What rate of return can you expect from the stock market?
Recently, I posted an article called What rate of return should you assume for your retirement plan. My conclusion was to use multiple returns because it is near impossible to accurately predict future returns. Despite that conclusion, a number of people went on to email, tweet or comment giving me their predictions on what return was appropriate. Regardless of the fact that we cannot predict future returns, people still try to do it. Maybe it’s fun so here’s my attempt with some data from Morningstar’s Paltrak program.
Annualized returns can be misleading
Everywhere you look, you can find the 1, 2, 5, 10 year numbers but this annualized return data can be misleading because it looks at performance as a ‘snapshot’ in time. Think of it as a click of your camera – one click equals one snapshot or a single moment in time. Take another picture a few minutes, hours, days or weeks later and the picture represents a different moment in time.
Here’s a snapshot of returns as of the end of Dec 2019:
|1 Year||3 year||5 year||10 year|
|S&P500 (in Cdn$)||24.84||13.99||14.25||16.00|
|MSCI EAFE in (CDN$)||16.45||8.88||8.61||8.27|
If you look at the any time frame, the stock markets have done pretty well for the past 1, 3, 5 or 10 years. In case you didn’t know, any stock market is a risk and has ups and downs. If you look at this same chart at a different point in time (different snapshots) all the numbers will look different.
In fact, 2 months later her are the returns to the end of February 2020
|1 Year||3 year||5 year||10 year|
|S&P500 (in Cdn$)||10.28||10.36||10.82||15.38|
|MSCI EAFE in (CDN$)||1.88||4.91||3.95||7.87|
I will run this again once we have March 31, 2020 data because the numbers will look very different
Trailing returns is better data
Since snapshot returns can be misleading, the better way to look at performance data is to look at trailing returns. Essentially this is like looking at performance using a video camera instead of a still camera. Here’s an example of the TSX showing trailing 10 year periods:
What you will see here is all of the 10 year returns on the TSX since Jun 1986. The first 10 year period shown is the first bar which represents Jun 1986 to Jun 1996. The next bar shows Jul 1986 to Jul 1996. The next bar shows Aug 1986 to Aug 1996. this continues every month until the most recent 10 year period from Jun 2001 to Jun 2011.
The best 10 year period was from Aug 1990 to Aug 2000 which produced a 10 year annual compound return of 15.59%. The worst 10 year period was quite recent from Aug 2000 to Aug 2010 where the 10 year annual compound return was only 2.84% which was lower than a risk free GIC return. The average 10 year return was 9.23%.
Can we use this data to forecast future returns?
Even on a 10 year basis, the stock market produces unpredictable results. In fact other market indices produced more volatile results:
- best 10 year return = 17.28%
- worst 10 year return = -3.79%
- average 10 year return = 7.24%
- best 10 year return = 22.25%
- worst 10 year return = -2.92%
- average 10 year return = 11.12%
In the end, you have to have some belief that the stock markets will produced some returns over the long term otherwise you won’t be in the market. However, I’m not sure being able to predict a number with any degree of accuracy is possible. It may be fun but not possible.
Great post Jim,
This gets to the heart of my pet peeve with trying to evaluate whether or not my financial planner is providing me with value worth the fees I pay.
Because returns can be cut and diced in so many different ways – how does one evaluate performance? I tend to think it’s just a matter of choosing a metric and then comparing individual fund returns against an index for that metric. But are there other simple calculations that can be used? There must be a simple way that is easily understandable by all parties.
I think you have to look at performance in many different ways to properly evaluate success. Traditionally, the industry measures success against an appropriate benchmark. It’s important to pick the right benchmark and also choose multiple time periods for that evaluation.
Thanks for the comment!
The only way to cut through it all is track how much you money you actually invested and look at the value today, divide the two numbers over the time period and see your growth, nothing else matters,
Nice article, Jim. It’s a tricky thing here – as you say, predicting long-rate returns with any accuracy is pretty much impossible.
On the other hand, of course, retirement planning (or pension fund mgt) requires this sort of prediction.
So the world absolutely needs something that is nigh impossible 🙂
Hi Peter, I think it is impossible to do with accuracy but you need to do some projections. In the first link https://retirehappy.ca/what-rate-of-return-should-you-assume-for-your-retirement-plan/ I talk about using multiple return projections as a possible solution to that problem.
Thanks, that is a nice resource. Spot on that you’ve really got to go with a range of possibilities and keep conservative expectations.
Assuming you could use this information to predict expected returns, how could you verify that you could duplicate it? Short of investing one lump sum at the beginning of a 10 year period in one of the indexes you are tracking, you can’t. There are too many variables.
Part of it might depend on when you started investing. Did you add money regularly or sporadically? Did you sell at the wrong time due to fear or fail to sell at the right time due to greed? Few people invest by investing one lump sum and walking away for decades so that individual returns can be all over the map even if you can accurately predict what a particular index might do.
That’s a great point about timing of deposits. Few people (maybe no one) invests all their money at once. Knowing your personal rate of return is very important.
Thanks for the comment CashflowMantra
Good to see you popping by every now and then!
Useful article. However, I can’t read the chart. Anyway to get a bigger chart?
Also, I see you use GIC as a benchmark; does this apply to investments in the US versus Canada (or, any where in the world for that matter). I mean, we say that risk is relevant to one’s guts to absorb it; but then we compare our risk to an overall benchmark that applies to all. Do I make any sense?