We Are In A Low Return Environment

So Fees Matter

Friends, its time to take a hard look at what investing is costing you.

This is not the first time that I have  written on this topic and it certinly won't be the last.

However, after 6 really good years for equity and fixed income markets, we have become somewhat complacent about our expectations for returns and this chapter is coming to a close.

A balanced and diversified portfolio of 60% equity and 40% fixed income has averaged, approximately a 9 to 10% return (depending on a number of factors, like asset allocation) over the last 6 years or thereabouts (before fees).

This is well above the average. So if you thought that paying whatever you were paying in fees and hidden or embedded costs was worth getting better returns, fair enough.

But the 60/40 model is due for some under-performance because of the simple law of averages and the average return of a 60/40 portfolio over longer time horizon's is between 7 and 8%.

If you were paying 2.5% all in (advisor fee + fund company or third party management fees and you should really want to know about these, so ask!), you have had an all-in return of 6.5 to 7.5%. 

However, this year the 60/40 model is running at somewhere between 1-2% year to date and if annualized could be somewhere between 2 and 4% by year end.

After fees (at 2.5% all-in) you may possibly end up with a negative return this year.

Why are returns going to be so low? 

Law of averages for one reason.

But also, inflation  (or so we are told by those who track it closely) is running at or below 2%.

As long as inflation remains low, fixed income assets will produce low returns because interest rates are low.

That is 40% of your 60/40 model.

As well, corporate revenues and earnings are declining, so it is likely that equity markets are going to generate lower returns into the future.

That is 60% of your 60/40 model.

It is the nature of cyclicality: economies and markets go through cycles and the most recent part of the cycle has seen higher than average returns, the next part of the cycle will likely see lower than average returns.

Unfortunately, human nature (behavioural instincts) compels us to have a bias that infers that what has been happening in the recent past will carry on into the future, so we may be reluctant to accept this fact. 

So make sure that you check in on what you are paying for advice and ask about the third party fees that are not necessarily being disclosed because over the next few years, if you are maintaining the same level of risk, your returns will shrink less if you take the simple step to reduce your costs.

We will talk about this and the latest financial market and economic developments on our weekly webinar today at 4:15.

There will be a recorded version available for those who can't make the call available on our website following.

www.highrockcapital.ca