If you are in Mid 40's, and have moderate(read 5% swing at portfolio wide or with 3% of SPY) tolerance for risk, and decent NW and Liquid net worth to invest, what kind of returns you should aim for?
I was at a retirement planning seminar, where one presenter said that the best one can hope for is a real return of 4% with a diversified portfolio of stocks, fixed income, etc invested for very long periods (25 years or more).In the past many retirement plans were modeling real return of 6%, but that has been ratcheted down in the last few years.
Are you asking about 'general' year over year returns for growth while you are still 'working'?Or retirement returns?puzzledralph
real return of 4% with a diversified portfolio When you say real return, I assume that is 4% + inflation rate. Am I correct? If not, don't you think 4% return is cutting too close?If your risk tolerance is only 5% at the portfolio level, can you achieve say 7 to 8% return? I would like to discount superior stock picking skills, and rely mostly on asset allocation.
Are you asking about 'general' year over year returns for growth while you are still 'working'? Investment returns while still planing retirement AKA "working". :)
When you say real return, I assume that is 4% + inflation rate. Am I correct? Yes that's exactly what I meant. Lot of retirement plan return assumptions are based on real return.
Well. It would be nice if you can outperform inflation by that margin. For now, I am not worrying about inflation, and rather focused on return from the portfolio. Also, the inflation is somewhat irrelevant because your needs change as you age, so inflation on medical services impact more than inflation on beer or grocery items. So without getting too detailed, I am looking something like settle for 6% to 7% return and then decide on investments that can provide that kind of returns with acceptable risk and volatility for me.
I would suggest you look at, for example, www.barclayhedge.com in order to evaluate some* historical returns by, as you say, asset alocation. I believe you should be aiming for 9%pa net of fees (with inflation sub-2%) from a diversified portfolio. Your risk profile (5% vol) is on the very conservative side, in my view. If that is your 'rule' then you can dumb down those returns to around 4-6% p.a. gross returns. Do some research on how daily/weekly/monthly returns and thus volatility will DIRECTLY give you a P&L swing-meter. What you need to look at is drawdowns. How much can a strategy (for your asset allocation) lose before it makes new highs.To put this in perspective, this is the current S&P drawdown since January 2007 (and it is still in the drawdown, together with every single equity and commodity index)S&P 500: 56 monthsDJ Stoxx 600: 61 monthsMSCI World Index: 57 monthsDJ UBS Total Return Commodity Index (€): 48 monthsS&P-Goldman Sachs Commodity Index: 48 months* these indices are based only on those funds that supply data to Barclay Hedge
Thanks for the suggestion. I will look into that.Your risk profile (5% vol) is on the very conservative sideYes, I am aware of that. While I believe I can handle more risk or volatility, this is a conscious choice to reduce the risk and accept related lessor returns. I am looking to compound the assets, that I have set aside for retirement, at around 7 to 8%. Fortunately, we (me and my wife) can cover any shortfall on a given year's return from our income.My thought process is evolving, as I have seen having sizable cash had truly hurt me in the last few years, likewise some of my fixed income investments had provided more than the yield due to falling rates, etc.So, I am thinking of moving into asset allocation, with exposure to equities, fixed income, some precious metals/ commodity and some real estate. Of course, I will be doing this over extended period and trying to understand what kind of returns v risks to expect. Also, another goal is to free up some of my time, for travel and couple of items on the bucket list. :)
(read 5% swing at portfolio wide or with 3% of SPY)Not sure what this means. What is "5% swing at portfolio wide"? Are you saying 5% max drawdown? You can't take hardly any risk at that level.Roughly speaking, I would think you could shoot for 8-12% returns if you are willing to tolerate a 30% drawdown.Really though...the question is the wrong question to begin with. There is an old maxim "manage the downside risk, and let the returns take care of themselves". In my experience, people get into trouble when they start thinking in terms of certain returns to target. I think it is more useful to think in terms of what is the maximum tolerable downside drawdown I can tolerate.
I am looking to compound the assets, that I have set aside for retirement, at around 7 to 8%. Fortunately, we (me and my wife) can cover any shortfall on a given year's return from our incomeHonestly, I think it is completely unrealistic to expect 7-8% annual returns in the current economic and interest rate environment with only 5% annual standard deviation. If I talked to someone as a potential client, I would flat out tell that is extremely unlikely. If you want 7-8% returns over say the next 5-10 years you are likely going to have to be willing to accept higher annual volatility than 5%.
I am not restricting myself to only equities but looking at all asset classes. For example, I can buy rental properties and use rental cash flow to pay the mortgage and I think, you can look for low single digit returns now and low single digit price appreciation. At this point of housing cycle I can be reasonably certain the price fluctuations are not going to be beyond 5%. Ofourse you can argue unlike equities you don't see the quote every day so you don't really know the drawdown or volatility. This is just one example.While 30% drawdown may seem normal but for my retirement funds that is unacceptable, especially when I am looking at the entire portfolio. I don't have exhaustive study to prove but volatility is not really required to generate above average returns and especially average returns.My IRA accounts for the last few years haven't experienced more than -3% swing per quarter or month and has achieved over 8% return annually. All the while I have maintained a minimum of 20% cash. Of course this required active management. That is what I am trying to avoid.
I am not restricting myself to only equities but looking at all asset classes. For example, I can buy rental properties and use rental cash flow to pay the mortgage and I think, you can look for low single digit returns now and low single digit price appreciation.I thought you were just referring to a portfolio of marketable securities. You are probably right about rental properties, and with those it isn't like you are seeing a mark to market value on a daily basis. I am actually looking at this area myself as I think at current stock valuation levels and interest rates, rental properties look pretty good.
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