One of the questions many investors have is: What kind of returns can I expect? It tends to be a difficult question to answer, given an investor may be invested in different assets such as stocks, bonds, REITS and other publicly traded assets. Even within stocks, there may be subtle differences between expected returns for emerging market stocks versus, say US stocks looking out the next 10 years. But for those investors attempting to do a back-of-the-envelope calculation of what they can expect over the next decade based upon their own asset mix, the following may be useful.
· Global Large Cap equities ~6.5%-7%
· Emerging Market Equities ~8.5%
· Canadian Universe Bond Index ~1.5
In fact, expected returns over a 7-10 year time horizon are one of the factors we use in determining appropriate asset mixes for our clients.
Within bonds, there is the possibility of achieving higher returns, if you leave the relative safety of government and provincial bonds. In any regards, it’s clear that a “traditional” asset mix of 60% stocks and 40% bonds, will struggle to achieve mid-single digit returns. If a higher rate of return is required, then you’ll need to increase your exposure to stocks, which will also increase the potential volatility of your portfolio. Outside of increasing portfolio volatility to achieve a potentially higher rate of return, are there other options for investors? Similar to a piece we put out on diversification, we believe that gaining exposure to non-public assets such as Private Equity, Agriculture, Infrastructure, etc., can potentially enhance your portfolios returns while decreasing its volatility, due to the low correlation some of these assets have with traditional assets.
We believe the days of “traditional” asset mixes is behind us. One will need to embrace non-public assets to achieve your required return in the future. We recognized that a while back and have taken concrete steps to provide our clients with exposure to institutional quality private assets. The bottom line is that after your back-of-the-envelope return calculation isn’t up to snuff, you may be in need of a healthy dose of non-public assets.