As we enter 2021, many of us may be more than ready to move on. At the same time, the new year provides an opportunity to reflect on the progress you may have made toward achieving your goals, which may include reviewing your investment performance.
But how should you be evaluating your performance, and how can you know if your return expectations are appropriate? Ultimately, your investment portfolio should be designed to help you reach specific financial objectives, so you should measure its performance against the return you need to reach those goals. We recommend three R’s to help you put your performance into perspective:
1. Your return expectations should be relevant.
When you’re unsure of what you’re aiming for, it can be difficult to know if you’re on target. Once you’ve worked with your financial advisor to set your goals, he or she can help you determine the return you’ll need to achieve them. This is the return you should keep in your sights rather than the market’s return.
2. Your return expectations should be realistic.
In general, your portfolio’s return will depend on:
Our long-term return expectations are 5.5% to 7.5% for U.S. stocks and 3% to 4.25% for fixed-income investments. As economic and market conditions change, our return expectations will as well, so it’s important to review this outlook periodically.
- Your asset allocation
The asset allocation of your portfolio – the mix of stocks and bonds, including the mix of domestic and international investments, etc. – should align with your long-term financial goals and comfort with risk. For example, the greater the return you need to meet your goals, the more you should consider investing in stocks. But risk and return go hand in hand – the more you invest in stocks, the higher the risk of market declines you’ll face.
If you need higher returns but don’t want to take on more risk, you may need to consider your options, such as saving more, working longer or potentially changing your asset allocation. See below for the risk/return trade-offs for each of our Portfolio Objectives.
Potential Long-term Average Annual Returns for Different Portfolio Objectives Based on Current Market Assumptions
Source: Edward Jones. These return ranges are based on the firm's long-term capital market assumptions and are not guaranteed. In addition, return ranges incorporate our return expectations for both domestic and international equities and do not include any taxes or fees.
This chart plots our long-term return expectations for each of our six portfolio objectives on a matrix based on two factors – risk and return. Here's we expect from each Portfolio Objective, starting with the Portfolio Objectives with the least amount of risk and return to Portfolio Objectives with the most potential risk and return:
- Income Focus (20% equity, 80% fixed income) – 3.5% - 5.5% return
- Balanced toward Income (35% equity, 65% fixed income) – 4% - 6% return
- Balanced Growth and Income (50% equity, 50% fixed income) – 4.5% - 6.5% return
- Balanced toward Growth (65% equity, 35% fixed income) – 5% - 7% return
- Growth Focus (80% equity, 20% fixed income) – 5.5% - 7.5% return
- All-equity Focus (100% equity, 0% fixed income) – 6% - 8% return
Investment holding period
While the above chart shows average annual returns, the market rarely has an “average” year. In general, the longer you own your investments, the higher the likelihood your returns will be positive and the closer your return could be to the long-term average.
3. Your return objectives should be reviewed.
Regular performance reviews with your financial advisor can help keep you on track. If you haven’t done so in the past year, the new year is a good reminder to check your portfolio and financial position, including your personal rate of return. But as we noted above, rarely does the market have an average year. You’ll want to evaluate not just the past year but your performance over time.
You’ll also want to look at your goals and objectives in case these have changed. If you decide to make some changes, remember to keep a long-term outlook rather than reacting to short-term fluctuations.
Are you measuring against a market index?
Some investors question why they “underperform” or “outperform” an index such as the S&P 500. Indexes can provide insight into stock and bond performance, but they’re usually not a relevant comparison to your portfolio’s performance:
- A market index doesn’t account for your goals or comfort with risk, so your investment mix likely won’t match that of an index.
- Indexes are generally not diversified across different types of investments, but instead will usually focus on one asset class, such as large company stocks, investment-grade bonds or international stocks. That’s also why they often have wider swings in value compared to a well-diversified portfolio.
- Your performance will be affected by your contributions and withdrawals, while market index returns are not. Investing also carries expenses and fees that are not included in index returns.
How are you doing?
Your financial advisor can help you review your current performance in the context of your long-term goals and our expectations for future performance. More important, you’ll review how your performance affects progress toward your long-term goals and if any changes need to be made. Ultimately, the best way to measure performance is by comparing it to the progress you've made toward reaching your financial goals.
Scott Thoma co-chairs Edward Jones’ Investment Policy Committee and is responsible for Client Needs Research, the team that develops and communicates advice and guidance for client needs, including retirement, education, preparing for the unexpected and leaving a legacy.
He is a CFA® charterholder and a member of the CFA Institute and the CFA Society of St. Louis. Scott also earned the CFP® professional designation. He graduated summa cum laude from Southern Illinois University-Edwardsville with a bachelor’s degree in business administration, with an emphasis in finance. Scott earned a master’s degree in economics and finance from the same university.