How to Calculate Your Investment Performance Expectations

Business man hand drawing  graphWhat are your investment performance expectations? The answer should be based on your needs and several variables (expenses, inflation) that impact your net results and the achievement of your goals.

Establishing realistic, achievable expectations is more complicated than you may think.  Make sure you read our eBook, How to Calculate Your Investment Performance Expectations and use our worksheet to develop yours.

 

Performance Promises

Did you know that a performance promise is a frequently used sales tactic by financial advisors because it appeals to your need for results?

Your Performance Expectations

Understand what characteristics performance expectations should be based on.  It should be a well thought-out process.

Assumptions

Your performance expectation is based on several assumptions that reflect your needs and the various forms of erosion: expenses, inflation, distributions, and taxes. Your expectation should include a premium return that increases the real value of your assets over time.

Advisor Acknowledgement

More sophisticated fee advisors will be able to provide input for your assumptions and help you select an appropriate premium return.

Investment Expenses

If you know your actual expenses, you can estimate the expenses, or your financial advisor can provide the information. This is an important assumption because investment expenses impact your net performance.

Inflation Assumptions

Why include inflation in your performance expectation? Inflation erodes the purchasing power of your assets. That is a big deal if you are investing long-term, for example retirement assets.

Distribution Requirements

If you are retired you may be taking distributions to help cover your expenses. By offsetting distributions with performance, you reduce your risk of prematurely invading your principal.

 Tax Assumptions

Are all of your assets held in tax-deferred accounts (IRAs) or are your assets held in taxable accounts where you will incur taxes for dividend and interest income and transactions that produce realized capital gains?

Risk Tolerance

It’s simple. If you want higher returns you have to accept higher risk. If you want lower risk you have to accept lower returns.  Understand how this risk/reward relationship governs how performance and risk interact with each other over longer time periods.

Other posts from Jack Waymire