Calgary Herald

Investors want high returns, but expect safety at same time

Realistic targets with low risk a better way to build a portfolio, Martin Pelletier writes.

- Financial Post Martin Pelletier, CFA, is a portfolio manager at Wellington-altus Private Counsel Inc. ( formerly Trivest Wealth Counsel Ltd.), a private client and institutio­nal investment firm specializi­ng in discretion­ary risk-managed portfolios, inves

As most global equity markets set new highs, many are no doubt wondering how much juice is left to squeeze out of this bull market run. However, at the same time, when asked what the future holds as to forward returns, the answer might surprise you.

In a recently released Natixis report, it showed that an investor's past experience weighed heavily on their forward expectatio­n. In particular, those with exposure to markets with the highest recent returns had a higher forward expectatio­n, while those who experience­d more moderate returns had a lower forward expectatio­n.

Interestin­gly, the same relationsh­ip played out for advisers, albeit at a much lower and more reasonable level. For example, U.S. investors have the highest long-term annual return expectatio­n at a whopping 17.5 per cent, more than two-anda-half times that of financial profession­als (6.7 per cent). Canada comes in at the bottom with investors expecting a 11.2 per cent go-forward, long-term annual return, versus 5.1 per cent for financial profession­als.

Clearly, past returns are responsibl­e for this variance. Over the past 10 years, the S&P 500 (adjusted for Canadian dollars) has earned an annual excess return of six per cent over the S&P/TSX.

Maybe this also explains why many Canadians prefer to invest their wealth in real estate speculatio­n instead of stocks, so much so that it now represents nearly one-quarter of all homes purchased in this country.

That said, these double-digit return expectatio­ns are strangely at odds with how investors feel about risk in today's market environmen­t. The report indicates that three-quarters of investors prefer safety over investment performanc­e. Six in 10 also believe that “volatility undermines their savings and investment goals.”

It appears that investors have forgotten that return and risk go hand in hand, which perhaps helps explain the large gap to financial profession­al expectatio­ns. We do worry that unless guided down by their advisers, investors could be onboarding excessive risk at the wrong time which will wreak havoc on their portfolios when markets correct — and they will.

Fortunatel­y, there are three things you can do to help reconnect your expectatio­ns with reality:


The problem with normal benchmarki­ng is in the selection of the appropriat­e indexes, which quite often leads to return chasing. For the past 10 years, those with a large weighting to U.S. stocks outperform­ed by a wide margin. But the decade before that, those Canadians with a home country bias did much better.

So which benchmark and how much of a weighting should be chosen and why, again considerin­g the fact that past performanc­e has nothing to do with future performanc­e?

We recommend skipping this process altogether and instead undertakin­g a wealth plan that works backwards in deriving a realistic target return to meet a specific financial objective, such as funding a certain lifestyle in retirement or leaving a set amount to a charity and/or your estate.

The next step is to then construct a well-diversifie­d global portfolio designed to meet this target return while taking as little risk as possible in doing so. Then track the variance, if any, to this goal measured against the level of volatility it is experienci­ng.


Identifyin­g and tracking portfolio risk exposure is imperative, especially for those drawing on their portfolio in retirement. Believe it or not, you can actually have two portfolios with the same average return but a dramatical­ly different terminal value simply based on the pattern of portfolio volatility.

Therefore, managing the portfolio risk against the timing of one's withdrawal­s is essential to meeting one's goals.


Not surprising­ly, despite the plethora of media attention directed toward climate change and ESG, it didn't make the top five investment concerns. However, one thing did consistent­ly show up — inflation and the potential for material tax hikes.

This isn't just a U.S. phenomenon: Many other countries expressed similar levels of trepidatio­n, given the record amount of money being spent as a means to “Build Back Better” POST-COVID

This is where undertakin­g a wealth plan is imperative in identifyin­g ways to seriously boost after-tax returns on your portfolio.

In conclusion, a great first step is to change your overall mindset by charting your own course independen­t of what everyone else is doing. This means benchmarki­ng against your own goals and objectives, realizing that past returns have nothing to do with future ones. And, finally, it also means seeking help from a team of experts — accounting, legal, investment — that can really help keep your feet planted in the ground of reality.

 ?? PETER J THOMPSON ?? A recent report showed Canadian investors expected double-digit returns, but financial advisers had lower targets.
PETER J THOMPSON A recent report showed Canadian investors expected double-digit returns, but financial advisers had lower targets.

Newspapers in English

Newspapers from Canada