What to expect for investment returns

1 April, 2014

How do you know if your portfolio has done well? If you’re 10% up on the year, is that good? It might be if global markets are up only 5%, it might not be if global markets are up 20%. The risk profile of your portfolio is key, too. Did you see a 10% increase when the markets were up 15%, but it did so with a bond-heavy portfolio while taking on very little risk? How about if you lost 10%, but global equity markets are down 25%? The risk taken to achieve the resulting performance is a key component, and there are a multitude of other factors to take into account when assessing the performance of your investment portfolio. 

The most important element is understanding that the associated time frame is fundamental in establishing context. Market volatility is part of the game; the longer the time frame, the more accurate you can be with your expectations. Short time frames require taking into account the nature of the markets during that time, as these short time frames will not include full market cycles. 

In financial planning, 5-7% (annualized) is the typical figure used when looking at projected stock market returns over the long term, but this does not include many other variables that determine how much money you are left with at the end of the day.

For instance, taxation is one of the biggest keys to long term investment profitability; whether you are using government registrations like TFSAs or RRSPs to shelter your money, or providing tax efficient streams of income from non-registered assets in retirement. Know your tax situation, and take every advantage available. Keep in mind that not all profitable financial decisions will result directly from the performance figures on your investment statement. RRSP refunds do not show up on your return figures at the end of the year, and neither do RESPs show the 20% grant issuance from the government in performance. This is where proper financial planning becomes critical. 

In the end, the best way to gauge your portfolio’s performance is to take into account the time frame you are looking at, know the risk profile your portfolio had during that time frame and then find a benchmark that gives a fair comparison. Over the long term, if you can stay in that 5-7% range, continue to contribute to your investments and manage your tax situation properly, time and compound interest will do the rest of the work for you and help you meet you financial objectives.