Realistic Expectations and Asset Allocation: Important Factors to Help With Long-Term Success

As the markets continue to increase, investor expectations are on the rise. This isn’t necessarily a positive trend as it is important for our long term investment results that we need to keep our expectations realistic.

In June 2017, Legg Mason released the Global Investor Survey that captured the expectations of 900 investors. The survey reveals that income investors seek an overall average rate of return of 8.64 percent. Those who are working expect 9.27 percent returns, while those who are retired are counting on a 6.22 percent. But in reality, U.S. respondents say they achieve a 7.44 percent average rate of return on their income-producing investments.[1]

This expectation is certainly better than the 14.1 percent that investors expected in 2005, reported by the Securities Industry Association. And it’s definitely closer to being realistic than expectations consumers had in 2000 of above 30 percent.

What History Has Taught Us

Having an unrealistic expectation of your return can be problematic. For one thing, an overly optimistic outlook can translate into losing sight of lessons learned during recent years. With rising interest rates and a stock market that is highly valued in historical terms, returns that are somewhat lower than the S&P 500’s historical average, which was approximately 10.4 percent for the period from 1926 through 2003, are realistic.

Since 1950, returns on a traditional U.S. portfolio of 60 percent for stocks and 40 percent for bonds generated an average annual return of 9.5 percent over rolling five-year periods.

But to earn this return, portfolio values were enhanced by exposure to bonds that were paying yields significantly higher (4–6 percent) than those now available in 2017. With the 10-year U.S. Treasury paying a paltry 1.5 percent, global bonds providing negative yields and predictions of continued slow global economic growth, it is important for investors to lower their expectations for returns from those earned historically.

As the saying goes, “If all else fails, lower your expectations!”

Focus on What You Can Control

Market fluctuations are beyond our control. So if you’re an investor, it’s important for you to focus on the two things you can control: savings and spending. As your investment consultant, in this environment of lower return expectations, we will remain disciplined by employing the appropriate risk-adjusted investment strategy to help meet your goals and objectives. And we will work with you to identify appropriate savings and spending plans.

Strive for Long-Term Performance

You also must look beyond quarterly and yearly investment results and instead establish time horizons of five years or more. This can help ensure that your portfolio meets your longer-term investment objectives. Study after study proves that some investors can make very poor decisions when trying to guess the direction of financial markets.

We provide added value by rebalancing your portfolio strategically based on our review of your needs, your investment status and our assessment of your individual level of risk tolerance.

Every investment class will fluctuate. Some investors attempt to time the markets in search of the greatest returns in a given environment. For many investors, making small adjustments according to prevailing market conditions is part of an overall investment strategy. But in our opinion,  the best course of action is usually adhering to a long-term plan in which you allocate your assets according to your individual goals, tolerance for risk and time horizon.

Diversify Your Investment Classes

Also, by creating a mix of different investment classes within a portfolio, you can better mitigate the inherent risks in all categories. When one asset class underperforms, other investment choices may remain stable or appreciate, potentially lessening overall losses. In fact, studies have shown that asset allocation can be even more significant than individual investment selection in determining portfolio performance as a whole.

The Difference Between Asset Allocation and Investment Selection

There are two important aspects of your long-term investing strategy. The difference between them can be confusing, and sometimes advisors don’t explain these concepts well.

Basically, asset allocation is the process of putting your money to work in the most suitable place, in the types of investments that make the most sense for your unique situation. Instead of moving in and out of various investment classes, which is the tendency for many investors, it is typically wiser to simply rebalance your allocation. Rotate your investment in the various classes periodically.

Asset allocation can be your strategy for long-term performance in our opinion. Asset allocation is so important that even some researchers say it is responsible for 90 percent of observed returns.

Now, investment selection is the process of identifying individual securities or investments within a certain asset class that will make up your portfolio. You will select investments that can help you achieve your overall strategy.

The turnaround in the markets and economy is currently positive, and the outlook for the future is more optimistic than in recent years. Having reasonable expectations and allocating your assets wisely should remain at the forefront of your long-term plans.

If you have any questions about your personal asset allocation or the possible outlook for the markets, please contact your financial advisor. He or she will help you create and maintain a course of action that best fits your needs, regardless of the market environment.

The information contained in this blog does not purport to be a complete description of the securities,markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Randy Carver and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.  There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. Past performance is not a guarantee of future results.  Investing involves risk and you may incur a profit or loss regardless of strategy selected.

[1]. Karen DeMasters, “Investors Expect Too Much from Their Portfolios, Study Says,” June 20, 2017, Financial Advisor magazine website,