With an increasing number of global analysts expecting slower economic growth over the next few years, investors should be taking a hard look at their investment return expectations.
John Nicola, CEO of Nicola Wealth Management, noted in a recent interview that many investors have an inflated idea of the level of investment returns they can reasonably make.
“That makes them behave poorly and makes their returns actually worse.”
The fact that people are fixated on capital gains as being the key source of investment return compounds the problem, when there are arguably other types of investments available that are arguably more stable over the long term.
“Price in publicly traded markets is the combination of irrational behaviour of buyers and sellers in an auction, sometimes manic, sometimes depressive.”
He said investors should focus on investments that provide a steady cash flow like dividend-paying stocks, interest-bearing bonds mortgage investments or investment-grade real estate that produce a reasonable income stream. Look for investments that do not require an investor to sell an asset in order to make a return.
Investors that primarily focused on a stock’s price would likely have been the most anxious over the past couple years with the high stock market volatility. Taking RBC as an example, he noted the stock price fluctuated between $60 and $30 over the past few years, despite sticking to a $2 dividend.
“Was the Royal Bank intrinsically a $60 company or a $30 company? Or was it, in fact, a money-making machine capable of distributing a $2 dividend? If you were relying on that dividend for retirement purposes, you were completely unaffected. The problem is, as investors, we’re so hung up on the issue that price matters.”
He suggested investors should realize that going back over the past century, the average inflation-adjusted real rate of return, across all cycles is roughly 4% with bonds producing about 3%, stocks about 6%, real estate about 5% and gold about 2%.
More about Nicola’s recommendations are in this week’s print edition of Business in Vancouver.