Question of the Week: What is an average return on investment?

When investing, most people would like to get an average or above average return on their investments. This make sense of course. However, most people do not know what an average return is.

In the latest Investor Index survey conducted by the Canadian Securities Administrators, Canadians were asked what they believed was the typical rate of return on an investment portfolio. When conducting the survey, the CSA used a “benchmark of an equal weighted five-year average of three-month T-bills, all Canadian bonds and the TSX Composite Index. The benchmark has consistently been four percent.” The average return on the benchmark investment portfolio in this instance is four percent.

During the survey respondents were asked “What do you think is the annual rate of return today on the average investment portfolio?” The answers to choose from were, below four percent, four percent or above, or don’t know. In the results 41 percent of respondents said four percent or above, 11 percent said below four percent and 49 percent did not know.

In the same survey respondents were also asked “What do you think is the annual rate of return today on your investment portfolio? To that question 12 percent of respondents said below four percent, 49 percent said four percent or above and 39 percent said they don’t know.

Knowing the typical or average return for your investment portfolio is important for several reasons. First, it can help you better set investment goals for the future. If you expect to maintain a certain average return over time it can help you better plan for where you’re going with your finances. It can also help you avoid investment fraud. If someone offers you an opportunity that greatly surpasses your personal average return, you will know to question it and recognize that there is a heightened chance that it could be a fraud or a scam.