What return on my investments can I expect?

Clients and prospects often ask this question, so let’s talk it through. I can’t tell you what your return will be, but still there’s a fair amount I can tell you about what you can expect. Let’s take a look from a few different angles.

What we can say and what we can’t

Thank goodness for the Commonwealth of Massachusetts, the regulator of investment advisors in our state. In addition to policing the rare psychopathic rogue like Bernie Madoff, our state government sets rules for our firm and all our peers. High on the list of regulations is a strict prohibition against promising returns. Anyone who assures that you can expect X percent return is not only creating a false expectation, but also breaking the law.

We can also thank the Commonwealth for a phrase that can never be repeated too many times: “Past performance is no guarantee of future return.”

Let’s start with “3-6-9”

Uncertainty And ConfusionMarkets are uncertain, but long-term returns by asset class are remarkably consistent over time. It’s the short term that varies, often significantly. But if you hold on through thick and thin – for decades, not months – you are highly likely to come out somewhere near the long term return for any given asset class. What are those averages? Think “3-6-9” for the long-term return on money markets, bonds, and stocks. In any given year, the returns may look nothing like this, but over your investment lifetime, these are as reasonable estimates as you’re likely to come up with.

Keep in mind that the stock category can be broken down further by company size, geography and other variables, each with its own long-term expected return. For instance, small company stocks have a much higher long-term average return, and much greater risk, than stocks as a whole. Also keep in mind one more “3” – the long-term inflation rate. This number reduces the real return of all asset classes, and essentially wipes out the low risk money market return.

Andex produces a great color chart on long-term returns – call us if you would like one, as it doesn’t scan well.  617-217-2772, ask for John or Max.

Life in the short term

Long-term averages are very helpful, but we must understand and expect deviations from these “normal” returns. For instance, we’ve been in a near-zero interest rate, low inflation environment for six years. Bonds have just notched their fifth straight quarter of positive returns, which means that interest rates keep going down, from low to even lower. In fact, bonds have gone down in yield and up in price for 34 years now in an almost uninterrupted straight line. Even more remarkably, one third of the European bond market is now in negative interest rate territory, where bondholders get less money back than they invest. If you expect positive returns on bonds at this point you must believe in persistent low to negative rates. Even in that environment one is looking at low single digit returns going forward.


So if we use “3-6-9” as the guide for returns, does this mean that every long-term investor in stocks should expect 9 and every investor in bonds should expect 6? Unfortunately, it’s not that simple. As we often describe here, very few managers of actively managed funds keep pace with index benchmarks, such as the S&P or the Russell 2000. And individuals who own just a few stocks can suffer dearly if one of their stocks collapses due to company-specific problems. It is very easy to earn less than asset class benchmarks.

But if you index, what kind of returns can you expect? Index returns! It may be up, or may be down, but the return of an index fund replicates the performance of its asset class. Take SPY, for example, the oldest, biggest exchange traded fund that replicates the S&P 500. For more than 20 years it has given investors the approximate return of the S&P 500, minus 7 basis points for costs. What you see is what you get.

If you have ever made an investment that didn’t return what it was “supposed to” then you know the value of WYSIWYG. Indexing is in the Osbon Capital DNA; we’ve done it since our establishment in 2005.

Control what you can

We can’t predict or promise returns. Nor can anyone else.  We can, however, attempt to increase your returns by reducing costs and taxes. Furthermore, we can materially influence the risk of your investments through careful attention to your asset mix of stocks, bonds and alternatives. We can affect your return by rebalancing your accounts regularly, according to changes in market value and changes in your personal circumstances. Lastly, we can partner with you to navigate through thick and thin and the tough decisions that will inevitably emerge.

John Osbon- josbon@osboncapital.com

Weekly Articles by Osbon Capital Management: