Investing Returns: What Can You Expect?

Investing Returns - What Can You Expect

In this episode, I’ve pulled together the newest numbers of what you can expect from your investments. These are based on historical returns using several different highly reputable sources that I personally use and trust.

In other words, this isn’t some subjective opinion of what one person thinks you’ll get on your investments. Instead, it’s actual data, studies, and reports that reputable sources in the industry have put together, and is what I personally use.

The full audio and text version of the episode is down below, and that’s also where you can download the latest numbers directly from the sources.

I’ve also created a summary where you can see the ranges of possible investment returns based on the different sources (which use different times frames and assumptions).

The Investing Guide is Ready

But before we get into that, I have a big announcement to make and that is that the investing guide is finally ready!

If you’ve been listening to the show for a while then you know that one of the questions that I get asked most often by listeners of the show, is:

  1. How to actually gets started in investing here in Canada
  2. For those Canadians who have already been investing, the question that inevitably comes up is how to transition to low-cost investments like ETFs, to eliminate these ridiculously high fees that you are likely paying in your mutual funds and other investment products.

Often this happens to Canadians who started investing in mutual funds years ago through their bank, and then as the years go by you start hearing about how Canada has some of the highest mutual fund fees in the world, you notice that the returns you get end up being much lower than what your index investing friends are getting because of these fees, and you learn how these fees will eventually end up costing you hundreds of thousands of dollars over your investing lifetime.

Due to all this, you eventually see the light and decide to switch over to doing index investing yourself which is actually really easy once you know how.

Now the problem up until now has been that while there are definitely some great books and blog posts out there, there isn’t really an in-depth, step-by-step video guide that shows you how to actually do everything from beginning to end.

And so after constantly being asked by listeners of the show about how to properly invest, I decided to create the first video training course, made specifically for Canadians where you actually get to look over my shoulder, and see exactly how to actually invest every month. You’ll see exactly where I go, where to click, and how to avoid the most common and critical investing mistakes made by Canadians.

On top of that, you get full access to all the tools and resources that I personally use when I invest every month so you don’t have to do any complicated math or build your own spreadsheets as I’ve built and automated all the complicated parts for you.

You also get unlimited support directly from me in case you have any questions, and you get an entire 2 months to try out the entire guide risk-free.

You can check the out guide by clicking here: Investing Guide. The guide is actually temporarily discounted right now too so you can lock in the discount before the price goes up now, and you have an entire 2 months to check out the entire course risk-free. I’m sure you’ll love it.

Investment Returns You Can Expect

Below is the summary of the different investment return ranges that I’ve compiled from the different source. You can also see the full reports and book from these sources at the links below:

expected investment returns summary


PWL Great Expectations

Global Asset Allocation: A Survey of the World’s Top Asset Allocation Strategies

Credit Suisse Annual Report: Global Returns Yearbook 2016 (Canada is on page 41)

Investing Returns: What Can You Expect?

Below is the text version of the episode in case you prefer reading over audio. Enjoy 🙂

Alright, now let’s get started about talked about the returns. To start things off, keep in mind that the historical performance numbers that I’m going to share with you don’t really change much from year to year. We’re looking at long-term historical returns here, some looking back at the last 50 years, others since the early 1900s.

Therefore, whether you listen to this podcast now, a year from now, or 5 years from now, this episode is still a good gauge to give you a general idea of what returns to expect because obviously a few years into the future isn’t going to skew the average when we’re looking at such long periods.

Also, these numbers get updated every year so if you scroll up you’ll be able to download the newest reports from the different sources and see all their details.

I’ll try to update them every year for you too so if you’re reading this year’s from now you can still go there to get the latest report (and if I forget then just reach out to me however you want and I’ll update them for you).

A Few Investment Returns Caveats Before I Begin:

First, when I talk about historical returns, I’m talking about returns that you would have gotten historically if you invested in the market as a whole. In other words, I’m assuming that you’re buying the indexes as an index investor and not stock picker.

Obviously, you can try gambling on some penny stocks for example, where you could make a lot more than the market, or lose it all. But, here we’re talking about the type of investing that I personally do and that I recommend other Canadians do which is index investing by buying ETFs (exchange traded funds) where we’re buying entire markets with extremely low fees.

For example, one of the investments we buy is the entire Canadian market (instead of trying to pick and choose the right individual stocks to buy within the Canadian market).

I buy these indexes by buying ETFs because they are the least expensive way to buy the entire markets and so if you buy the investments this way, then you will most closely match these typical market returns that you see listed.

The Impact Fees Have on Investment Returns

Now I’m sure that there are some Canadians listening to this episode, where when I say for example that the Canadian stock market returned 8.9% on average, they’ll say “rubbish”, because their mutual fund salesperson who calls themselves an advisor told them that they are investing in the entire market like this too, and so why are their returns so much lower than what I am claiming?

Well, one of the biggest and most critical factors that lower your returns is fees. Let’s use the Candian stock market as an example:

Every month, one of the ETFs that I buy is one that represents the Canadian stocks market. I’m basically paying around $20 dollars to buy one share of an ETF that consists of  hundreds of companies that make up 95% of the Canadian market. The fee that I pay on that as of today is 0.05%, plus with the discount broker that I choose I get to buy that ETF for free (no typical $10 trading fees or anything like that).

I’m basically paying around $20 dollars to buy one share of an ETF that consists of  hundreds of companies that make up 95% of the Canadian market. The fee that I pay on that as of today is 0.05%. Also, with the discount broker that I choose, I get to buy that ETF for free (no typical $10 trading fees or anything like that).

Now, the average mutual fund in Canada will charge between 2.3% and 2.5%. If we go with the conservative 2.3% then that’s still 46 times more than what I pay in fees. If you do this then you’re paying 2.3% in fees instead of .05% in fees which is 4,500% more in fees (when looking at percentage growth between these two numbers). Those are some pretty crazy savings and it’s no wonder why so many Canadians switch to this form of investing once they actually learn how massive these fees are.

If you do this then you’re paying 2.3% in fees instead of .05% in fees which is 4,500% more in fees (when looking at percentage growth between these two numbers). Those are some pretty crazy savings and it’s no wonder why so many Canadians switch to this form of investing once they actually learn how massive these fees are.

Now let’s say you own a mutual fund in Canada that holds the entire market just like I do. Now let’s say that the Canadian market grows by 8.9% which is the average nominal return that we can expect for Canada based on historical performance.

Well, if you hold a mutual fund that charges 2.5% then you didn’t earn the market’s 8.9%. You have to subtract that 2.5% fee so you actually only made 8.9-2.5=6.4%. So, 6.4% instead of 8.9%. That’s a pretty big difference.

Now with the ETF that I buy for example, I’m only paying 0.05% in fees. So if we take the 8.9% that the market grew, and subtract the .05% then  that equals 8.85. So now, you just earned an 8.85% return instead of the 6.4% that you would have earned if you instead went with the high fee mutual funds.

So what do these percentages actually mean? Aren’t they small anyways? 2.3% seems small compared to the 18% we see on  credit card debt for example. But let’s look at the numbers:

If I have a $100,000 portfolio, then with the fees that I’m personally paying right now, I’m paying $146 per year in in fees. FYI: Here I’m using my average fee (MER) from my entire portfolio which is 0.146% based on all the ETFs that I buy).

Not too shabby. I’ll gladly pay that all day long since ETFs like this let me by thousands of companies like this across the entire world for $20, $30, $40 for instance instead of buying thousands of companies one by one individually.

Now with the mutual funds, a common fee is around 2.50%. That’s $2,500 per year that you’re paying in fees compared to the $146 that you could be paying. In other words, that’s an extra $2,354 per year that you’re paying in fees

Ouch. No wonder the returns are so horrible. That money is being taken out of your portfolio to pay for the fees whether the markets do good or not, so that money is no longer growing for you to let you potentially retire even earlier.

This is why you should care about the fees, and this is why I built the course because:

1. I kept being asked to do it.

2. It blew my mind how few Canadians know about this and are getting destroyed on these fees and then wondering why they aren’t earning as much on their investments like everyone else?

Now this may sound like I’m going off on a tangent or digressing but I’m not, because the main question that we’re covering in this episode is “What can I expect in returns?”, and easily one of, if not the biggest factor that impacts the returns that you’ll get isn’t whether you put 50% in stocks or 60% in stocks, but instead, it’s how much you pay in fees.

Now let’s say that you know about the high mutual fund fees in Canada, and so instead you decided to go for a robo-adviser service which buys the index for you as well.

Now in this case while it’s great that you dodged a bullet by not getting caught in buying high fee mutual funds, keep in mind that robo-advisor companies do charge more in fees than if you were doing it yourself by buying ETFs.

After all, they aren’t charities trying to help you for free. They are businesses that offer you a service and in exchange, they charge fees.

Therefore, when you’re looking at fees and where to invest, I like to break it down into three categories:

Category 1: High Fee Mutual Funds

The first category is you go with high fee mutual funds where you’re getting charged that 2.3%-2.5%.

This is where a lot of Canadians fall into just because they don’t know about how significant these fees are, and don’t know about the other options. This particular category I would never recommend to anyone just because there are much cheaper options out there.

Sure you miss out on the convenience of just giving your banker a giant sack of money and letting them do everything for you, but the upside is that you can easily save hundreds of thousands of dollars in investing fees over your lifetime so I’m personally okay with foregoing this “convenience”.

Category 2: The Middle Ground. Lower Investment Fees for Service

The 2nd option is that middle ground where you’re still paying more in fees than you have to, but you may or may not get some convenience for paying those extra fees.

This is where I would put in investing options such as robo-advisers, Tangerine, and TD e-series. In these cases, you’re still paying a lot more than if you were to do it all yourself, but at least you might get some conveniences and it can make things extremely easy to invest in depending on which option you choose.

In this case, you still can’t assume that you’re getting the same return as in the market. The fees are going to eat away at your returns so don’t be upset when you get your annual statement and you notice that your returns are lagging compared to a friend that just does the investing themselves.

But the upside with going with one of the robo-adviser companies for example, is you basically get an “easy-button”. In other words, you don’t have to spend a few hours learning how to do it yourself, you get your hand held a bit, a lot of it is automated, and so the convenience factor is there.

I personally wouldn’t use services like that myself because I find it’s ridiculously easy to just invest the money yourself and save on all those fees. But, I totally get it if someone is just looking for the mass convenience, doesn’t want to learn something new, and is willing to pay a premium for that extra level service and convenience.

Ultimately you won’t be able to retire as early as if you were to do it yourself because of the extra fees, but for some Canadians that’s a worthy trade-off, and I’m glad that at least now that option exists for Canadians.

Option 3: Buy ETFs (Exchange Traded Funds) Yourself (The Lowest Cost Option)

The 3rd option is basically doing it yourself. This is where you’ll pay the lowest fee if you do it properly, and it gives you the highest probability of being able to retire early compared to the other two options due to the smaller fees you pay.

Now some media and blogs make it sounds like this is hard to do, and this is really because before I made the investing guide, there wasn’t really a resource that you could go to where you can see a video recording of how to do everything step-by-step.

Instead, you had to basically read a bunch of books and articles, try to piece it all together about what to do from the many different sources, and hope that you don’t mess something up when you go do your first trade.

That’s actually why I made the investing course, because I kept getting asked how to actually invest yourself to bypass these fees by listeners of the show and so instead of constantly  having 1 one 1 consultations with Canadians on how to do it (which isn’t scalable and only let’s me help a small amount of Canadians at a time), this way there’s a guide that I can point listeners to where you can learn how to do it step-by-step, and where you can ask questions, and get all the tools you need to do it yourself easily.

The Impact of Inflation on Investment Returns

Now that we’ve talked about fees, which is easily one of, if not the most important factor that impacts your returns, let’s talk about another factor that will significantly impact your returns: Inflation.

If you’re new to all this, inflation is basically a general increase in prices that happens over time. In other words, it’s the decrease of the purchasing power of money that occurs over time.

A classic example of this is when you see prices of goods from decades ago like a bottle of cola where you could buy it for pennies before, and in the present day it’s over a dollar.

It’s basically something that happens over time and that you and I have no control over.

The Bank of Canada is able to influence inflation, and they definitely intervene to keep it at their desired rate which is 2%.

Historically, they’ve proven that they are able to keep it at around that 2% level, and since their goal is to keep it at the 2% level, I personally us this rate of 2% in all my calculations.

Why is this important? The answer is that let’s say you buy the index of the Canadian stock market which historically has brought in a nominal return of around 8.9%. While that sounds great, you have to factor in inflation which is around 2%. Therefore, while your portfolio might have gone up 8.9%, your money is actually worth around 2% less than a year ago due to inflation. Therefore, you really only earned around a 6.9% return.

This is why other than your emergency fund, you should never keep giant amounts of money in cash like this because every year, you can predict that you will actually lose around 2% of its value by simply letting it sit there.

In other words, not only are you missing out on earning more money by investing it, but you’re actually losing money by simply doing nothing.

Now when I mentioned that the Canadian stock market has historically earned an average of 8.9%, then that is called the nominal rate of return. This basically means it’s the rate of return, without taking into account inflation.

The 6.9% that I mentioned which is taking that 8.9% expected return and subtracting the 2% inflation is called the real rate of return. Therefore, whenever you see rates of return, it’s very important to know whether that number is a real, or nominal rate of return.

You also want to make sure that when you’re looking at real returns, that you’re using expected Canadian inflation. For example, if you listen to US investing shows, you’ll often hear some experts use a conservative inflation number of around 3% in the US.

For Canada though, the Bank of Canada has proven that they are able to keep it at around 2% and so while you can still use 3% which is somewhat conservative and accurate based on our inflation history as well, the reality is that our inflation is more likely to stick to 2% due to how high of a priority this is now for the Canadian government.

This is just a little aside to keep in mind, and of course a reminder that since we’re in Canada we have our own economy and policies, and so we can’t just use the same numbers that we hear Americans using if for example you’re listening to American podcasts, or reading blogs and books by American authors.

Now the inflation rate in Canada is constantly changing, but just to give you a range, if you’re doing your own analysis and want to see how your investment portfolio is likely to perform under different inflation rates, then the range that I would use is between 1% and 3% as based on history, that is what we can expect. Also like I already mentioned, if you want to use 1 number then I would just use 2%.

Obviously there is no guarantee that it won’t go higher or lower than this, but this is the number and range that I personally used based on multiple sources and past historical performance.

Alright, not let’s get into looking at the historical returns of bonds and stock from all over the world.

To bring you these numbers and ranges, I resorted to 3 really good sources that have compiled the statistics for us in the form of reports and a book.

2 of the 3 reports you can actually get for free. The sources publish these reports on their sites annually using the latest numbers. The 3rd source is an actual book on Amazon and so I’ve included a link below too:

PWL Great Expectations

Global Asset Allocation: A Survey of the World’s Top Asset Allocation Strategies

Credit Suisse Annual Report: Global Returns Yearbook 2016 (Canada is on page 41)

Now one important thing to keep in mind is that past performance doesn’t guarantee the exact same performance in the future. Therefore, if the average return over the past 30 years is let’s say 7%, that doesn’t mean that next year you can expect to earn exactly 7%.

Especially when it comes to investing in the stocks market index, the returns for any particular year can swing wildly, so just keep that in mind since it’s not like buying a GIC or putting money in a savings account where you know that you’re going to get a specific percentage per year.

This is a really important concept to wrap your head around if your whole life you’ve been just using savings accounts, or other very low risk, low return investments like GICs. If this is the case with you, then you’re used to seeing your money go up whenever you “put it away”, and are not used to being in the negatives one month, and being up in the positives the next. This can take some getting used to psychologically so that you don’t get all emotional and start to panic the moment there’s a minor short term dip in the market.

Just remember you’re doing this for the long term, and historically the returns are good if you’re willing to buy and hold instead of getting caught up in the emotions and day to day fluctuations of the markets.

To help illustrate this, I’ll give you a real life example of when I first started investing.

When I First Started Investing:

When I first started off, I basically spent months learning everything that I could about the subject. I read every top book on the subject, read the top blogs, and watched videos to get different perspectives and to make sure that I don’t miss out on any best practices. After spending countless hours studying the subject I finally jumped in, and made my first investments.

Everything went smoothly and as planned, but after a couple months, my portfolio was down by a couple hundred dollars. Is this normal?

Well, yes because the markets fluctuate so in those few months the portfolio could have gone up a thousand dollars, or gone down a thousand dollar (because a few months is an extremely short amount of time when it comes to investing for retirement).

The average numbers I’m providing here is what these investments have done historically over the LONG term, and I stress the word long term.

This is why you only invest money in the stock markets like this if you are willing and able to hold it long term. This isn’t where you put money if you need it in a couple years for school, or to buy a house. You could invest in bonds over the short but even those can fluctuate over the short term like the 2008 financial crisis demonstrated.

Just remember that this isn’t like putting your money in a chequing bank account where you’ll only see it going up (even though it’s only going up by a ridiculously small percentage and you’re likely loosing money due to the 2% inflation).

Alright, so back to my story: A few months in it was down few hundred like I said, then several months after that it was up well over $1,000. Then a year later is was down again due to a market correction that happened in Canada. Once again the bottom line is that you shouldn’t be logging into your account to check your portfolio every day and getting excited when the markets swing up, or get nervous and angry when they slide down.

Remember that this is money that you are saving for your retirement. You’re not supposed to touch that money until you retire, and so the big assumption that is made when investing is that you have to  invest the money for many years to actually get these returns. Year over year they could be up by thousands of dollars, or down by thousands, so it’s really critical that you wrap your head around that so that you don’t start getting emotional when markets go up or down as that’s when the mistakes are made.

A Good Analogy:

Another analogy that I really like is let’s say that you are going to Florida for a vacation during the winter.

You check the average temperatures for December and its’ 16 degrees celsius or 61 Fahrenheit.

Because that’s the average, you aren’t going to bring snow boots and a winter coat to Florida because the odds of the temperature getting that low is ridiculously low.

But, you also don’t assume that just because that’s the average, that that is exactly what the temperature will be like when you arrive, and will remain at throughout your whole trip.

You realize that it might rain so you bring a raincoat. It might get much colder on certain days so you bring a sweater and light jacket just in case.

That’s the same kind of way to think about investing. You get these averages, which give you a ballpark of what you’re likely to get in the long term, based on historical performance. But of course, you realize that just like it might snow in Florida, you might have a market crash. Yet, over the long term, you still have a general idea of the ballpark range that you are likely to fall into.

Expected Returns Summary:

Alright, let’s take a look at what you can expect as far as bonds and stocks go across the world.

Now keep in mind that depending on how you pull the data, you’ll get different numbers. For example, I’ll give you some returns that go all the way back to 1900, and other that go back to the last 50 years (one of the reasons being that many claim you get more reliable stats if we don’t go as far back as the 1900s).

Also, when you’re looking at real returns, those factor in inflation and so those numbers will be different for you depending on what inflation rate you decide to use.

For example, are you going more with a long term historical average for Canada which is around 3%? Or do you believe the Bank of Canada will continue to be able to keep our inflation at 2%?

Here is a summary of the findings based on the 3 different sources that I mentioned:

expected investment returns summary

That’s all for now. Thanks for joining me as I take you through what investment returns you can expect throughout the world. I’ll have another episode expanding on this even more, and talking about important considerations like standard deviation (i.e. how much can we expect each investment type to fluctuate) so stay tuned for that.

Have a great week!