Putting rates of return into perspective

Canadians have more investment options than ever – we’re inundated with choices.

In recent years, an increasing number of advertisements have displayed investment rates of return based on past performance. We’ve become accustomed to seeing posters promoting a growth percentage attached to a particular investment.

Likewise, many newspapers and financial publications contain ads about income trusts and principal-protected notes that also print historical rates of return. Unfortunately, these campaigns often set investors up for failure for two main reasons.

Reason one: Performance-chasers usually arrive too late

By the time an investment fund’s performance numbers are high enough to look good, much of the market growth in that sector has already occurred. Rather than a buy signal, good performance numbers can be a warning sign. Returns fluctuate, and no single investment can continue to grow indefinitely. Investing in assets that have already performed well could be called “chasing performance”, and often means buying high.

Reason two: High rates of return are usually associated with higher risk

There is no such thing as a free ride. Many investments – income trusts, for instance set cash amounts to distribute to investors, which aren’t guaranteed. Simply because an investment distributes six or seven per cent of its current value, doesn’t mean it won’t drop in value, reduce its distributions, or stop paying that income completely. Although good investments with high distributions exist, investing in something because of its stated annual yield is often a misguided approach to maximizing returns.

A simple analogy

Investing based solely on specific numbers is like driving with your eyes glued to one point on the road. Making investment decisions based solely on past returns is like driving with your eyes focused on the rear-view mirror.

A controlled and disciplined investment approach works best. Like any journey, the first step is determining your ultimate destination. The next includes making wise choices to get there. That’s where a properly crafted financial security plan comes into play. The best place to put a new investment is typically where you put the last – into your properly diversified portfolio, invested to meet your personal financial security goals.


This information is general in nature, and is intended for informational purposes only. For specific situations you should consult the appropriate legal, accounting or tax advisor.