What is considered an acceptable rate of return on investments?
tica_nan asked:
I receive the interest on a trust fund. The principle is almost $400,000. What percentage should I expect?
I receive the interest on a trust fund. The principle is almost $400,000. What percentage should I expect?
Dr. Deth:
Well at the least, you should be getting 5% or 20000 per year interest (before taxes). Investing long term in solid mutual funds should get you over 10% annually before taxes (no guarantees in stock, bonds, mutual funds - you could lose entire principle)
June 2, 2009, 5:52 pmEggolas M:
That depends entirely on the allocation of assets.
The dividend yield on common stocks in the U.S. is under 2%.
A 10-year Treasury Note yields under 5%.
The manager takes a fee, which usually comes out of income.
Talk to the trustee and ask how the fund is invested.
June 6, 2009, 1:19 amTerry:
Over the long term, expect 8 to 10%. That’s an average taken over at least 10 years. If the trust is being actively managed, you should get at least that.
If the trust is passively managed, or held in low risk securities, you may only get 4 or 5%. When you allow for inflation, that means that you are getting less than 3%.
June 6, 2009, 6:35 pmib4doc:
Very personal question. One man’s trash is another man’s treasure. What you consider reasonable might not be what I consider reasonable. Personally I never do anything that yields less than 25%. That is what I consider “reasonable”. My last investment earned almost 40%. Most “experts” will say there is too much risk involved in an investment that earns this much. It is called “risk-return” tradeoff. A boring and useless concept from Finance text books that argue there is a relationship between what you earn and the level of risk involved. Ridiculous!
A lot will depend on how much control you have over the investments that your trust makes. If the Trustee is lazy (or lacks investment knowledge) it is probably in some sort of financial asset like a money market or mutual fund. This is easy and relatively safe and has a very lame yield.
It is unlikely that you can control the investments, but you might be able to consult with the trustee about the kind of investment you seek, what kind of returns you want to achieve and the overall plan for growing the trust. For more insights, write to me
Good Luck!!
June 7, 2009, 5:14 pmBryan A:
There’s two components to “total return” in terms of investments — income generated from interest and dividends and capital appreciation from the gain or loss in principal from investments. If you receiving only the income from your trust fund, obviously that’s going to SEEM to be more important to you right now. However, growth in the principal of your investments, of course, helps out too (as I’ll mention in a sec)
Let’s assume the trustee is investing your money 50% in fixed income investments and 50% in stocks ( a good moderate asset allocation). With $400,000, that would mean about $200,000 in “income generating” investments (primarily) and $200,000 in “growth generating” investments (generally). Based on current interest rates, an average yield in terms of income would be about (a) 5.5% on the income side and (b) 1.5% on the growth side. So…
$200,000 @ 5.5% = $11,000
plus
$200,000 @ 1.5% = $ 3,000
equals $14,000 in estimated income in a year (less trustee’s fees and taxes of course)
In terms of growth of principal, the “growth” side will gain about 10% in an average year if it’s properly diversified and invested along market norms. Some years, of course, it could be in negative territory; some years it will do better than 10% — but that’s an average. So if half of your portfolio is invested in “growth” investments that would mean 5% growth in the total. Your “income generating” investments, though, will likely DECREASE in principal value because as interest rates rise (as they have) the principal value of the bonds goes down. If you’re “breaking even” on the principal side, you’re doing good, but most likely, you’re probably losing about 1% or 2%. Take the middle of that, and that means your total “growth” in this kind of portfolio would about 3.5%, meaning the $400,000 would grow in an average year to about $414,000.
Bottom line, “total return” for a 50/50 asset allocation portfolio on an average would be about 7-8% annualized over time.
June 11, 2009, 1:59 am