Mon, 2017-05-01

What is a fair rate of return?  It seems such a simple question but is not so easily answered.

We often refer to the "risk-free" rate of return which could mean a GIC or term deposit where there is little risk to capital.  The caveat being that purchasing power is lost over the long-term given the discrepancy between available returns and inflation.

Timeframe must also be considered.  Discussions of potential long-term returns are nice but require further commentary on sequencing of returns and financial and emotional requirements.

No discussion of return is ever complete without comparing it to the level of risk undertaken.  Reducing risk while attempting to increase returns can be a complicated subject however I think we all can agree that as level of risk reduces returns do too.  The opposite is not necessarily always true.

Certainly current and future economic conditions will play a role in determining returns.  In a global economy demand and profit go hand in hand and eventually influence valuations and hence, returns.

A benchmark is mandatory but is it the right benchmark? With the full implementation of CRM2 some for the first time will see these comparative measures.  Certainly relevant but likely requiring a conversation as to how the asset allocation, currency and risk level of a portfolio translate.

Finally, the make-up of that return and any embedded gains within.  While interest and dividend income are subject to annual taxation capital gains may accrue for many years and to those in a hurry to liquidate may require a hefty ransom headed to the CRA.

The most important question may be, "what is the required rate of return?"