"Risk-Adjusted" Returns and Costs

• If we are heading into a period of lower returns (with a protracted period of low interest rates) there are some very real concerns that investors need to be mindful of:

• A portfolio of 60% equity assets and 40% fixed income assets has, over the last 5 years has returned close to 10% (on average).
• The long-term average for this model is closer to 7.5%.

(click on this chart to enlarge)

• In all likelihood, then, the next 5 years may prove to be under-performing years.
• The "human behaviour" response to this might be to want to be more "aggressive" with your portfolio.
• Expectations of lower returns in the future can and may inspire investors to take on more risk to try to generate higher returns.
• When we discuss "risk-adjusted" returns and look at the above chart, we can see how, historically, a more aggressive (70% equity weighted) portfolio has not necessarily generated longer-term higher returns.
• In times of higher levels of volatility it will take a 70% equity portfolio more time to recover from a negative performance.
• That is longer "down-time", when a portfolio is not growing but playing "catch-up".
• This impacts the compounding potential of a portfolio.
• My counsel, stick to your plan, don't be tempted to make a short-term adjustment, it may just backfire.

Costs

• In a lower return environment, one way to improve your "net" return is to pay close attention to the costs associated with investing.
• If you are in the "old school " per transaction brokerage commission world, what is your advisor making when he/she buys and sells securities for you and how does this impact your return?
• If you are in the world of "fee-based" advisory services, what other (hidden) costs are you paying?
• Mutual Fund or ETF MER's are adding cost and reducing your "net" returns (and are not tax-deductible as are the fees). Do you know what these are?
• Fortunately for investors, the regulators are going to require that you are made aware of all of these costs in the upcoming implementation of the :
• Client Relationship Model - Phase 2 
• Performance Reporting and Fee / Charge Disclosure 

• More here: Client Relationship Model - Phase 2 Performance Reporting and Fee / Charge Disclosure amendments to Dealer Member Rule 200 and to Dealer Member Form 1

Ask your Advisor more about this. Ensure that you have the transparency that you deserve!

The views expressed are those of the author, Scott Tomenson, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund.