The need to be ruthlessly pessimistic in your expectations for investment returns cannot be overstated.
The latest update of investment return guidelines for financial planners suggests conservative investors should expect annual returns of 3.25 per cent after fees over the long term, which is specified as 10 or more years. Balanced investors should expect 3.92 per cent and aggressive investors 4.75 per cent. Dismiss from your mind any ideas you have about strong investment returns compensating for a lack of saving for retirement.
The projections come from Financial Planning Standards Council (FPSC) and Institut Québécois de planification financière (IQPF) and were developed by actuarial and financial planning professionals. They drew from sources like the Canada Pension Plan actuarial report, the Willis Towers Watson annual Canadian investment perspectives survey and historical market data.
Here's a summary of the numbers for 2017, which are designed to be free of financial industry sales hype:
- Inflation: 2 per cent, down from 2.1 per cent last year
- Short-term debt: 2.9 per cent, down from 3 per cent last year
- Bonds: 3.9 per cent, down from 4 per cent
- Canadian stocks: 6.5 per cent, up from 6.4 per cent
- Foreign developed market stocks: 6.7 per cent, down from 6.8 per cent
- Emerging market stocks: 7.5 per cent, down from 7.7 per cent
These projections were used to generate sample portfolio guidelines for conservative, balanced and aggressive investors. The conservative portfolio is 5 per cent short-term bonds, 70 per cent diversified bonds and 25 per cent Canadian stocks; the balanced portfolio is 5 per cent short-term bonds, 45 per cent diversified bonds and 40 per cent Canadian stocks and 10 per cent foreign stocks; the aggressive portfolio is 5 per cent short-term bonds, 20 per cent diversified bonds, 35 per cent Canadian stocks, 25 per cent foreign stocks and 15 per cent emerging market stocks.
Fees were set at 1.25 per cent, which reflects what high net worth investors would pay. If you have a smaller account, expect higher fees and lower returns. The numbers are grim, but grounded in reality.