calculations by brokers, money managers and newsletter publishers. There are just too many ways to manipulate or “fudge” the numbers.

For instance, a number of brokerage firms publish the results of what they refer to as “model accounts”. These hypothetical accounts supposedly measure the results you might enjoy by following the broker’s research. In reality, the hypothetical account does much better than the broker’s clients, because it enjoys advantages that are unavailable in real life.

For example, I recall one model account to which the broker could post new buys or sells after the close of trading, anytime up till the opening of trading in the morning. It based results of these late additions on the closing price of the night before.

At times, of course, overnight news or trading in foreign markets ensures that a stock will open substantially higher or lower when trading resumes in the morning. The advantage may rarely amount to more than a handful of percentage points. But those free gains add up and compound, just like the real thing. They can have any enormous ballooning impact on those hypothetical profits.

Other model accounts are calculated as if the account holder can get an unlimited ration of any hot new stock issue that shoots way up as soon as it comes to market. In reality, brokers apportion “hot new issues” only to their biggest and most profitable clients.

You should also be alert for what you might call “selective amnesia”. For instance, you’ll find mutual fund companies and portfolio managers that have been in business for decades, but who only advertise the performance of their most recent funds and accounts. They don’t mention older accounts or funds that have so-so records. They also disregard more recent investment products that they eliminated early on, because they got off to a poor start.

The bible of the investment newsletter industry

We sometimes refer in passing to recommendations of ours that have done outstandingly well in a short period. But we don’t calculate our overall performance in-house. For that, we rely on outside sources.

For the results of the advice we publish in our newsletters, we defer to the Hulbert Financial Digest. This periodical, published by the Dow Jones Company (it also publishes The Wall Street Journal), analyzes results of nearly 200 North American investment publishers. It is widely viewed as the bible of the investment newsletter industry.

The performance of our newsletter advice waxes and wanes, just like that of every other financial institution. But you’ll find we consistently rank in the upper reaches of Hulbert’s performance listings.

Indeed, the latest Hulbert rankings, released in the May 2014 issue, show The Successful Investor, our flagship advisory, as the best Canadian advisory over the past 10 years. With a 14.3% annualized gain, it also outpaced 91% of all U.S. investment advisories. Our advisory on U.S. stocks, was the best Canadian newsletter looking at the U.S. market over the past five years, with a 22.3% annualized return. These results are meaningful to our subscribers and to us precisely because they come from an independent, outside source.

For portfolio management, we rely on an automated system that we began using in April 2001. That’s when it first became available from the major financial institution that we use for our portfolio management transactions and accounting.

Here too, our results wax and wane. But clients who stick with us generally find their results improve as time passes. That in my opinion is because the random factor averages out over a period of years, and the value of our Successful Investor strategy has time to do its job.

COMMENTS PLEASE—Share your investment knowledge and opinions with fellow TSINetwork.ca members

Have the performance numbers posted by investment pros ever influenced your satisfaction, or dissatisfaction, with your own returns? Have you ever set a specific percentage return as your investment goal for a year, or period of years? How did you arrive at that figure?