Crafting Your Investment Strategy: Understanding the Factors of Long-Term Return Expectations

To achieve your financial goals, it may be important to take a strategic and informed approach to wealth management. Understanding the key factors that shape investment outcomes can be crucial for long-term success, especially in a volatile market. It is also helpful to utilize the insights of a trusted wealth management advisor to navigate through both opportunities and risks. In this article, Joe Bloodgood, CFP®, AIF®, Wealth Management Partner, unravels the intricacies of asset allocation, historical performance, diversification strategies, and other factors that affect long-term investment return expectations.

Factors of Long-Term Return Expectations

Long-term return expectations in the context of wealth management typically refer to the anticipated performance of investment portfolios over an extended period, often spanning several years or decades. These expectations can vary based on factors such as asset allocation, investment strategy, economic conditions, and the specific types of assets included in the portfolio. Here are some key components to consider:

1.  Asset Allocation: The allocation of assets within a portfolio, such as stocks, bonds, real estate, and other investment vehicles, significantly influences long-term returns. Generally, stocks have historically provided higher returns over the long term compared to bonds or cash equivalents. However, they also come with higher volatility and risk.

2.  Historical Performance: Wealth management advisors often consider historical market data and performance trends to make informed projections. Historical data can provide valuable insights into how different asset classes have performed over time, but keep in mind that past performance is not a guarantee of future results.

3.  Diversification: Diversifying a portfolio across various asset classes and geographic regions is a common strategy to manage risk and enhance long-term returns. A well-diversified portfolio may include a mix of equities, fixed-income securities, real assets, and other investments.

4.  Economic and Market Conditions: Long-term return expectations are influenced by a broad range of economic factors, such as interest rates, inflation, and global economic conditions. Changes in these factors can impact the performance of different asset classes.

5.  Investment Horizon: How long an investor plans to hold on to an investment can also affect return expectations. Investments held for longer periods allow for potential compounding of returns and provide more time to ride out market fluctuations.

6.  Risk Tolerance: Individual risk tolerance plays a crucial role in determining the appropriate investment strategy. Higher-risk investments have the potential for higher returns, but their increased volatility may lead to the possibility of larger losses.

7.  Market Outlook and Economic Forecasts: Wealth management advisors consider both current market conditions and economic forecasts when setting long-term return expectations. However, forecasts are inherently uncertain, so it’s best to approach these with caution.

What Does This Mean for Investors?

When the actual returns on assets are negative, as was the case for most major asset classes except for commodities in 2022, expected returns tend to increase. This may create an opportunity for investors to position their portfolios strategically and take advantage of future opportunities. Additionally, a corresponding increase in the efficient frontier may allow investors to maintain a favorable return per unit of risk, even with less volatile assets. The efficient frontier is a theoretical set of portfolios that yields the highest returns for its respective level of risk. This theory highlights the potential benefits of tactical asset allocation rather than focusing strictly on achieving a specific level of portfolio volatility.

Helping You Get There…

To grow and manage your wealth successfully, Boulay believes it is essential to work in partnership with your trusted wealth management advisor to establish practical and personalized long-term return expectations based on your financial goals, risk tolerance, and overall financial situation. For guidance on achieving your long-term investment goals and securing your financial future, connect with a member of the Boulay Financial Advisors, LLC team today.