Is an 8% Return Good? Three Ways to Find Out.

Is scoring 120 points in a basketball game good? Not if the other team scores 150. Is getting a 75% on a math test good? Yes, if every other student in the class scored under 75% and it is graded on a curve. Is Elisabeth Moss the best actor we’ve seen in the past 25 years? Yes, period, end of discussion.

So, is 8% a good rate of return on your investments? Yes, no, maybe. It depends. What I want to outline in this blog are the three key points of context you should examine when evaluating your portfolio’s investment performance.

1. Expectation Level – If possible, avoid investing in a bubble. There should be an objective and purpose to your investments. Are you saving for retirement 30 years from now or for a new house you want to purchase next year? What is your risk tolerance? Can you sleep at night knowing your portfolio is down 30% over the past month or do you start waking up in cold sweats when its down 10%? A sound investment portfolio will take these factors into consideration and you’ll have an expectation level set for all different market environments. We don’t know what the market is going to do tomorrow but we should know how the investment portfolio will react to different market cycles.
2. Benchmark – There is a fine line on how to benchmark your portfolio. If done poorly, you can quickly enter the spin zone with your advisor. I’ve seen a lot of portfolios that are extremely complex and the advisor makes the benchmark just as confusing. There are hundreds, if not thousands of benchmarks available. I could write a book on how to use the right benchmark (more likely a future blog post). To keep it simple, just ask yourself what your performance would be if you didn’t have an advisor. If you were to put together a simple, low cost portfolio with a similar risk profile, what would it look like? It may be that you would just put your money in a CD if you didn’t hire and advisor. Or maybe you would invest in low cost index funds. Whatever the case, that should be your benchmark. And your advisor, after fees, should exceed that on a regular basis.
3. Opportunity Cost – What are the rates of return on other investment strategies available to you? This is tricky, but should not be ignored. Most other strategies you read or hear about are probably a lot of noise or not presented in the proper context. If you see something different that appears to be outperforming your current portfolio you should bring it up to your advisor. There are many other reasons why you are working with your advisor, so you both should feel comfortable discussing other investment ideas. Especially if those ideas will help you achieve your objectives more efficiently.

I hope this was helpful in giving your investment performance the proper context. Please feel free to me anytime to discuss this topic or any other in more detail.