What Is a good rate of return for pensions and investments?

Hi,

How do I know what a good rate of return looks like for pensions, investments, etc? Are there tables? A return over 7%?

Thanks.

The answer to this depends on two key things. First, what sort of thing do you invest in? And second, what’s going on in the world?

If you invest in what the industry calls ‘high risk’ portfolios or funds, this effectively means you are investing in shares, rather than smoother or more cash-like things. These portfolios can be described in a number of ways, through percentages, adjectives, or numbers on a scale.

For example, higher risk might look like:

• 100% equities

• Aggressive, Adventurous, Ambitious

• 9 or 10 out of 10

Then you've got the middle ground, which you might see described as:

• 60% equities

• Balanced or Cautious

• Around 5 out of 10

And at the lower end, you might see words like:

• 20% - 40% equities

• Defensive

• 2 or 3 out of 10

Generally speaking, you map this to timeframes. 100% in shares would usually be for someone looking to invest for a minimum of 5-7 years. The middle option for about 5 years or someone who can't stomach the ups and downs of a more volatile portfolio. And the lower risk option would be for timeframes nearer to 3 years, or for people whose main priority is ‘capital preservation’ - i.e. not letting your money run out or get nibbled away by inflation!

The other thing to consider is what’s going on in the world. After Liz Truss’ mini budget, most things in the UK sank. When the world initially went into lockdown, everything tanked. And at the end of last year, as we all got giddy about AI, pretty much everything rallied. Interest rates and inflation also play a major role.

As a very general rule of thumb, I would expect the least risky portfolios (not so much in shares and a lot on bonds or cash) to return about 2% - 3% a year. I’d expect the medium risk ones to do about 5% a year. And the higher risk ones make about 7% a year.

This is a long-term average so will disguise the fact that the high risk ones, for example, could be up or down 20% in any one year period. I hope that helps.