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Great return expectations

By Barbara Whelehan ·
Friday, July 27, 2012
Posted: 5 pm ET

What's the investment return target for your portfolio? 10 percent? 8 percent? 5 percent?

Pension funds actually do have annual investment return targets. For instance, the California Public Employees' Retirement System, or CalPERS -- the largest pension fund in the U.S. -- has a long-term goal of 7.5 percent a year. That's down from the 7.75 percent target it had for 10 years until earlier this year. Prior to that, its target was 8.25 percent, according to

Last week Sonoma County's Press Democrat ran a scathing editorial complaining about the pension fund's paltry 1 percent gain for the fiscal year that ended June 30.

CalPERS responded this week with a letter defending its track record and long-term strategy, claiming it had surpassed its 7.5 percent goal over a 20-year period -- as if that had been its goal all along. I guess it's easy to point to successful achievements if your goal is a moving target.

CalPERS' chief investment officer, Joe Dear, was quoted in the letter: "The key to having a strategy is working with it. The worst mistake is to abandon the strategy when it appears to have some trouble."

Challenges of individual investors

When I took the Morningstar Investment Training course last year, my coach asked me what return I expected to get -- as if you can just visualize the return and then get it! But it is a first step in achieving a goal.

One thing's for sure: In preparation for retirement, you can look at your expenses right now and extrapolate how much income you'll need when you quit working for good. Yet a lot of people don't do this exercise. One-third of so-called "transition boomers" -- those between 55 and 65 years old -- don't know how much money they'll need for living expenses in retirement, according to a new survey commissioned by Allianz Life Insurance Company of North America. On top of that, 43 percent don't plan to focus on retirement planning strategies until they're within five years of retirement.

Last weekend my husband did a quick mental calculation of how much income we will need each month when we retire. (I had done a more elaborate analysis some time ago.) When he came up with a number, he asked, "Where can I get a guaranteed 5 percent return?"

I told him no such guarantees exist right now. Only about a dozen years ago, the risk-free interest rate, a rate that investors equate with no risk of loss, was 5 percent.

The investment environment is scary right now. Too many things are going on that may impact our portfolios -- our national debt situation coupled with a recalcitrant Congress, the euro crisis, manipulation of an important interest rate. I just finished reading Jerry Webman's "MoneyShift: How to Prosper from What You Can't Control" to try to get some ideas on how an investment strategy might change with all these potential threats to our financial security. It's an excellent book and very well written, I might add.

Webman expounds on broad themes and how individuals can capitalize on them: Some emerging markets, but not all, present opportunities, as do some domestic companies poised to benefit from the needs of aging boomers, for example. But don't expect a connect-the-dots explanation of how you should fashion your portfolio. Webman is chief economist at OppenheimerFunds. That company, like all fund companies, wants your assets. The subtext of Webman's book: Investing is a full-time job. Hire a good professional to help you.

The other day I got my 401(k) statement in the mail. My balance as of June 30 was slightly less than what it was at the end of March, in spite of all the payroll contributions that had been made in the interim. I felt like I was on an investment treadmill, expending a lot but going nowhere.

But the truth is, that's what you can expect from the stock market or mutual funds that invest in stocks. You can expect returns that are all over the place from one quarter to the next or one year to the next. But over the long term, if you have a sound investment strategy, it should all work out.

At least, that's my expectation.


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1 Comment
July 27, 2012 at 10:50 pm

The dollar is going to collapse. End of story