{"id":2863,"date":"2019-04-15T12:01:32","date_gmt":"2019-04-15T02:31:32","guid":{"rendered":"https:\/\/adelaideprivatewealth.com.au\/uncategorised\/meet-the-realistic-investor\/"},"modified":"2019-04-15T12:01:32","modified_gmt":"2019-04-15T02:31:32","slug":"meet-the-realistic-investor","status":"publish","type":"post","link":"https:\/\/adelaideprivatewealth.com.au\/meet-the-realistic-investor\/","title":{"rendered":"Meet the realistic investor"},"content":{"rendered":"
Investors should be realistic. This means being realistic in setting their long-term goals, being realistic in their expectations for investment returns and being realistic in their spending habits.<\/p>\n
Critically, the reasons for being realistic with your goals, return expectations and spending are indelibly linked. Being unrealistic in any of three may throw the others off course.<\/p>\n
The case for investors to take a realistic approach is particularly worth highlighting given widespread expectations for subdued returns over the medium-to-long term from diversified portfolios together with the likelihood of higher volatility.<\/p>\n
A Vanguard research paper* published several years ago \u2013\u00a0Required or desired returns? That is the question<\/em>\u00a0\u2013 closely examines the need for investor realism.<\/p>\n<\/p>\n As this research paper discusses, financial planning should result in an estimate of the return needed to achieve investors\u2019 realistic objectives given such factors as their investment time horizon, current assets, savings pattern, tax position and risk tolerance.<\/p>\n This thorough financial planning process should provide an estimate of an investor\u2019s\u00a0required<\/em>\u00a0return from their portfolios as opposed to a\u00a0desired<\/em>\u00a0return.<\/p>\n \u201cThe required return is the return necessary to accomplish the goals that the investor has determined to be most important while bearing the level of risk that the investor feels is most palatable, \u201cthe researchers explain.<\/p>\n Key points to help understand the often-overlooked difference between required and desired returns include:<\/p>\n A desired return usually originates from factors that are unrelated to an investor\u2019s objectives and constraints. These may include an investor\u2019s past experiences, recent market returns, historic market returns, media reports, fund advertising, best-performing fund lists and tips from friends.<\/p>\n<\/li>\n Many investors would already have a target investment return in mind \u2013 their desired return \u2013 before fully examining their particular circumstances.<\/p>\n<\/li>\n Desired returns are typically, but not always, higher than an investor\u2019s required return. \u201cHigher returns are associated with higher risk in the long run,\u201d the paper stresses. \u201cOther investors may insist they don\u2019t want no risk at all, ignoring the potential threat to their future wealth.<\/p>\n<\/li>\n<\/ul>\n Investors who keep their personal spending within their means are less likely to chase unrealistic investment returns. This is particularly relevant for retirees relying on their investment returns to pay their living costs. In other words, your spending habits should realistically reflect your income.<\/p>\n Understanding the difference between desired and required returns should help investors set appropriate asset allocations for their portfolios. And by being properly diversified, investors are well placed to reduce the level of short-term volatility in their portfolios.<\/p>\n *Required or desired returns? That is the question\u00a0<\/em>by Vanguard investment analysts Donald Bennyhoff and Colleen Jaconetti.<\/p>\n Please contact us on |PHONE| if you seek further discussion.<\/p>\n \u00a0<\/p>\nRealistic goal-setting<\/h3>\n
Realistic return expectations<\/h3>\n
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Realistic spending<\/h3>\n