Opinion: do your investment returns measure up?

By Simon Yates, CFP DipPFS CertsCII(MP&ER)

What are your lifestyle goals and what's that got to do with your investment returns?  Our experience is that our clients are much more interested in their lives than they are in chasing investment returns for no particular reason.

If we learned anything in 2009, we learned that a disciplined, diversified strategy that rebalances portfolios based on target tolerances works and reduces the time needed for recovery.  We are more confident than ever that asset allocation among many asset classes and regular rebalancing can weather any storm.  It's not the return in one particular year that counts; the average return over the years is what's important.  So, what is a good return?

The goal of achieving the "maximum rate of return" is neither a goal nor measurable.  If our clients state this as a goal then we dig deeper.  We stress the importance of investing to reach one's goals and not attempting to maximise returns just for the sake of it.  Blindly chasing returns is not good financial planning or sensible investing.

Investing is not a contest.  Obtaining a return that has a high probability of reaching your goals is what is most important.  There is a great deal of difference between risk and market fluctuation.  Risk, the way we define it, is running out of money before you run out of life.  Fluctuation is what may occur during the interim.  The greatest risk is allocating a portfolio in such a way that it avoids fluctuation but guarantees a return so low that your money will not last.  While a portfolio that invests a larger percentage in equities may provide more short-term volatility, it may be less risky than the "stable" portfolio.

Conversely, it's OK to invest most or even all of your money in low risk investments.  This may seem to contradict the market fluctuation comments made above, but it is different.  If you can reach all of your financial goals in life and avoid market volatility, there is nothing wrong with this strategy if it is right for you.  After all, why do people invest in the first place?  Is it to accumulate money to watch it grow, or is it to reach their lifestyle goals?  I believe it is the latter.

Many people spend too much time listening to the so-called "experts" who, with the advice they provide through the media, encourage people to seek the highest return they can and to take as much risk as they can tolerate.  As a result, many people want to chase returns because they're told that the objective of investing is to maximise returns.  When these clients are educated properly, our experience at Yates & Co is that they choose to invest in portfolios that match the return they need to achieve their objectives.  Relevant returns are more important than maximum returns.

So, what is a good investment return?  3%, 7%, 15%?  Surely a good investment return is the one that enables you to achieve and maintain the life that you want, with the minimum amount of worry.

Our Lifestyle Financial Planning service is based on understanding your lifestyle goals before we do anything else.  It takes a little extra time to do that properly but our clients tell us that the subsequent financial planning, relevant investment returns and peace of mind make it time well spent.