Trying to predict stock returns with any degree of certainty is not recommended. But when it comes to planning for long-term financial goals like retirement or post-secondary education, experts say certain assumptions need to be made.
“When we’re talking about expected returns, we’re just talking about a reasonable number that we can use for the purpose of projecting into the future,” Benjamin Felix, an Ottawa-based portfolio manager and head of research at PWL Capital, told Yahoo Finance Canada. “It doesn’t necessarily mean that you’re actually going to get that outcome.”
It’s good to be conservative, because overestimating future returns means you might not meet your financial objectives, says Nick Hearne, financial advisor and associate portfolio manager at RGF Integrated Wealth Management in Vancouver. On the other hand, setting your expectations too low may lead to unnecessary saving, he adds.
“If we’re too conservative, perhaps we don’t live the life that we want to live,” Hearne said in an interview with Yahoo Finance Canada.
So, what is a reasonable rate of return for Canadians to plan around?
Felix finds there’s a common belief, often based on the exceptional recent performance of the U.S. market, that stocks will yield an average annual return of 10 per cent or more. Over the past 20 years, ending in December 2023, the S&P 500 delivered an annualized return of 9.69 per cent. But Felix says using these figures to project future returns is problematic.
For one, it ignores historical periods when the U.S. market struggled. And it doesn’t account for the rising valuations of U.S. stocks relative to their earnings, which he says have driven up past returns, and, consequently, driven down expected future returns.
“If people look at the U.S. market and say, ‘That same thing is going to happen for the next 10 or 20 years,’ I don’t think that’s a reasonable expectation,” Felix said.
“You should actually have the opposite expectation.”
Felix’s firm, PWL Capital, projects average annual returns of 6.83 per cent for U.S. stocks, 7.32 per cent for Canadian stocks, and 7.86 per cent for international stocks over the next 30 years, as per its 2024 financial planning assumptions. The projected annual return for the global stock market, which Felix generally recommends for diversification, is 7.24 per cent.
Similarly, FP Canada, the professional body for certified financial planners in Canada, projects long-term annual stock returns of between 6.4 and 8.3 per cent (Felix and Hearne both sit on the committee that oversees the projections, which are based on assumptions provided in the Quebec Pension Plan and Canada Pension Plan actuarial reports, a survey of industry leaders, the current earnings yield, and historical market performance.)
