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“What You Really Need To Know About Your Rate Of Return But Nobody Told You”

Is financial planning more of an art than a science or the other way around? An interesting thing that I experience with people is their predisposition about the rate of return on their investment portfolio.  There are generally two groups that most people fall into: either they want to get the highest return possible or they want some risk-adjusted rate of return. 

The “highest return” group are always looking at their portfolio and hoping to see it surpass the S&P 500 year in and year out. This group thinks that “beating the Street” is what successful investing is all about.

The “risk-adjusted” group typically say something like “I want the greatest possible return with the least amount of fluctuations.”

Both thought processes are misguided.

You see, investing from a financial planning perspective is not about getting rich. If someone could do better than the S&P when it’s up while avoiding the nasty downturns that happen, they wouldn’t tell you. You couldn’t even hire them. They’d be in their basements getting rich for themselves with no need to bother dealing with people. And if you’re seeking CD-like stability with returns closer to that of the market all I can say is “join the club”. It’s not going to happen.

What good financial planning does is set clearly defined goals then, and only then, create a strategy that will give you the best chance at achieving those goals. Let me illustrate this with a story: a person comes to my office seeking a second opinion on what she feels is a pretty sound investment portfolio. She had a very good job, never married or had children and lived below her means. She had read much financial literature and came across all of the typical nuggets of advice: be diversified, have the percentage of bonds in your portfolio equal to your age to make it more conservative as you age and choose established companies with steady dividends, etc., etc., etc. She managed her money herself and felt that she had done a really good job. She had no reason to think someone could give her better advice.

What she didn’t do, however, is financial planning. If she did she would have realized one thing: her approach was all wrong for her goals. Like most of us, she wanted to retire in her mid-sixties, maintain her standard of living for the rest of her life and leave whatever was left to various beneficiaries.  What financial planning showed her, was that based on her income needs, if she achieved a 3% rate of return her nest egg would last until she was age 120. She had a perfect generic portfolio but that didn’t fit her profile. She didn’t need anything more than some corporate and government bonds to achieve her goals. She didn’t need exposure to dividend-paying stocks, growth stocks, international stocks, small company stocks, or stocks at all! They are for people willing to accept their volatility in exchange for the hope of higher returns. She didn’t need the higher returns and she certainly didn’t need the volatility.

Did I mention that this occurred in 2006? Yes, as the rest of us squirmed and agonized through the 2008-2009 financial crises, she retired. Gently and happily.

This lesson is lost on most people because they don’t tie their investment strategy toward their goals. They don’t engage in financial planning. This causes people to either take too much risk or not enough. It causes them to make emotional decisions when they need to be level-headed.


 Scott J. Menta, CFP, CLU, ChFC

Scott Menta has helped many people make decisions through a structured planning process that focuses on meeting long-term goals. As a CERTIFIED FINANCIAL PLANNER™ professional at Barnum Financial Group, Scott has published numerous articles offering insights and guidance to individuals looking to create and manage their wealth. He can be reached at or 1-877-GO-SCOTT.

This article was prepared by Scott Menta and is not intended as legal, tax, accounting or financial advice. Scott Menta is a registered representative of and offers securities and investment advisory services through MML Investors Services, LLC.  Member SIPC. 6 Corporate Drive, Shelton, CT 06484 The opinions provided above are not necessarily those of MML Investors Services, LLC or its affiliates.