What is a Good Rate of Return on a Portfolio?

Risk Vs. Return

Before that question can be answered, it is important to understand the relationship between risk and return. In the financial/investing world there is a direct relationship between the two. For example: a treasury bond is very low risk (the US government is unlikely to default), but as a result the return is also very small. A micro-cap stock is very high risk (very likely to go bust), but if it survives the returns will be very large.


However, even if something is guaranteed to survive it might still be very risky. Risky investments have a lot of fluctuation (it might be down when you need the money). An example of something guaranteed to survive is the S&P 500 (SPY is the name of the ETF). The S&P 500 is composed of 500 large-cap companies that are part of the U.S stock exchange. It is a good approximation of the US economy; it will survive as long as the United States survives.

Managing Portfolio Risk 

Portfolio risk can be raised or lowered based on the allocation to short term bonds. For example, if you were entirely short bonds and CDs, you would have very low return and low risk. If you were 100% stock, the risk would be high as the account would be bouncing up and down.

Sharpe Ratio 

So one would evaluate whether a particular portfolio return is good or bad by adjusting the return to the risk. One way of doing that is with the Sharpe Ratio. That is (portfolio return – risk free rate) / portfolio standard deviation. The risk free rate is the return from treasury bills (it is presume to be zero risk). Portfolio standard deviation is a measure of how much fluctuation there is within the portfolio.

Evaluating Portfolio Rates of Return

So a particular rate of return might be either good or bad based on the level of risk taken. For example: 7% would be very good annual rate of return if one had a risk adverse portfolio. It would be a poor annual rate of return if one had a high risk portfolio.

Fee Structure

Rate Assets Under Management
1.44% Below $125,000
1.00% Between $125,000 and $750,000
.85% Between $750,000 and $1,250,000
.80% Between $1,250,000 and $1,750,000
.75% Between $1,750,000 and $2,500,000
.70% Between $2,500,000 and $3,250,000
.65% Between $3,250,000 and $4,250,000
.60% Above $4,250,000

A single rate is applied to the entire account. So a person with a $750,000.01 account pays less than a person with a $750,000 account. I will waive personal tax return fees for accounts over $1 million. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.

As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. If you would like to submit a post to my blog, please contact me.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

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Questions for the comments

Did my explanation make sense? Do you agree or disagree with what I said?

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