The rate of return you use in financial projections for clients is critical. So, do you use historical figures? Or an estimate based on future probability?

Benchmark returns for a variety of portfolios from Connor Clark & Lunn Investment Management Ltd. show that a balanced portfolio, with 55% global equities, matched or did slightly better than a growth portfolio with 75% global equities in the five, 10, 15 and 20 years ended June 30.

Yet history may not be the best guide. Interest rates fell through most of the past 15 years, pro-viding gains for bonds. But will that happen in the future? Rates are low and are expected to remain so, even though they’re up from their bottoms.

On the other hand, can you count on strong equity returns? Stock prices tend to go up over time, but there have been quite long periods when they hardly moved.

CCL vice president Don Fraser prefers to use a conservative 6% annual return in his projections, regardless of the client’s asset mix. This allows for a period of poor equity returns but also leaves the door open for significantly better returns if clients can tolerate the higher volatility that comes with more equity exposure.

For example, the best year-over-year return for the growth portfolio was 55.9% as of Aug. 31, 1986, vs 44.9% for the balanced portfolio. These returns were accompanied, though, by average volatility over 20 years of 10.9% for the growth portfolio vs 8.1% for the balanced portfolio.

— CATHERINE HARRIS