With a 50-50 portfolio, even conservative investors should have done better than 6 per cent on a gross basis over the past five years.Darren Calabrese/The Canadian Press
Even conservative investors make out well when stock market returns are fabulous and bonds contribute nothing.
Such was the past five years.
Both the S&P/TSX Composite Index and the S&P 500 in Canadian dollars delivered annual average total returns around 15 per cent for the five years to May 31. The FTSE Canada Universe Bond Index lost an average 0.05 per cent over the same period.
A benchmark return for someone with a portfolio mix of 50 per cent bonds and 25 per cent in both Canadian U.S. stocks would be something in the area of 7.5 per cent annually before fees.
The idea of using these benchmark returns for the past five years to assess portfolio returns comes from John Pitfield, relationship manager at Claret Asset Management in Toronto.
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Mr. Pitfield was responding to a recent blog post about a reader who said his returns rarely hit six per cent and asked if he should fire his adviser.
Mr. Pitfield said three key questions need to be asked in assessing returns: What was the performance, what was the asset mix and what were the fees?
“If a guy says he’s not happy with a six per cent number, it’s random,” Mr. Pitfield said. “Context is phenomenally important.”
The reader who complained about his investment performance did not specify his mix of stocks and bonds. Mr. Pitfield’s point about the 50-50 portfolio over the past five years is that even conservative investors should have done better than 6 per cent on a gross basis.
Net returns reflect the impact of advisory fees, which for the reader come in at one per cent. Mr. Pitfield questioned whether there might be additional fees attached to specific investment products like mutual funds or exchange-traded funds.
ETFs tracking the bond market as well as Canadian and U.S. stocks have minuscule fees that barely erode gross returns, but mutual funds could easily add a percentage point or more in costs.
In assessing the work done by an adviser, the biggest question is whether you are on track to meet your financial goals.
Example: Based on your portfolio’s performance to date, will you have the assets to deliver the annual retirement income you need over the number of years you expect to live and, perhaps, to provide financial help to your adult children while alive or after you die?
Mr. Pitfield stressed the importance of investment returns as well. We’ve seen exceptionally good stock market returns in the past five years. Your portfolio should reflect that, even if you’re a conservative investor.