What to Expect from Expected Returns

Q3 | October 2019

Topic: Wealth Planning

Brad Weber  CPA, CA, CFP

October 1, 2019

Image used with permission: iStock/Jirapong Manustrong


Print & Share

Print

What to Expect from Expected Returns

Q3 | October 2019

The foundation of financial planning often starts with financial models that are used to make projections into the future. Those projections rely on making a number of assumptions about expected returns, and the quality of those assumptions is of premier importance.

In addition, understanding how those assumptions translate into the real world is critical to measure how your actual experiences compare to what was planned.

The rate of return expected on your investments is a key input into any financial planning model. That rate of return determines both how your assets are assumed to grow towards retirement, as well as how much income they might generate throughout retirement. The return assumption that is used in planning should ultimately be net of all fees that you pay: in other words, the actual return you are going to keep. Understanding your investment returns and what fees you are paying will help provide a basis for evaluating how you are doing against your plan.

In the last issue of Nexus Notes we provide details of our latest financial planning assumptions when it comes to rates of return:

Note: the rate of return assumptions are nominal and before investment management fees.

Blending Expected Rates of Return

The returns above represent the return on each potential component of a portfolio, not the expected return of the portfolio as a whole. For example, while our return projection on equities is 6.5%, a typical client invested in our Balanced Fund should anticipate lower returns as that fund includes a portion of bond holdings. As a result, the Balanced Fund would project returns of approximately 4.9% based on the 35% of its assets invested in fixed income and cash. It’s important to reiterate that these return assumptions don’t include the impact of expenses, as the investment management fee paid will be different for each individual. We provide a separate assumption for each client based on their average management and custody fees plus applicable taxes.

Financial planning can provide many benefits, including aiding in investment decisions and providing insight into what type of portfolio will meet a client’s needs. Planning can also help underline the importance of reasonable expectations by outlining what a realistic return expectation for a given portfolio might be, and if that will allow you to achieve your long-term goals.

It might be tempting to think of the asset projections in your plan as an annual report card against which to check your actual performance. While there can be some directional benefit to this, it’s important to realize that this isn’t a perfect comparison. A plan encompasses a long period of time and utilizes average annualized returns. As a result, the volatility that comes with investing gets smoothed out in the numbers that are presented in the plan.

Whether returns in any given year are higher or lower than the long-term rate of return assumed in the plan matters much less than how your portfolio performs on average over the long run.

More Like This...

See another CRM2 blog post that may be of interest to you.

CRM2: The Nexus Approach to our CRM2 Reports

Topic:
CRM2
Excerpt:
With changing securities regulations coming into effect, investment firms are now required to provide individual investors with specific additional in

More Like This...

See another Foundations & Endowments blog post that may be of interest to you.

Charitable Giving Made Easier

Topic:
Foundations & Endowments
Excerpt:
Giving to charities and supporting our community are important to us at Nexus. We donate a portion of our management fees back to the charities and

More Like This...

See another Human Interest blog post that may be of interest to you.

Don’t Worry, Be Happy

Topic:
Human Interest
Excerpt:
A recent article by David Brooks in The Atlantic magazine argues that, despite the heavy shroud of pessimism that envelopes most of our current

More Like This...

See another Inside Nexus blog post that may be of interest to you.

Here we Grow Again!

Topic:
Inside Nexus
Excerpt:
Recently, the Nexus team welcomed our seventh new face to join us since the start of the pandemic in 2020. As growth is an integral part of our

More Like This...

See another Investments blog post that may be of interest to you.

The Demise of FTX and Sam Bankman-Fried

Topic:
Investments
Excerpt:
At the beginning of November 2022, Sam Bankman-Fried was crypto-currency’s “White Knight”. The flip-flop and t-shirt-wearing 30-year-old was the found

More Like This...

See another Pearls of Wisdom blog post that may be of interest to you.

“Work, Work, Work, Work, Work, Work”

Topic:
Pearls of Wisdom
Excerpt:
This has been a busy year. I’ve had lots happening on the home front (a wedding!) and lots going on at the office (too long to list!) Managing work

More Like This...

See another Tax Planning blog post that may be of interest to you.

Saving in my Professional Corporation – It’s a Great Idea!

Topic:
Tax Planning
Excerpt:
The ability for professionals in Canada to incorporate their practice has existed for some time. Doctors, dentists, lawyers, accountants, and other

More Like This...

See another Wealth Planning blog post that may be of interest to you.

Living to 100

Topic:
Wealth Planning, Living to 100
Excerpt:
“You’re going to live to 100!” For some, this may sound like a fantastic, welcome prognosis. They imagine gazing at sunsets every evening at the

On a Side Note…

See another CRM2 Nexus Notes Quarterly article that may be of interest to you.

No posts found.

On a Side Note…

See another Foundations & Endowments Nexus Notes Quarterly article that may be of interest to you.

Charitable Giving Made Easier

Topic:
Foundations & Endowments
Excerpt:
Giving to charities and supporting our community are important to us at Nexus. We donate a portion of our management fees back to the charities and

On a Side Note…

See another Human Interest Nexus Notes Quarterly article that may be of interest to you.

The Case for Openness – An Open and Shut Case?

Topic:
Human Interest
Excerpt:
From time immemorial, mankind has been open. Open to new ideas, open to trade, and open to migration – the three critical ingredients for progress.

On a Side Note…

See another Inside Nexus Nexus Notes Quarterly article that may be of interest to you.

Here we Grow Again!

Topic:
Inside Nexus
Excerpt:
Recently, the Nexus team welcomed our seventh new face to join us since the start of the pandemic in 2020. As growth is an integral part of our

On a Side Note…

See another Investments Nexus Notes Quarterly article that may be of interest to you.

Lessons From the Art World and Beyond

Topic:
Investments
Excerpt:
“Exactitude is not truth.”

On a Side Note…

See another Pearls of Wisdom Nexus Notes Quarterly article that may be of interest to you.

A Table for None, Please; Working From Home on the Rise

Topic:
Pearls of Wisdom
Excerpt:
Reading is one of the principal occupations in our profession. As we digest a wide range of material, interesting ideas and surprising facts – some

On a Side Note…

See another Tax Planning Nexus Notes Quarterly article that may be of interest to you.

Saving in my Professional Corporation – It’s a Great Idea!

Topic:
Tax Planning
Excerpt:
The ability for professionals in Canada to incorporate their practice has existed for some time. Doctors, dentists, lawyers, accountants, and other

On a Side Note…

See another Wealth Planning Nexus Notes Quarterly article that may be of interest to you.

From The Editor: What’s My Age Again?

Topic:
Wealth Planning, Living to 100
Excerpt:
How old are you? It’s a simple question, one we readily know the answer to, although some of us might not want to talk about it. And why do we know