Brent Soloway, ChFC®

While discussing portfolio performance with clients for the last 28 years, I continue to be fascinated by their views on what’s doing well and what is a “good return” on their investments.

During our first meeting, I routinely ask prospective clients how their portfolio has performed over the last 2-3 years. Responses usually run from okay, to great, or not so good. All fair answers, but that begs the question: what is an okay return? or what is great or not so good? When asked what the return averaged, most have no idea. It struck me that something is not quite right when I have heard the same thing over and over again for nearly three decades. Let’s dig a little deeper.

At seminar a few years ago, I asked attendees what they considered was a good return on their stock and bond portfolios. Answers varied from 5% to 20%. Very interesting. I suggested that a 5% return is okay when inflation is less than 2%, and 8% is very good. But what about those returns in 1980, when inflation was running well into double digits. Was an 8% return good at that time? Not so much. So what kind of return is truly okay, great, or bad? The answer is, it depends.

It seems that a good or great return is more related to the needs of the individual client. For non-retirees, it may be based upon how much they are contributing to their portfolios and what kind of growth they need to meet their retirement income objectives. That usually means saving a certain amount, beating inflation by so much, and projecting how much they want to spend in retirement (inflation adjusted). This seems to make a lot more sense and is less subjective than some generic ROR (return on revenue) that is identified as good, great, or bad. When put in this perspective, people should be asking, “based upon my savings pattern, how much do I need to beat inflation by in order to meet my long-term accumulation needs and comfortably fund my retirement?” By the way, you may spend more in the first 10-15 years of retirement, rather than less. If you need to beat inflation by 4% over the next twenty years (prior to retirement), then you have a defined measuring gauge to determine if your portfolio returns are meeting your financial needs.

Of course, there is more to it than that. Your tolerance for variability plays into this scenario. How you emotionally handle the iterations of stock market movement is also an important piece to this puzzle. That is a separate issue altogether and will be discussed in more detail at a future date.

To sum up, a good return successfully achieves your desire for accumulation, distribution and preservation of assets, as tied to your future needs and goals. A great return exceeds this ROR, without subjecting your portfolio to volatility that creates emotional discomfort. A retiree with income beyond his/her needs may have a goal of beating inflation by 5% to 6%, because the money is really being invested for kids or grandkids. Every portfolio is best constructed to meet the needs of the individual investor. When viewed from this standpoint, it becomes clear what is good, great, or bad.

Any opinions are those of Brent Soloway and not necessarily those of RJFS or Raymond James. Investing involves risk and investors may incur a profit or a loss. Past performance may not be indicative of future results.