What is a reasonable return?

[My Dream]

I'm a newbie to investing.........newbie in the sense that after several years, I still don't get it. I've tried several investment companies as well as advisor and am told that my expected returns are unrealistic. Here in Canada I usually base my "expected returns" on what the TSX does in other words, beat the TSX by X amount. Is it wrong to pay an institution $15000.00 per year in hopes that they beat the TSX by a reasonable amount. Question, what is reasonable and how long a timeframe should they need to accomplish this..........couple year......a decade?

[ziggy29]

If you're paying someone $15,000 a year to manage your money, they'd better be "beating the market" with more than $15,000 extra return per year on average.

For a 100% stock portfolio I'd consider a "reasonable return" to be roughly the overall market performance minus, say, 0.25% for expenses. After all, this is what you'd be accomplishing with stock index funds with no institution taking $15,000 a year.

[freebird5825]

Go to the overall Research Funds page at https://personal.vanguard.com/us/fun...&sortorder=asc
Make sure you are in the Performance view (blue tabs just above list).
On the left hand side, you will see a vertical option list for type of fund. Add or remove Xs to select funds by Asset Class (stocks, bonds, balanced, international). Or do nothing to the boxes and look at all of them at once.
This is real live data for very low cost funds, some of which are actively managed and some indexed. You can split the list by using that left side option box under Management and turn off either Active or Indexed.
I would look at 5 and 10 year performance data. The Since Inception column will give you even longer term data (since the fund existed).
If you click on the blue Attributes & Expense Ratio tab just above the list of funds, you will see the annual cost as a percentage of assets.
You can do the same type of research at other fund family sites, both Canadian and US.

What you choose to pay an advisor is up to you. Most of the folks here are DIYers.

[My Dream]

Quote:

Originally Posted by ziggy29 For a 100% stock portfolio I'd consider a "reasonable return" to be roughly the overall market performance minus, say, 0.25% for expenses. After all, this is what you'd be accomplishing with stock index funds with no institution taking $15,000 a year.

Yes it's invested in 100% stocks and when you say "overall maket performance" are you saying the TSX in my case? So if I understand, you say it's reasonable to expect a financial institution to follow the TSX after fees at a cost to me of $15000.00 per year?

Quote:

Originally Posted by freebird5825 Go to the overall Research Funds page at https://personal.vanguard.com/us/fun...&sortorder=asc Make sure you are in the Performance view (blue tabs just above list). On the left hand side, you will see a vertical option list for type of fund. Add or remove Xs to select funds by Asset Class (stocks, bonds, balanced, international). Or do nothing to the boxes and look at all of them at once. What you choose to pay an advisor is up to you. Most of the folks here are DIYers.

freebird, I appreciate the link but if I could understand the info in the link I think I'm be on my way to become a DIYer and wouldn't need an advisor. I'm also not familiar with many of those US companies, maybe because I'm from Canada.
It's possible you or I missundertood, I wasn't asking what is a reasonable return since nobody has a crystal ball, what I was asking is what was a reasonable return above the Toronto Stock Exchange if investing in Canadian funds?

[ziggy29]

Quote:

Originally Posted by My Dream Yes it's invested in 100% stocks and when you say "overall maket performance" are you saying the TSX in my case? So if I understand, you say it's reasonable to expect a financial institution to follow the TSX after fees at a cost to me of $15000.00 per year?

If all of your portfolio is in Canadian stocks then the TSX would be the appropriate benchmark.

If a financial institution can't more than produce its fees in excess returns in the general case, then yes -- I'd kick it to the curb. There's no need to pay someone to do something when you can easily match or beat their after-fee returns with index funds.

[ERD50]

Can they show a history of beating the market after fees? Since we have had up and down cycles (slight understatement!) in the past ten years, a ten year chart should show how they perform under different markets.

And those returns really need to be adjusted for volatility. If they were more volatile than the index you compare to, it really isn't apples-apples. And if they cannot produce that data, I see no reason for you to produce $15,000 annually.

So while you should *expect* them to beat the market after charging you $15,000, I doubt that they will, long term. First, they have to do $15,000 better just to break even, they are starting out 'in the red'.

Two words: index funds.

-ERD50

[Sarah in SC]

I'm inclined to agree with ERD on the index funds, unless they truly can beat the market benchmark by more than their fees, over a 10 year term.
I'm hesitant to say for sure what you should do, just because I'm not familiar with the Canadian system.
Some of our more savvy neighbors to the north are sure to chime in, though. Stand by!

[kumquat]

MyDream,
I've followed your posts (both here and at FWF) since your arrival. You're learning, keep it up. I think it's just wording but some things sound funny.

Quote:

Originally Posted by My Dream Here in Canada I usually base my "expected returns" on what the TSX does in other words, beat the TSX by X amount.

If the TSX returns 7%, and your "expected" return is 5%, does your portfolio has to increase 12% to meet your goal? If this is the case, your goal is unrealistic. Using the TSX as an example, you should expect that the Canadian Equities portion of your portfolio will approximate the TSX return minus costs (MER's, loads, etc.). If the TSX returns 7% and you are paying an MER of 2.5% (not outrageous by Canadian standards) your return should be around 4.5%.

Quote:

Originally Posted by My Dream Is it wrong to pay an institution $15000.00 per year in hopes that they beat the TSX by a reasonable amount. Question, what is reasonable and how long a timeframe should they need to accomplish this..........couple year......a decade?

This depends a bit on your portfolio size. If I had $100,000,000 I'd probably pay someone $15K to look after it. If I had $150,000, not a chance.

If you are measuring performance of a conservative portfolio relative to a benchmark, you'd probably at least 5 years to determine effectiveness. If you are measuring absolute returns from a risky aggressive portfolio, a longer term might be needed. If you are, indeed, expecting someone to beat the benchmark by MER plus any percentage > (0-MER), don't. If the benchmark is properly constructed, the odds of it happening over any long period are too far against you.

[My Dream]

Quote:

Originally Posted by ziggy29 If a financial institution can't more than produce its fees in excess returns in the general case, then yes -- I'd kick it to the curb. There's no need to pay someone to do something when you can easily match or beat their after-fee returns with index funds.

When I'm quoting returns, that's after all fees.

Quote:

Originally Posted by ERD50 Can they show a history of beating the market after fees? First, they have to do $15,000 better just to break even, they are starting out 'in the red'. Two words: index funds. -ERD50

They won't show me a history since they claim it all depends on the individual risk level of which they won't tell me which levels nets which returns. ERD, I don't know what index funds are....sorry.

Quote:

Originally Posted by kumquat MyDream, I've followed your posts (both here and at FWF) since your arrival. You're learning, keep it up. I think it's just wording but some things sound funny. If the TSX returns 7%, and your "expected" return is 5%, does your portfolio has to increase 12% to meet your goal? If this is the case, your goal is unrealistic.If the TSX returns 7% and you are paying an MER of 2.5% (not outrageous by Canadian standards) your return should be around 4.5%. This depends a bit on your portfolio size. If I had $100,000,000 I'd probably pay someone $15K to look after it. If you are measuring performance of a conservative portfolio relative to a benchmark, you'd probably at least 5 years to determine effectiveness. If you are measuring absolute returns from a risky aggressive portfolio, a longer term might be needed. If you are, indeed, expecting someone to beat the benchmark by MER plus any percentage > (0-MER), don't. If the benchmark is properly constructed, the odds of it happening over any long period are too far against you.

I know that there several members on both forums therefore I wanted both threads to be somewhat different. I haven't posted much on both since this whole ER and FP is not as easy as I once thought. I really didn't think anyone followed my post for over the last 3 years since they were somewhat infrequent.
Yes they would have "to increase 12% to meet your goal" although beating the TSX by 5% per year would send me into hysterics since that would be "My Dream" which I know won't happen. I don't expect any institution to beat the TSX by 5% per year after fees.
The amount is around 1 mil and I agreed to the $15000.00 per year but hoped they would beat the TSX by more then .5% per year.

[kumquat]

Is $15K your total cost? Or do you pay this to have them find Mutual Funds for you. If your actual investments are MFs then the fund MERs have to be added to that $15K to get the "real cost". If they are trading stocks and bonds for you, then the commissions have to be included (unless this is really an "all in" cost model). They should be able to tell you this "real cost". It may surprise you.

Is $15K high? Well, it's 1.5% of 1 million. I suspect you could do better.

If they can't won't supply historical numbers, one of the reasons might be that they are not proud of them. "Caveat Emptor".

While I can't remember all of your posts, either here or at FWF, I do remember things about people who cross post on the two. I tend not to reply at FWF as there are several posters who can offer far better advice there. Here, while many most can give better advice, most are unfamiliar with the Canadian content.

[ziggy29]

They are charging you about 1.5% per year based on your numbers. They have to beat the TSX by 1.5% in an average year just to *match* the performance of the index (after fees). I don't think too many people can regularly beat the market by 1.5% a year; there aren't too many Buffetts out there.

[My Dream]

They charge a percentage of the portfolio that they manage which is around 1.4% of 1 million which I've rounded off to $15,000.00 to keep it simple. I was told that they would invest in stocks only so there would be no MER fees but I would obviously pay the fee to purchase stocks. They do not invest in mutual funds and I took my principal amount I invested Jan 18 and the present amount todate which told me how much I'm down. I then calculated how much the TSX is down from opening day Jan 08 and calculated accordingly.

I have to go out and will be back in a couple hours to answer recent posts.

[ERD50]

Quote:

Originally Posted by My Dream They won't show me a history since they claim it all depends on the individual risk level of which they won't tell me which levels nets which returns.

I agree with kumquat on this one, Red Flag.

Quote:

ERD, I don't know what index funds are....sorry.

Quote:

Originally Posted by kumquat Here, while many most can give better advice, most are unfamiliar with the Canadian content.

True - I have no idea if an equivalent to our low cost, no-load index funds or ETFs are available in to Canadians. I seem to recall that there were more limitations, but I don't know if that is true, and I can't imagine why it would be true?

-ERD50

[IndependentlyPoor]

Most of us here are DIY types. If you want to see more of this check out the Bogleheads board. Bogleheads Investing Advice and Info

For some it is almost a religion. For others, I believe it can be a worthwhile service (assuming that you have an honest manager).

Risking the irritation of some here, I will once again resort to a couple of anecdotes.

A good friend of ours is a doctor with almost unlimited human capital. He is not at all interested in money, having passed up lucrative private practice for a position as an attending in a teaching hospital. Still, he is handsomely compensated with near-absolute job security. His eyes glaze over any time the stock market or economics is mentioned. His partner and I would gladly babble on about investment stuff, but he stops any such conversation cold. Unsurprisingly he is with a paid advisor.

A coworker who retired shortly before shocked me by turning over his entire portfolio, with full trading authority to a local private money manager. The guys doubled his already comfortably sized nest egg the first year. I didn't say anything, but my reaction was Holy cr@p! What kind of risks is this dude taking? This year they are down about 18% on their equity portfolio and up about 8% on their fixed income portfolio.

You pays your money and you takes your chances.

Please be sure to find out everything you can. Ask about the magic words: fiduciary responsibility (although I don't know how that applies in Canada), turnover rates (churning), how the manager is compensated, commissions from bond syndicates (kickbacks), check with their professional association about complaint records.

I hate giving advice, but here I am prattling on. My "advice" is free, take it for what it is worth.

[FIREd]

I think that if your stock portfolio, after fees, can more or less match the returns of the TSX you'd be doing great. Demanding returns in excess of the TSX's will require taking additional risks that may or may not pay off. If you are willing to take that gamble, then fine. Otherwise, investing your money in a mutual fund that tracks the performance of the TSX index (a so called "index fund") will give you the guarantee that your returns will always match the TSX's returns.

I believe that an honest advisor will never promise returns in excess of what your portfolio's benchmark can achieve (after fees) because that's a very hard thing to do. If someone promises you that they can beat the TSX by 2,3,4,or 5% consistently, it is a huge red flag (think Bernard Maddoff).

[kumquat]

Quote:

Originally Posted by ERD50 I have no idea if an equivalent to our low cost, no-load index funds or ETFs are available in to Canadians. I seem to recall that there were more limitations, but I don't know if that is true, and I can't imagine why it would be true? -ERD50

Not to hijack the thread:
There are a few no-load index funds available. Their MERs are higher than south of the border.
There are a few ETFs available. The largest TSX equity fund, XIU, carries an MER of 0.17%. This is Canada's lowest MER. Compared to VTI (MER 0.07%), it's expensive. ETFs listed in NY are also available but now we have to factor in currency risk.
Typical retail funds sold by the banks, EJ like companies, etc usually exceed 2%.
Even Fidelity Canada offers 509 funds with MERs > 2% (192 > 2.5). Whether Fidelity Canada is related to your Fidelity, I don't know.

This is how it is. Why it is, is another question. I guess the answer is partly that the fees come from a smaller NAV and partly mostly that Canadian have yet to wake up.

[My Dream]

I started watching the BNN channel which is one way that I'm learning about the world of investing and I found it interesting that one analyst said once and forgive me if I don't quote him exactly "it's not rocket science for an advisor to pick funds that follow the TSX, that's easy, the measure of a good advisor is one that beats the TSX. No advisor has control over the Toronto Stock Exchange, but you can control whether you beat the TSX."
That statement made so much sense to me and that gave me motivation to learn more.
In conclusion, so far during the last 21 months I've been able to beat the TSX therefore it's time to put my money where my mouth is. I'm not as focased on the returns since I don't have much control over that, I'm more interested in getting ahead of the TSX and need to figure out how that can be accomplished without more risk then needed.
I give myself credit for not giving up and my ultimate goal is to manage my own money.........all of it. It's sometimes difficult to be a jack of all trades master of none but I've got to add investing to one of my goals.


Thanks for everyone's help, I started this thread with an open mind and can now see the light more clearly, even though it may be only a 7 watt night light.

[Meadbh]

MD, just to complicate things further, it's not all about returns. We would all love to get returns higher than the TSX, after fees are paid, if there were no risk of loss involved. Trouble is, higher returns usually mean higher volatility. (Think boom and bust Alberta versus slow and steady Manitoba). As your wealth increases, it's less important to grow it fast than not to lose it all. And as we have all discovered, when your assets drop by 50%, it takes an increase of 100% to get back to where you started. Not much return there!

Two terms you may come across are Alpha and Beta. Alpha represents net returns after inflation is factored in. Beta represents risk. We all want a positive Alpha, that is, positive return after inflation. That's what really counts, not just "beating the TSX". In general, to minimize Beta, you have to give up a little Alpha. One way to do this is to add some boring, steady bonds to your portfolio.

Unfortunately there are many Canadian mutual funds out there with MERs of 2.5-3%, which is insane. Nobody should be throwing money away like that. The most cost effective fees are in index fund as kumquat has indicated. Your expense ratio of 1.4% is not excessively high by Canadian standards and suggests to me that you are using private wealth management. If so, use the services to the maximum. For example, has your private wealth management outfit offered to provide free estate planning, tax planning, etc? Is your advisor a registered bond trader, who can purchase bonds for your portfolio at a 1-2% discount? (I know, you don't have any bonds). And finally, don't forget: management fees on assets under private management are tax deductible.

I use private wealth management for a part of my portfolio and I pay a flat 1%. The assets involved are comparable to yours.

[kumquat]

One last suggestion, My Dream,

If you want to learn about investing, BNN is the last place to go. You have good resources here and at FWF. Read what they have to say. Read books and articles that they suggest.

This tidbit really got me:

Quote:

"it's not rocket science for an advisor to pick funds that follow the TSX, that's easy, the measure of a good advisor is one that beats the TSX. No advisor has control over the Toronto Stock Exchange, but you can control whether you beat the TSX."

Bovine feces. If one could do this on a regular basis (net of fees), he wouldn't be asking for a measly $15K from your tiny ($1M) stash. People with real money would be begging at his door.

[Ed_The_Gypsy]

You might want to look around financial webring:
Financial Webring Forum :: Index

It is sort of the Canadian equivalent to this forum.

Also consider Derek Foster's web site and his books:
Stop Working

Of course, for amusement, consider Alex Doulis:
Welcome to AlexDoulis.com

and, as always, gummi (may he live long and prosper):
gummy stuff

All for Canadistan.

Enjoy.