The Pax Financial Blog

How to Calculate Your Investment Performance Expectations: 10 Things to Consider

Financial Planning, retirement Jul 26th, 2021 by: David Alvarez

No one invests hoping to lose money. But what are your expectations for your financial investments? Are they reasonable? As an investment firm in San Antonio, we see that many times, these goals are unrealistic.

People wouldn’t invest if they weren’t cautiously optimistic that their investments will flourish and their balances increase. But what are your actual, realistic expectations of investment returns, and how do you evaluate and measure performance?

Knowing how your portfolio is doing is essential to staying on track toward your goals – should you re-evaluate your plan or rebalance your portfolio?

Before making any change to your investments, it’s wise to discuss your plans with a financial advisor. In our experience at PAX Financial Group, there are 10 things to take into consideration.

 

Have a question about your investments? Contact the team at PAX Financial Group for answers.

 

1. Risk Tolerance

Although the essence of this point is simple – higher risk comes with the potential for higher returns, and lower risk typically yields lower returns – the relationship between risk and performance is a bit more complex and should be measured over time.

Do you know if you’re taking the right amount of risk in your portfolio?

 

2. Account Expenses

When you calculate your investment performance expectations, make sure to estimate your portfolio’s expenses: Transaction fees (both for buying and selling), advisor fees, account management fees, custodial fees, etc. If you’re not sure, talk with your financial advisor.

 

3. inflation

Whether you’re already retired or still working, inflation impacts your portfolio and is yet another factor to take into consideration. Inflation affects the purchasing power of your portfolio, as well as the price of future goods and services you’ll pay for. This is an especially important point of consideration for long-term investments. It’s generally accepted that long-term inflation assumptions range from 2 to 3 percent.

 

4. Taxes

Your tax assumptions will depend on what types of assets and accounts your portfolio includes, your dividend and interest income, any capital gains, etc. As part of your investment performance review, make sure to account for taxes and how they affect your plan.

 

5. Original Expectations

When you first created your investment portfolio, were your performance expectations reasonable? As an investment firm in San Antonio, often times, we see expectations wildly skewed when taking a DIY approach? Why? Sometimes it’s positive thinking. Other times it’s based on a co-worker’s or family member’s experience. Investing can be an emotional process – no one wants to lose their hard-earned money. Be wary of any investment firms that make promises for future gains – no one can predict the future and therefore, know for sure what the rate of return will be. For a no-obligation second opinion, contact the team at PAX Financial Group.

 

6. Distributions

If you’re still working, your distributions will likely be zero, but once you retire, how much will you need to withdraw from your portfolio? What will your expenses and financial requirements be in retirement? Don’t forget to account for longevity when calculating your distributions. Retirement can last 30 to 40 years, if not longer.

 

7. Performance Standards

Yield measures the income paid by an investment, usually expressed as a percentage.

Rate of return measures the total amount you earned or lost on an investment, calculated by determining the change in value since you purchased an asset. Annualized return is calculated over a certain period of time. Rates of return are also usually expressed as a percentage.

Be sure when measuring and comparing investment performance that you apply the appropriate evaluation standards. Be careful to compare equal yield or returns (i.e.: daily, weekly, monthly, quarterly, annually or holding period).

 

8. Reasonable Return

Take the end value of an investment, subtract the initial value, then divide by the initial value. The return is expressed as a percentage.

If you invested $1,000, and the value is now $1,100, the return is 10 percent ($1,100 - $1,000 = $100; $100/$1,000 = 10).

There is no guarantee that an asset will continue to perform at the same rate of return year over year, but you can use this information to make an educated assumption regarding future performance expectations.

A good rate of return depends on several factors, not the least of which is time spent in the investment, and time left to invest.

Discuss the reasonable returns on your investments with your financial advisor.

 

9. History

Take all comparisons with a grain of salt. Although it’s vital to track progress and review portfolio performance, it’s easy to get obsessed. Don’t let this be something that consumes you, or inspires you to make bad decisions. Schedule a standing annual review with your financial advisor to see how you’re doing as a whole. If you’re losing sleep at night worrying about your investments, talk to your financial advisor and remember your long-term goals.

 

10. Market Changes

Market volatility is easily the most misunderstood part of investing. When the market is too volatile, investors tend to panic and want to sell their investments. When the market is thriving, investors risk not earning the returns needed to make it through retirement.

The reality is, volatility is normal and completely necessary for portfolio growth. The key to investing is to stop fearing it. Talk to your financial advisor about where you stand.

Download our free eBook: How to Retire During Volatile Market Conditions.

 

Why It’s Important to Know

If you thought setting up your accounts, choosing your investments and making contributions was the extent of your responsibility with regard to your portfolio, you were wrong. Calculating and managing investment performance expectations is another step in your financial success, including being aware of market changes, opportunities for improvement and investments that just aren’t working for you.

It’s also nice to have a ballpark idea of what kind of return you can expect before investing, as long as you’re able to internalize the idea that it’s an estimated return, not a guarantee.

Investing can be complicated, and understanding how your portfolio fits into your overall wealth management plan can be even more complex.

As with any complicated investment concepts, if you’re not working with a financial advisor, make sure to read your account statements and understand how your portfolio is set up. If you’re not sure, our team can help.

With more than 100 years of combined experience, PAX Financial Group is a financial planning and investment firm in San Antonio, TX. Our financial advisors are passionate about helping investors plan for the future. Locally owned and independent, our financial advisors are deeply committed to helping our clients achieve their vision of financial success. We offer holistic financial assessments, investment management and insurance all in one place.

If you’re ready for a second opinion, let’s talk. PAX Financial Group is here to help.

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This material is provided by PAX Financial Group, LLC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The information herein has been derived from sources believed to be accurate. Please note: Investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. All economic and performance data is historical and not indicative of future results.

 

 

David Alvarez

David Alvarez

David Alvarez, CFP, is the son of Armando and Teresita Alvarez, both of whom immigrated to the U.S. from Cuba as children in 1962. David grew up in San Antonio, attending St. Gregory the Great Catholic School and Antonian College Prep. Following high school, David went to Northwestern University where he studied Economics and History, played baseball and met his wife, Meredith. After more than a decade spent in New York and Chicago, they moved back to San Antonio in 2012. David and Meredith have two boys, two dogs and no idea what they will do if their house is ever quiet.

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