Planit:Rates of Return

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Where do the Projected Rates of Return Come From in PlanPlus Planit?

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PlanPlus Planit is populated with historical indices data for all asset classes used in the Asset Allocation Screen. For Canada, our goal is to use data is to retain data going back to 1950, when identifying the long term historical return for each asset class. Some asset classes use shorter time frames simply because data is not available going back this far. In some other jurisdictions like Malaysia or China, indices data is only available for a much shorter time period and in those cases our returns will be based on the longest period possible. The Investment Policy Statement document for most jurisdictions will include the assumptions used for rates of return which will identify the indices used and the time period covered. This is a valuable source for details about the return assumptions used on your site.

Regardless of the actual time period used, the calculation to identify the rate of return for the Current and Target portfolio is the same. We do a weighted return calculation that is based on the asset allocation of the portfolio. The following illustrates a simple example for a portfolio that has 10% in Cash, 75% in Fixed Income and 15% in Domestic Equities:


In this example, you’ll notice that we use the historical real rate of return for each asset class. This is simply the historical returns from the benchmark indices net of inflation. We then take that “Real Rate of Return” and add back in the client’s inflation assumption from the Personal Information screen to get a forward looking projected return.

This allows us to use history as a benchmark for our rates of return while tempering those returns with inflation rates that are appropriate given conservative long term projections. This in effect means we use hisorical returns but adjust those historical returns through the inflation assumption to make the returns more forward looking.

One other consideration is the fact that advisors can elect to use the “Return Reduction” feature on the Asset Allocation Screen or the Planning Assumptions screen in version 5.6 and higher, to further adjust the projected long term returns downwards. This allows advisors to present projections that they are comfortable with and create what they feel are realistic expectations in the mind of the client. It also allows you to use long term rates of return that are more conservative in your long term planning to help protect the integrity of the long term analysis.

The rates of return you use for your clients are a key element in your planning assumptions. Corporate compliance departments and advisors alike recognize that it’s important for you to be able to support your assumptions with reasoning that is prudent and practical as opposed to merely choosing a rate of return out of thin air! It’s for this reason that the historical returns are the foundation of our return projections, but we also don’t want to tie advisors hands, but rather allow them to modify downwards the assumptions in order to be conservative. This approach allows us to reference historical returns in our documents as the basis for the return projections, which indeed they are.