Dana's $750,000 portfolio had weaker returns than her advisor promised. What should she do?
Q. My husband and I had a combined investment portfolio of about $750,000. We agreed to a 0.75% fee to our advisor, which amounted to $5,600 last year. Despite that cost, our portfolio is now worth $732,120. This advisor claimed that 4% was his expected gain for us, and he has fallen far short. Any advice would be appreciated.
A. One of the most challenging parts of creating a financial plan is managing expectations. Dana, it's possible that your advisor assured you that your portfolio would achieve an annual return of approximately 4% every year, but such a promise could have got him fired. In an era where safe investments (such as government bonds and GICs) pay less than 3% before fees, it simply is not possible to earn a consistent annual return of 4%: no advisor should ever promise that, and no investor should expect it.
My guess is that the advisor quoted you and expected long-term average return of 4%, which is actually quite conservative for a balanced portfolio of stocks and bonds. But perhaps he did not take enough time to explain that in any given year your portfolio's return is likely to be significantly higher or lower than that long-term average.
Most people don't appreciate just how volatile stock markets can be. Consider this: From 1999 through 2018, a portfolio with equal amounts of Canadian, U.S. and international equities had an annualized return of about 5.2%. But during those two decades, the portfolio never had a calendar-year return anywhere close to that average. There were 13 years with returns of greater than 9.4%, and the other seven years were losses. The best year saw a gain of almost 29%, and the worst saw a loss of the same magnitude. That is one heck of a dramatic ride to earn a modest 5.2% overall.
Dana, if your portfolio fell from $750,000 to $732,120 in one year, that's a loss of just 2.4%, which is well within the range of what you should expect from a balanced portfolio. Indeed, in 2018, both the Canadian and international stock markets lost much more than that, and even bond funds were barely positive. Almost all balanced portfolios were in the red last year.
From what you've described, it doesn't sound like your advisor has fallen short, except perhaps by failing to explain that the returns of stocks and bonds are never consistent, and that short-term losses are inevitable.
If you are not comfortable with this level of volatility, I would suggest you speak to the advisor about making the portfolio more conservative, perhaps including investments such as GICs, which never fall in value. Just remember that when you reduce your risk, you will also need to accept a lower expected return.
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