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The pressure on investors and advisers to make smart decisions is getting ever more intense as a result of the recent decline in global bond yields.
Lower yields suggest lower investment returns ahead. For investors and advisers, that means less likelihood that strong portfolio returns will make up for indifferent retirement savings habits and heal the damage done by poorly-chosen investment products. Now is the time for investors to check the soundness of their approach, including the fees they're paying.
The sobering news on returns comes in a recent note from BMO Nesbitt Burns that told investors to "pencil in future returns that are much softer than those seen historically." The example used in this analysis was a 6-per-cent return from stocks, based on 2 percentage points each from dividends, inflation and after-inflation growth. Bonds were estimated to return around 2 per cent. In a portfolio weighted 60 per cent to stocks and 40 per cent to bonds, that works out to returns in the range of 4 to 5 per cent.
BMO didn't note the impact of fees here, but let's assume they undercut returns by 1.5 to 2 percentage points if you have an adviser and 0.5 per cent if you're a DIY investor trading through an online broker. That leaves us with net gains averaging as little as 2 per cent annually from a portfolio with a somewhat conservative asset mix.
The discipline of a regular investment plan started at a young age becomes of paramount importance in an investing environment like this. Starting late will put you in a big hole if the best you can hope for from your investing is a return in the low single digits. Plan to get aggressive with your investments to juice returns? Some bad stock picks could cause damage that will take ages to undo.
Finally, consider the impact of fees in a low-return world. The Freedom 0.12 Portfolio I wrote about in a column earlier this year has a weighted average management expense ratio of 0.12 per cent. That's a razor thin cost if you're a DIY investor, and still a good value if you have an adviser charging an advice fee of 1 per cent. But don't just look at cost; value is important, too. You'll need all the help you can get to maximize results in the low-return world ahead.