A husband and wife in their mid-70s contacted me with an investing question that should resonate with all investors receiving their 2016 account statements.
I offered a guide to interpreting these statements in this recent column, but, in general, they introduce a higher level of disclosure on advice fees paid by investors and their personal portfolio returns. The question for the retired couple that e-mailed me focused on how to make sense of the return data they expect to see for their high net worth portfolio. The question in short: "What would be considered a reasonable return for a balanced portfolio?"
Let's create a personalized benchmark to gauge this couple's portfolio. To start, we need to look at the portfolio mix they have:
- Bonds: 47 per cent
- Canadian stocks: 23 per cent
- U.S. stocks: 16 per cent
- International stocks: 8 per cent
- Cash: 6 per cent
Next, we need to find benchmark indexes to use for each of these investment categories:
- Bonds: The FTSE TMX Bond Universe Index
- Canadian stocks: The S&P/TSX composite index
- U.S. stocks: The S&P 500 index
- International stocks: The MSCI Europe Australasia Far East (EAFE) index
- Cash: FTSE TMX Treasury Bill Index
Note: The total return versions of the stock indexes are used here – that means dividends plus share price changes; you can find long-term benchmark performance numbers here.
Now let's look at the returns for each of these indexes for 2016 and weigh their impact on our retirees' investment portfolio (multiply index return by portfolio weighting):
-The FTSE TMX Bond Universe Index: A 1.7 per cent gain multiplied by.47 = 0.8 per cent
-The S&P/TSX composite index: A 21.2 per cent gain multiplied by .23 = 4.9 per cent
-The S&P 500 index: An 8.1 per cent (Canadian dollars) gain multiplied by .16 = 1.3 per cent
-The MSCI EAFE index: A 2 per cent (Canadian dollars) loss multiplied by .08 = -0.2 per cent
-The FTSE TMX Treasury Bill Index: A 0.5 per cent gain multiplied by .06 = 0.03 per cent
Total benchmark gain for 2016: 0.8 + 4.9 + 1.3 -0.2 + 0.03 = 6.8 per cent.
That's a gross return. Subtract a reasonable 1.5 per cent for all fees, advice plus the cost of owning investment products, and you end up with 5.3 per cent as a benchmark for 2016. Repeat the process for three-, five- and 10-year returns to get the all-important long-term view.