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Are You Comparing Your Retirement Investment Returns To The Right Metric?

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I often hear people discuss “good investment returns.” What is a “good” return? Does that simply mean a return that is not negative? But can that actually mean that the returns are consistent with a person’s values? Let me explain.

In my role as a CERTIFIED FINANCIAL PLANNER™ professional, I am accustomed to qualifying investment performance by a combination of risk and return. This requires looking at returns over a long time horizon, such as 10 years or more. That allows us to observe the movement of a particular investment, including an average number and the amplitude, or variation, of those returns over time.

For example, an average return of 5% may have seen the returns range between -15% and 25%. In this context, is a 10% return “good?” Is a -10% “bad?” When I speak to most people, they judge their returns as good when recent returns, say a quarter or a year, are positive returns.

Many people think that investing is hoping for the best. Movies and TV shows often show the speculative side of investing. That’s when you have a good feeling, possibly based upon some research you’ve done on the company or sector, and you decide to invest. That mentality is more appropriate for acquiring discretionary wealth, however, not generating monthly income in retirement.

The default investments in 401(k) plans, target date mutual funds, and balanced funds and asset allocation funds, are built on this risk-adjusted return philosophy. Charles Self, former chief investment officer for iSectors, says, “You can only manage risk, not return.“


Your employer may use a balanced fund or other asset-allocated fund as the company’s default. These funds often are made up of a static 60%-40% stock and 40%-60% bond allocation. Target date funds are made up of similar allocations, but the stock-to-bond proportion changes over time based on the mutual fund’s strategy.

What is your investment target?

Many people have a goal of making money. That could simply mean putting your money in a savings account.

Another approach is to complete a risk questionnaire to assess your tolerance for risk. Most of the time, those give no real insight into your comfort with market declines, which is the true measure of risk tolerance.

Risk questionnaires generally spit out a certain mix of stocks and bonds, framed with an emphasis on expected long term returns. They rarely if ever give insight to the investor of the expected, irregular bumpiness of the ride to achieve those returns.

I believe the best results come from calculating how much return you need to meet your goal according to your own timeline. In retirement investing, that should involve considering factors such as:

  1. How much do you want to spend in retirement.
  2. What health and long-term care costs might you face.
  3. When you will take Social Security and its expected value.
  4. Will you receive there any pension income?
  5. How much are you willing to save, and when do you expect to retire?

After considering the factors related to you, you can determine the rates of return and their volatility you need to hit, to not run out of money.

Proper Investment Comparisons*

I believe one of the comparisons needed to judge good performance is a proper benchmark. The Standard and Poor’s 500 (S&P 500) is often cited. That is not an accurate comparison for most people, however, especially those investing for retirement. If you were in the S&P 500 during the Great Recession, your money would have been down around 50% if you left it in the market.

Many people took their money out of the market, though, because they weren’t seeing the returns they expected. If one were to look at the S&P 500 over decades, they would’ve seen that it is volatile. We tend only remember it when it’s up, however; it appears that it’s a bit like the mother forgetting her childbirth experience.

Vanguard offers an S&P 500 Mutual Fund that replicates the S&P 500 index. In this case, the S&P 500 index is a great benchmark. You should understand that the index returns will be reduced by the fees that Vanguard and your advisor charges.

Vanguard also offers the LifeStrategy Fund Series that provide static stock and bond mixes from 80% stock/20% bond all the way to 20% stock/80% bond. Let’s examine the results of the LifeStrategy Moderate Growth Fund (VSMGX).

The VSMGX fund is made up of four other Vanguard funds:

  • 36% Total Stock Market Index Fund;
  • 28% Total Bond Market II Index Fund;
  • 24% Total International Stock Index Fund; and
  • 12% Total International Bond Index Fund/Total International Bond II Index Fund.

According to their website, as of July 1, 2015, Vanguard benchmarks the VSMGX fund against a portfolio comprised of:

  • 36% CRSP (Center for Research in Security Prices) US Total Market Index;
  • 28% Bloomberg U.S. Aggregate Float Adjusted Index;
  • 24% FTSE (Financial Times Stock Exchange) Global All Cap ex US Index; and
  • 12% Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index.

While Vanguard offers investors the ability to directly invest in the S & P 500, that is not explicitly listed in this asset allocation.

From a risk and return perspective, consider…

What does risk mean in this context?

Let’s look at the 10-year risk numbers. While the annualized return of the Fund was 8.10%, around 95% of the time those returns ranged between -14.33% and 26.99%. If you do the analysis on the other time periods, you won’t get the same exact results. In fact, past returns may not be what you will get in the future.

This analysis does try to make more sense of the first table that gave the annual results for each period. The monthly and daily investment returns that comprise their annual rate aren’t given. The risk and return numbers attempt to give us a sense of the bumpiness of the ride.

If you are invested moderately (at 60% stock/40% bond), how does your portfolio compare to Vanguard’s benchmark?

Are your values incorporated into your returns?

I frequently hear people compare or complain about race and gender inequality issues in the corporate world. Do you know how the companies that you are invested in, through your mutual funds or exchange traded funds, score on these issues?

There is an argument that if companies score well on issues of equity, you would not make as much money in your investments because the companies are paying their workers more money.

There’s another argument that says by paying workers more, companies will get higher quality workers, ultimately delivering better products and services. I believe this is a values choice! You may want to check out the many articles I’ve written on values-integrated investing:

Are You Unknowingly Investing In Private Prisons?

Can Women Actually Retire Successfully by Investing in Gender Equality?

Can Women Really Retire Comfortably with Index Investing In Gender Equality?

Do you want to retire investing fossil free?

Do you want to retire deforestation free?

How do your cause-adjusted returns look?

Closing thoughts

It’s imperative that you have specific numerical targets for your required rate of return, but preferably for both risk and return. That is the best way to judge whether you have superior performance. It can be easy to want to jump ship to another investment when you hear of its returns. However, what is its risk?

That can be assessed by understanding its benchmark. And, just because something says “Conservative” on the label, does it actually fit with your definition, or the definition of another mutual fund company? Benchmarks can help you with that assessment!

It’s important to know what to expect during your investment journey. Because your journey will be unique to your needs. Knowing what kind of turbulence to expect is helpful. You don’t want to bail out for the wrong reasons. If a new opportunity comes along with less turbulence, but the same expected return, then it may be worth changing your flight. If not, you should stay the course.

*The reference to Vanguard funds or the Vanguard LifeStrategy Moderate Growth Fund is not a recommendation to invest. It was used for illustration purposes.