Edmonton Retirement Planner

Is your portfolio's performance where it should be?

By Patrick Gibson CFP

This is definitely a loaded question as most investors do not understand the range a portfolio's returns can move within and still be considered normal.

I'll try my best to explain this phenomenon without becoming too technical. We all understand the concept of asset allocation whereby adding different asset types to a portfolio we can, depending on the asset types added, either increase potential returns or decrease potential risk.

A moderate portfolio containing 10% cash, 30% Canadian bonds, 20% Canadian Equity, 20% US Equity and 20% International Equity has over a 60 year period returned an average +9.04% per year, and if it actually returned +9.04% each calendar year then that would be great, a guaranteed return with no fluctuations. But because the above number is an average we also know that in some years we received more than the average and in some years we received less.

What we are interested in is what is considered a normal range of returns for this blend of assets. Research shows that over the past 60 years, which contains 709 rolling 12 month blocks of time that 68% of the time when we looked at 12 month returns, this portfolio's returns would range between -5.3% to a high of +23.47%, that's quite a range but your question here should really be what about the other 32% of the time? Pretty fair to say 2008 fell within the other 32% of the time. What this really shows is that making investment decisions based on returns, good or bad, obtained over a short period of time is really a crap shoot.

Now let's look at the same portfolio based on 60 month (5 year) blocks of time. Over that same 60 year period, which contains 661 rolling 60 month blocks of time the above portfolio has the same average +9.04% rate of return but now, 99% of the time it ranges between a low of +2.22% and a high of +15.86%.

What this highlights to me is that making investment decisions based on long term data that falls within a set of parameters 99% of the time is more reliable than basing decisions on short term data that falls within those same parameters only 68% of the time. If you're finding you can't handle the short term fluctuations in your portfolio, then your asset allocation needs to be reviewed and the portfolio re-structured so it contains more of those type of assets that are not prone to gyrating with every market bump that comes along.

So to sum up, the above portfolio or a similarly structured client portfolio that over the past 12 months is down 4 or 5% is near the low point of its range, but it is not outside that portfolio's normal range of returns for those short time periods.

Commission, trailing commissions, management fees and expenses all may be associated with mutual fund investments and the use of an asset allocation service. Please read the prospectus of the mutual funds in which investments may be made under the asset allocation service before investing. The indicated rates of return are the historical annual compounded total return assuming the investment strategy recommended by the asset allocation service is used and after deduction of the fees and charges in respect of the service. The returns are based on the historical annual compounded total returns of the participating funds including changes in the share or unit value and reinvestment of all dividends or distributions and does not take into account sales redemptions, distribution or optional income taxes payable by any security holder in respect ;of a participating fund that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

The particulars contained herein were obtained from sources which we believe are reliable, but are not guaranteed by us and may be incomplete. The opinions expressed have not been approved by and are not those of DundeeWealth Inc., its subsidiaries, or its affiliates, including, but not limited to, DWM Securities Inc. Dundee Private Investors Inc., Dundee Insurance Agency Ltd. and DundeeWealth Mortgages. This website is not deemed to be used as a solicitation in a jurisdiction where this DundeeWealth representative is not registered.

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