Expected returns? Professional Advisors?

[Edgar]

Hello:

I am a new poster and would like to RE in appx 2 years.

I have been managing my own assets with mixed results.
I'm not sure if I should go to a wealth management firm or an investment counslor or not. I read something from Bruce Williams today that stated 10% annual returns should be possible. 

I was curious what kind of returns other members get from their investments or expect to get and if you get professional advice?

Edgar

 

[Maximillion]

7 -8%.

 

[REWahoo]

Edgar, welcome to the forum.

I think a majority of those on the forum manage their own investments. Bottom line, most "wealth management" firms are primarily interested in managing their wealth, not yours. Take a look at this thread for more thoughts on this subject: http://early-retirement.org/forums/index.php?topic=5813.0

You will see all sorts of annual return claims on the board, to be expected from a group that varies widely in their choce of investments. I personally think 10% future returns are "possible", but unlikely for a sustained period of years, at least at risk levels I would be comfortable with. Others here may feel differently, and will certainly not be shy about giving you their opinion.

 

[LOL!]

I do not pay for professional advice.  I do not pay for non-professional advice either.
My goal is to try to beat the performance of my kids' 529 plans invested in Vanguard index funds in the Utah plan.  That plan has 50% S&P500, 5% international value, 5% international growth, 20% small cap, 20% mid-cap.

Since we started the Utah plans, they have returned 18.5% annuallized.  It's up 7% year-to-date.
Our entire portfolio has returned 17% annuallized over the same time frame and is up 5% YTD.

I'm expecting to get the same return as a combination of index funds invested in domestic, international, large, small, mid cap and cash.  That's about 7% to 10% long term.  You might wish to read some of the articles at http://www.fundadvice.com

All calculations done with MSMoney.

 

[JPatrick]

Hello:

I am a new poster and would like to RE in appx 2 years.

I have been managing my own assets with mixed results.

Edgar

Everybody gets mixed results Edgar.  Why don't you share your results?
Not trying to be nosey, but that info is salient to the problem.
One of the first steps you should take is to look at the results of various target retirement funds from fido / vanguard.  This is probably the ultimate in set it and forget it and still manage decent returns.  You could look at the "coffeehouse type" portfolios that you simply rebalance each year.  Not quite set and forget, but close.  Good returns here also.
After having done that, how's that advisor looking with his/her fat fees?

 

[ladelfina]

Expected returns? Professional Advisors? How do you calculate return?

Ok, after reading this thread and "My wife and I are living the good life".. I started to look more closely at my overall returns.

I use Quicken and it's mostly OK, except I have a few gaps and messes I haven't addressed w/r/t spinoffs and mergers that Q royally f's... I tend to look at each investment individually using the IRR and ROI performance reports, which have a slight discrepancy that I never bothered to investigate/understand fully since it wasn't that big... I skip over the one or two messes I haven't entirely raveled/unraveled when I'm checking to see how things are doing.

Now that these 2 guys have inspired me to look at my overall yearly performance, I notice the two numbers (IRR and ROI) are significantly different. Quick internet searches give me things that either gloss over the terms, or are too complicated for my poor brain.

Using the period folks were talking about in the "good life" thread (2003-2005) Quicken gave me these results:

2003
ROI 11.38%
IRR 12.5%

2004
ROI 19.05%
IRR 41.9%

2005
ROI 48.75%
IRR 50.5%

YTD
ROI 4.35%
IRR 16.8%

Starting and ending market values show up as identical in both reports, as do all Investments and Returns.

I'm inferring the difference is happening due to taking money out, because in '04 we had a big deposit to the taxable account, followed closely by an equally big withdrawal (using that account to get a better foreign exchange spread when buying our house abroad). The next biggest discrepancy is in this year: we've had to start using some of our stash to live on and w/d ~$10k so far in Feb., but we w/d $10k in Nov. of '05 as well... so that leads to more .

I noticed that to get a non-negative number for '04 I had to re-characterize the house money out as a XFR (where it had come through as CHECK). Otherwise, both performance reports tracked the money in, but not the money out (actually it seemed vice-versa) and gave a spurious result.

Hoping the geniuses here can help with a layman's explanation of the diff. betw. IRR and ROI, and also to gather opinions as to whether these things are worth looking at in Quicken or not?

As for the OP, can you tell that I am not in the advisor camp? But I also have had little in the way of fixed income in the years listed.. have introduced some in Nov. and probably should do more (?) with bonds at 13%, cash 7% currently.

 

[Nords]

Re: Expected returns? Professional Advisors? How do you calculate return?

Hoping the geniuses here can help with a layman's explanation of the diff. betw. IRR and ROI, and also to gather opinions as to whether these things are worth looking at in Quicken or not?

Until a genius shows up, here's the difference.

ROI looks at the starting & ending balances and computes the gain. Pretty straightforward, great for purchases of shares in one block with no subsequent investments (and no dividends, either!).

http://www.investopedia.com/terms/r/returnoninvestment.asp

However most people don't invest in a manner that allows you to easily calculate ROI. We invest in cash flows-- a series of periodic payments and probably a stream of cap gains & dividends (e.g. mutual fund distributions). IRR gives you a way to value the rate of return on that cash flow using the dreaded net present value calculation. The math gets ugly but the English is fairly readable.

http://www.investopedia.com/offsite...t-faq.com/articles/analy-int-rate-return.html

So if you're investing in a lump sum, use ROI. If you're DCA'ing (or taking money out, or reinvesting divs/cgs), use IRR.

 

[Edgar]

Thanks for all the well thought out responses. I get appx 5-6% returns. I am probably too heavy in fixed income investments, CD's, Bond funds, etc.

I will read some of the threads that I have been directed to.

I do believe the consensus seems to be that you do not need a high priced advisor

 

[Ed_The_Gypsy]

I do believe the consensus seems to be that you do not need a high priced advisor Grin

I have always found that I can lose my money just as well as any advisor can--I don't need any help with that. And it costs less (if that makes any sense at all).

 

[ladelfina]

Edgar, I think you can do better than 5-6%, that is for sure! Given that now even most money-market funds, short term CDs, and some online banks are giving you almost 5% anyway...

But please don't look to my numbers as a baseline!! I was shocked myself to see the numbers I posted above. Maybe I am doing something wierd in Quicken. The problem is I have a loooong history that I've tried to enter, with a lot of DRIPs and spinoffs that create havoc. Then I haven't gotten around to entering checking account stuff for 2003-2005 (was pretty busy doing other things), so some money that was in cash and bonds in my bank-connected account I transferred to my brokerage account, so that could have resulted in extra-ordinary "income"... I need to either start over fresh or just not try to butt heads with Quicken at all.

Anyway, when I look at just individual holdings for 2003-2005, I see a lot of double digits:
Quicken's Avg. Annual Return for 2003-2005
3M COMPANY 10.00%
ABERDEEN ASIA PAC INCM 17.70%
ALTRIA GROUP INC 23.50%
AMER ELECTRIC PWR CO INC 16.00%
AMERICA MOVIL SA L ADR FSPONSORED ADR 83.70%
AMERICAN EXPRESS COMPANY 14.40%
AMERIPRISE FINANCIAL INC 24.60%
C V S CORP DEL 29.20%
CATERPILLAR INC 38.90%
CHEVRONTEXACO CORP 15.60%
CITIGROUP INC 14.90%
ENI S P A SPON ADR FSPONSORED ADR 15.80%
FREESCALE SEMICOND CL B CLASS B 58.80%
GENERAL MOTORS CORP -36.40%
INTL BUSINESS MACHINES 2.80%
ISHARES MSCI EMRG MKT FDWITH STOCK SPLIT SHARES EMERGING MA 96.40%
ISHARES TR LEHMAN BD FD LEHMAN 20+ YEAR TREASURY 4.60%
ISHARES TR LEHMAN TIPS TIPS BOND FUND 4.80%
ISHARES TR RUSSELL 2000 WITH STOCK SPLIT SHARES RUSSELL 200 17.70%
KRAFT FOODS INC -4.10%
LATIN AMER EQUITY FD NEW 49.20%
LUXOTTICA GRP SPA ADR F1 ADR REP 1 ORD 24.50%
MOTOROLA INC 44.40%
NATUZZI SPA ADR FSPONSORED ADR -9.50%
NORTHEAST UTILITIES 12.90%
OLD REPUBLIC INTL CORP 22.70%
OLD STONE $2.40 PFD SR B 82.40%
ORACLE CORPORATION 4.10%
PFIZER INCORPORATED -6.40%
SAFECO CORE EQUITY FUND 40.00%
SANPAOLO IMI SPA ADR FSPONSORED ADR 40.20%
SCHLUMBERGER LTD F 33.80%
SOUND SHORE FUND INC 17.40%
ST PAUL TRAVELERS COS 12.30%
TELEFON DE MEX L ADR FSPONSORED ADR 19.00%
TRANSOCEAN INC F 44.20%
UIL HOLDINGS CO 18.00%
VANGUARD HEALTH CARE FD INVESTOR SHARES 16.90%
WAL-MART DE CV SPN ADR FSPONSORED ADR 37.90%

Now, I left out a couple of spinoffs and mergers that I am not confident are handled correctly in Q (ATT, BAC, Pioneer Fund). You have to take these #s with a grain of salt... for example I only recently bought the EEM, and it happened to go up a lot in the last 2 months of '05, showing an average of 96%.. If I look at "all transactions" 11/8/05-4/7/06 it's 77.8%.  Of some that went up a lot, I only have a small holding, while I've got more of some of the losers.  1/2 to 1/3 have dividend re-investment through the brokerage. I haven't troubled to see whether/how that has affected the returns shown here via Quicken.

Suffice it to say that stock investments in 2003-2005 should have given you double-digit returns. But an  equity-heavy portfolio is not right for everyone.. I don't even think it is right for me!!!  My "retirement" at 43 was not planned for.. my husband is only just starting to gain some traction in IT contracting overseas, so we could have a decent earned income this year, ...or not. Same with next year.. who knows? So that's why I am going on the assumption that we are "retired early" and am trying to work it so any future earned income is gravy. Bizzarely, the biggest gains have been precisely in the years since I quit working in 2003! A complete fluke!

Also note that many big performers here are oddball stocks I 'inherited' from back in the '70s and '80s, while the only losers are among my picks..    (though I had some winners, too). OTOH, few of them appear to me to be risky propositions that will implode overnight, and a large number are S&P500-type stocks.

Since joining the board and starting to read about asset allocation, the only things I have added are the iShares ETFs last year. I plan to continue down the AA path, but want to avoid unneccessary capital gains if I am just going to re-invest and not use the money to live on. I "get" the idea of asset allocation, but I am squeamish about killing geese that are currently laying golden eggs.

I got a lot of info out of the ETFInvestor site, but I pulled up short when I read their recommendation on how to start ("First, sell all your stocks..")!  gulp! 

Nords, thanks for the short & sweet reponse. I've book-marked the Investopedia site for future 'dumb' questions... 

 

[Rich_by_the_Bay]

Edgar,

I found there is a decided and probably justified tilt against investment and financial advisors in this here community. By self-selection mostly, these folks are savvy and successful on their own, so any advantage of an advisor is quickly offset by the fees, which can range up to 2%.

That said, I have my equity holdings with a financial advising company (Alliance-Bernstein). I keep my own cash and bond/debt holdings on my own. I also keep a small  "laboratory" portfolio going where I manage my money as if I had no advisor (stocks, bonds, REITs). This is very educational, and allows me to compare my own results to theirs in a real world way. I think of it like my financial training.

In the past two years, my advisor has 'beaten' my own portfolio after fees by about 0.3 or 0.6%. I pretty much follow sound principles of diversification, low cost Vanguard, etc. in a 70/30 mix.

Overall I am happy with the arrangement. I'm pretty busy still and appreciate the assurance that someone else is keeping an eye on things. As I gain confidence, I can say that the moment my advisor fails to beat me after fees for a year or so, I'm outa there.

 

[brewer12345]

Rich, just a quibble. Whether your advisor beats you or not in absolute terms is meaningless. You need to compare risk-adjusted return, not just return. If the advisor took 50% more risk to get 10% more return, it wouldn't be a very good trade-off.

 

[oldcrowcall]

I heard that investment managers don't create returns, markets do. Probably a lot of truth to that. Therefore, due to the fact that no one can predict what the future markets are going to do, a well diversified portfolio is about the second best you thing you can do. (The first is just getting  lucky.)

 

[Rich_by_the_Bay]

Rich, just a quibble. Whether your advisor beats you or not in absolute terms is meaningless. You need to compare risk-adjusted return, not just return. If the advisor took 50% more risk to get 10% more return, it wouldn't be a very good trade-off.

Hmm.. good point, and he is a bit riskier than I have a tendency to be.

At least I think he is - I don't have the knowledge to compare this accurately, but he has me in 25% foreign (including emerging) which is more than I'd have done (probably he is right); I actually have a little more in small cap and we are both style-neutral (i.e. value v growth). Both he and I are at 70/30 overall.

Guess I need to take a more sophisticated look at this. Once I get sophisticated .

 

[Nords]

Guess I need to take a more sophisticated look at this. Once I get sophisticated  .

Brewer, is that risk comparison as simple as plugging through Riskgrades or some other website?

 

[OHjosh]

Well, I guess I am in the other camp.  I am a big fan of getting a professional. I paid a one time fee of $400 five years ago for advice from a nice man at Ameriprise Fianncial (American Express knock off).  I had been "managing" my holdings and managd to put all of them into large cap vehicles.  Luckily he diversified me-- for real-- before the bottom fell out. 

Even if I was retired, I would NOT enjoy doing the research and tracking and fees it takes to manage my money.  Now I see him twice a year and we discuss the strategy and the performance.  Rebalance typically occurs then.  He has an email alert program that informs me based upon my holdings if I need or should make a change in between.

I suppose choosing and advisor is like choosing a doctor-- there are a lot of quacks and charlatans out there.  On the other hand, if you use word of mouth from those you trust on financial issues to identify possible candidates, check credentials and determine you ahve a nice "fit" and most of all stay skeptical and ask questions WHY before you follow their advice, I think it can work.

OHjosh

 

[Dude]

Brewer, is that risk comparison as simple as plugging through Riskgrades or some other website?

If you invest with mostly mutual funds, Financial Engines will teach you alot about risk.....if you have at least $100k at Vanguard you should have access to it for free, otherwise available for about $40/quarter last time I checked.....I like the tool and recommend it.  However, it is really geared towards younger investors with at least 5 years until "retirement".

 

[free4now]

My take is that professional advisors are useful for doing asset allocation if you are the kind of person who can't or won't learn asset allocation yourself.  But it's really not hard and all the professionals will do is plug your numbers into a formula and spit out some allocations.  They'll charge you 1-2+% per year (siphoned off in hidden costs).  If you have a big portfolio that can easily be a month's worth of salary every year.  Or much more.    I figure it's better to learn those formulas myself and keep the dough in my pile.

 

[brewer12345]

Brewer, is that risk comparison as simple as plugging through Riskgrades or some other website?

Well, I guess I would have to say that there are many papers, textbooks, and entire research careers devotted to this sort of thing, so it is not as simple as just plugging stuff into a website. Ideally, one would look at the historical performance and volatility of two portfolios and compare them, using alpha, beta, sharpe ratio, information ratio, treynor ratio, volatility, etc. to see how things stack up. However, this approach requires a significant amount of data (more than a couple years' worth) and a lot of painful quantitative effort. The main alternative is simulation, which has its own problems (assumptions are critical, doesn't do well with changing portfolios over time, often problematic due to lack of data, doesn't deal well with fat tails AKA "million to one chances pop up 9 times out of 10").

So if you have enough of a track record to be able to do some number crunching, I'd say that's probably the best way to go. Otherwise, you will have to settle for Financial engines monte carlo deal, riskgrades (with which I am not familiar), or some other black box.

 

[Maximillion]

ladelfina, that is a very interesting Portfolio, obviously you are not afraid to take risks, but I look at your holdings and there is no way they are random choices??

The mix of course is important, but that Portfolio had a whole lot of thought behind it??

 

[youbet]

Well, I guess I am in the other camp.  I am a big fan of getting a professional. I paid a one time fee of $400 five years ago for advice from a nice man at Ameriprise Fianncial (American Express knock off). 

Ameriprise funds are load funds.     Does the Ameriprise nice man ever move you in and out of funds for which you pay their 5% load?

Also, Ameriprise was spun off from American Express Financial Services which was originally Investors Diversified Services.  In the IDS days, the reps did semi-annual allocation and advise sessions for free, usually at your kitchen table, with a lot of prep work done in advance.  The $400 charge is a recent innovation!

Anyway........  just make sure you identify and understand any loads you are paying for their funds.

 

[ladelfina]

Max, about 1/2-1/3 is "random" in the sense that I did not pick it but it was a small account started for me by my dad. He had a broker or two that he listened to. About 1/2 the money was in ORI, FAX, LAQ, TMX, OSTN, FBF (now BAC), AXP, MOT, AU --not more than few hundred or a thousand or 2 in each--along with a couple treasuries and a muni bond.. he was big on treasuries and munis. That was phase I.

Phase II: The AU did nothing but go down so I got rid of it... As the bonds matured and I added my own $, I bought good things (3M, Schlumberger, CAT) and bad (Oracle/IBM--asked DH which tech firms he had the most confidence in.. ok, well ,he was right in that we only lost some instead of almost all when tech plummeted); Pfizer.. enh. The domestic funds (PFIOX formerly SAFQX, SSHFX, and VGHCX) were tips from my sister who was pursuing an MBA at the time (which made her, in my mind, the "big expert"!). The Italian ones (E, LUX, IMI, NTZ) are from my "infatuation with Italy" phase.. the only real dog is NTZ but I had high hopes for it when I saw all the "Natuzzi leather" sofas for sale around Boston. In Italy I also see lots of their sofa outlets, so I think the company is doing fine; whether that translates overseas or whether the underlying structure is sound (impossilbe to know for sure) is another matter. Peter Lynch did not help me out here. This is the phase where I was making money and putting it into retirement accounts when I wasn't spending it on shoes that are now collecting dust.

Phase III: Move to Italy and start worrying about asset allocation and not having so much in just banking and "weird" foreign stocks, so I move a bit towards bigger "normal" American companies and good dividends: MO, ATT, Chevron (inspired by Condi's personal tanker), GM (hey! Schwab gave it an "A" grade..  ), KFT (not sure what I was thinking.. food, I guess--there's no mac&cheese here and I miss it; I should have picked Campbell's--there's no canned soup, either..!).

Phase IV: more intrigued by a serious asset allocation approach hence the ETFs. In the meantime many of the past holdings begat offspring, further complicating the picture.

In all this time I've been buying rather than selling, because I never needed to sell, not being retired and paying zero attention to the portfolio in most years, aside from a few brief, intense periods of "shopping". So expenses are not a word in my vocabulary, aside from what the various funds charge inherently. About 1/2-1/3 have div.s re-invested automatically.

I honest-to-God never have thought of my portfolio as "risky". I don't look at 'beta' or any of those things. When I've bought I've considered p/e ratios, dividend yields and have looked at general price tendencies with charts.. that's it.

When I looked back at the "total return" (inspired by the OP) I found that I had 3 negative years out of 25 (Quicken IRR report '81-'06):
35.60%
1.30%
0.90%
81.30%
317.30%
27.40%
10.50%
9.30%
17.60%
-1.50%
15.40%
1.20%
-12.80%
13.80%
8.20%
24.70%
20.80%
-2.10%
43.70%
25.20%
16.80%
-3.30%
12.50%
43.00%
47.50%
14.20% ytd

What am I to take away from all this? I am not an experienced investor despite 25 years in the mkt., because I understand it only on a very rudimentary level. What I did understand very quickly was that online portfolio-tracking is a complete waste of time since it only tracks price appreciation; nobody tracks total return, which obviously what counts. Quicken for all its faults at least provides a clearer picture in this regard. All I can say with certainty is: "dividends are good; foreign exposure is good; buying and holding is good". Reinvestment is good, because the $ gets whisked away and invested (these days at zero cost) before you have the chance to ever see it as cash and do something stupid with it. The stocks I haven't set up re-investment for are the ones I was less 'convinced' of.. who knows what that cost me.  OTOH, it gave me some cash to diversify, even if it was in my own individual and completely haphazard fashion.   wheee!

I would love to say this is all the product of my brilliance! I infer that it is only dumb luck.

(or should I stick with 'brilliance'?)  8)


I do look back at this and Thank My Lucky Stars that I never turned it over to an advisor.  I am fairly sanguine about the future of this mix especially if I dump 2 or 3 obvious laggards and diversify some into foreign bonds and commodities. If the whole market tumbles, and I tumble 20% with it, I can take that.. I don't know how I would feel if I weren't right around "the number" already. I can find ways to cut back 20% on expenses if I had to, but they are already lower than a 4% SWR if I renounce planning the new kitchen.

Go Ameriprise! (Keep raking in those fees, for meeee!  )

 

[Spanky]

It's amazing - your annualized return is over 20% for the last 26 years!

 

[ladelfina]

well, after the few couple days ytd is only around 12% after I updated quotes..

I dunno..      This is all big news to me. Previously I'd been on CFB's wavelength: the bottom line gets bigger =>  -- the bottom line gets smaller => ..I shrug and look around and see that "things are going down' all over", so I don't worry too much. I did very little w*rk, and can count all my trades on my fingers & toes.

I have to rack a lot of it up to the early small purchases in what, at the time, were truly "emerging" markets. The TMX/AMX combo is responsible for a lot of the overall gain.. In this case whatever broker suggested this to my dad earned his commission several thousand times over. Maybe I should look him up and send him a fruit basket!

But again, if you look at total return for the last few years for my "regular" S&P500-type companies (in my earlier post), most have been doing extremely well. Now I'm curious to go back and run the IRR report without the foreign stocks..

I get this:
1.40%
1.90%
1.40%
67.80%
197.20%
25.40%
13.30%
4.50%
19.00%
-12.40%
32.80%
16.40%
10.30%
-1.90%
13.60%
18.50%
31.10%
3.60%
35.00%
17.50%
-16.40%
-9.00%
36.50%
18.00%
4.10%
13.90% ytd

wthout any of the foreign funds and ADRs

The negative numbers get bigger; the positive numbers get smaller. An anecdotal case, I guess for splitting your pot between US and foreign (over the past 25 years). Ok, now who will tell me if this is going to keep working?!?     I want me that new kitchen!

In hindsight, this is NOT the portfolio I would have picked if I had had ER in mind 25 years ago, or even 10 years ago. Following every 'sane' rule of investing would have gotten me less.. I guess I was blissfully ignorant of my high-wire act! I didn't know when I would stop working or if I would even want to or be able to retire particularly early.. I never made a huge salary: when I started working I made not even $30k, went into my own business where I got about $12k the first year, $24k the second, etc., finishing off at between $60-80k in the last few years (pre-ER in 2003).

I've been squeamish about even posting any of this, because it happened to work out for me with THESE holdings, and I don't want to make out as if people who have planned a more conservative route aren't doing the right thing!! If I were to start over and not allowed to pick any of them in a new mix, I might well be as susceptible as the next person, except for the lessons I noted previously (US-foreign mix; dividends; buy&hold; re-invest).. all big advantages, but nothing new to most folks here.

 

[unclemick]

Good stuff ladefina

Nothing wrong with doing it the old fashion way. IN A GALAXY FAR FAR AWAY - THE NORWEGIAN WIDOW ONCE HAD A HUSBAND BUY THE STOCKS!

heh heh heh