Do You Know Your “Number”?

Our succinct perspective on key investment and wealth-related issues.

Your “number” is the required rate of return on your investment portfolio that allows you to achieve your financial goals. If you are a high-net-worth investor and you don’t know your number (or you are not sure), you certainly are not alone. However, lacking this key piece of information means you are likely taking too much risk in your portfolio.

When we ask prospective clients what rate of return would represent success on their portfolios, we hear a wide range of answers – usually about what they want. Some wants are relative (for example, “I want to outperform the market”); some wants are coloured by recent experience (“my portfolio made me 15% last year, so I want that every year”), while other wants are anchored in a bygone era (“I used to roll GICs at 10% when I began investing, so I want at least that”). And almost all wants are arbitrary.

Too often, investors set lofty return targets for their portfolios that are based on these wants. The result is a portfolio (whether constructed by the investor or their advisor) that eschews diversification and is overexposed to one type of security—public equities—in the hopes of hitting this mark. During a painful market correction, these investors could face tough choices and/or permanent impairment of capital should human emotions take hold or an unexpected need for liquidity arises. Spring of 2020 (and the COVID-19 pandemic) offered an example of this type of correction and, with the subsequent rebound in equity markets, there is now an opportunity to reposition and be better prepared for the next one.

We believe that, for most families, successful investing is less about focusing on what you want, and more about understanding what you need. Said differently, it is about determining the rate of return, or range of returns, which will allow you to achieve your financial goals. And the result may surprise you—if you are already wealthy, you probably don’t need to hit homeruns in order to win the game… you just have to avoid striking out.

If you have the right assistance, figuring out your number is straightforward. It starts by building a holistic picture of your family’s financial position, including your assets, expected incomes, and any liabilities.

The next step is enumerating and articulating your family’s financial goals. These goals come in many forms and can include maintaining your lifestyle in retirement with a desired level of after-tax income, helping your children with the purchase of a home, or making a sizable bequest to a meaningful charity.

With an understanding of your family’s financial starting point and goals, an experienced professional can help you chart your course and determine the necessary rate of return (or range of returns) that gets you to your destination. In most cases, families can comfortably achieve these goals with well-diversified, conservative portfolios without tying their financial (and emotional) well-being to the vagaries of the stock market.

So, if you don’t know your “number”, there may be a better way for you to invest. Reach out to us so we can show you how.

Author: James Stellick, Focus Managing Director