Are your investment returns lower than you hoped?

So what are you supposed to do?  You have a budget in place – and for the most part you are pretty good about keeping to it. You have your forced savings plans in place – and for the most part you are pretty good about not touching them. And you are even managing to put aside some money every month to get ahead before retirement, or to save for those critical large expenses that come along at some point (Bar/Bat Mitzvahs, weddings, etc).  The only problem is that your portfolio isn’t really gaining as much as you had thought reasonable or expected. With worldwide growth rates still considered sluggish and interest rates at all-time lows, portfolio management has been much more challenging in recent years and has left people wondering what to do.

In the past, even conservatively managed portfolios were able to offer decent rates of return allowing savers to accumulate nest eggs for retirement, but the current economic conditions have made this increasingly more difficult.  So what, if anything can you be doing to compensate? The following are some points to consider.

• If you chose your risk level years ago you might need to adjust it depending on your personal circumstances.  If you are not getting enough of a return, you may want to discuss higher risk levels, especially if your investments are only needed in the very long term rather than short to medium term.  The further away from retirement you are, the greater your ability to absorb the ups and downs of the markets and stay the course with your investment plan.   Stock markets generally rise in the long run as long as you have a plan and can stay with it over time.  The closer you are to retirement, or to needing the funds, the more important it is that you control your risk and avoid serious losses. However, never change your risk exposure without thinking through the possible implications.  A chance to earn higher returns is always accompanied by the risk of also losing money, so you must be prepared for both eventualities.  If you have a slow and steady risk averse attitude, then probably you will not want to make any major changes in the short run.  While interest rates are low and the Israeli market has underperformed in recent years, things tend to even out over the long term.  However, long term investments can’t be judged on an annual basis and must be examined over a much lengthier time period.
• When you look at the percentage gains or losses in your investment portfolio, you must remember that real returns are after inflation.  In the 80’s and 90’s when inflation was averaging between 4-5%, you needed to get an eight or nine percentage gain to earn what most people would consider a decent return.  In today’s zero to one percent environment, a four or five percentage gain after taxes is equal to the much higher gains of yesteryear.  Because of the drop in interest rates around the world, government bonds, while still providing a safe return, often offer nearly nothing to the investor.  And high-interest savings bank accounts are a thing of the past. These changes mean that people have to consider changing their mindset and finding alternative options. Although this poses a challenge, it can be done via diversification into other investments areas including real estate.   There are many asset classes that can be combined and used to create the portfolio that suits your needs.  Speak to your investment manager about the options available.
• And of course, at regular intervals, be in touch with your investment advisor. Regardless of whether your portfolio is showing great, satisfactory or poor results it is important to assess your risk exposure and how to balance it.  Consider increasing your savings rates.  With lower investment gains, many people need to consider putting away more on a monthly basis to ensure they have enough for the future.  Steady and sure contributions can make a major impact in the long run but you need to get started to have that impact augmented.
• Make sure your investment costs are kept reasonable.  Keeping costs down ensure that more money stays with you the investor.

The reality is that people are living longer and enjoying many more years in retirement, which means that retirement funds and investment portfolio need to go further. Remember that the seemingly lower returns on your portfolio need to be offset against inflation and cost of living increases, and thus are not as low as they appear.  Ensure that your monthly savings contributions are sufficient to cover projected expenses and retirement scenarios.  While lower rates are a sign of concern, there are things that you can consider to help weather the storm and ensure a steady and healthy financial future.