The article “Here’s What Kind Of Return You Can Expect From Stock Markets Going Forward” was originally published on Financial Post on May, 19, 2020.

These factors will help investors and advisors set appropriate expectations about returns


Recent stock market volatility has put a spotlight on daily market movements for people who would not normally pay such close attention to their portfolio. Setting appropriate expectations about investment returns is important for investors and advisors. These expectations depend on several factors and impact investment and financial planning decisions.


Most people in the investment industry use treasury bills or government bonds as a proxy for a risk-free rate of return. However, most average investors would consider a Guaranteed Investment Certificate (GIC) to be a more appropriate benchmark.

GIC rates are currently in the 2.5 per cent range for one-to-five-year terms. This is unusual, as longer-term GICs usually pay higher interest rates than shorter-term ones. The yield curve is currently “flat.” In order to secure rates of 2.5 per cent, you need to look past the banks to trust companies and credit unions, as the banks are only paying between 1.5 and two per cent.

The FTSE Canada Universe Bond Index is a good benchmark for mid-term Canadian investment grade bonds, including government and high-quality corporate bonds. The current yield to maturity (interest rate) is only 1.5 per cent.

The distribution yield (dividend rate) for the S&P/TSX Capped Composite Index is currently 3.6 per cent, and for the S&P 500, it is 2.4 per cent. These yields assume the underlying companies continue to pay the same dividends in the next year as they did in the past year, which may be questionable given the current state of the economy.

Higher yielding bonds are available for investors willing to take on more risk. Higher yielding stocks with larger dividends are available as well, albeit potentially at the expense of potential capital growth otherwise reserved for companies that may pay lower or no dividends.

Stock market investors expect to earn a return by way of capital appreciation or an increase in the underlying price of stocks. Stock markets generally rise over time, although that rise is not in a straight line, as we have seen underscored in 2020.


Stocks rise in value about three out of every four years. They typically do not fall in value in consecutive years as recessions tend to be short lived. Over the past 100 years, the S&P 500 has only had four multi-year declines, including four straight years at the outset of the Great Depression, three straight years at the start of the First World War, two years in a row during the 1973 oil crisis, and three consecutive years following the bursting of the tech bubble in 2000.

A balanced portfolio of stocks and bonds has not had a negative five-year return since 1935. As a result, a balanced investor with a time horizon of more than five years can probably expect to have a higher portfolio value than now by that time.

Over the past 50 years, the TSX has returned 9.1 per cent annually. The S&P 500 has returned 11.0 per cent in Canadian dollar terms. Canadian inflation over the past 50 years has been 3.9 per cent, so this means part of those returns are reflective of higher annual cost of living increases in the past than we are used to today. The Bank of Canada and most central banks have a two per cent inflation target.

Over the past 20 years, going back to the peaks of the 2000 dot-com bubble, Canadian stocks have only returned 6.3 per cent, and U.S. stocks, in Canadian dollars, only 5.4 per cent.

Historical bond returns are somewhat skewed because interest rates were so much higher in the past. Canadian three-month treasury bills — the aforementioned proxy for a Canadian risk-free rate — returned 5.6 per cent over the past 50 years, but just 2.0 per cent over the past 20 years. Given the three-month treasury bill yield is currently 0.27 per cent, this reinforces why some aspects of investment history can result in deceiving expectations for the future.


FP Canada is the professional body for Certified Financial Planners (CFPs) in Canada. Their 2020 Projection Assumption Guidelines found the average long-term return assumptions from 11 actuarial and asset management firms for bonds was 3.15 per cent. Canadian stocks, foreign developed market stocks (like the U.S.), and emerging market stocks (most notably China) were forecast at 6.05 per cent, 6.25 per cent, and 8.02 per cent respectively.

The most recent triennial Actuarial Report on the Canada Pension Plan from Dec. 31, 2018 included government estimates for stock market returns. They anticipated a “real” rate of return for public equities of 3.9 per cent until 2025 due to low cash returns. By 2025, their forecast was 4.3 per cent. In a two per cent inflation environment, these real returns suggest a nominal 5.9 to 6.3 per cent per year overall for stocks, with higher return potential identified for emerging markets and private equities.

There are other methods to try to forecast future stock market returns, perhaps most notably from Yale economist and Nobel Prize winner, Robert Shiller. The Shiller P/E, or cyclically adjusted price-earnings (CAPE) ratio, is a statistical method used to imply future stock market returns. It is determined by dividing the price of a stock or a stock market, like the S&P 500, by the average of the previous 10 years of inflation-adjusted corporate earnings.

A lower CAPE suggests that stock prices are cheap relative to historical earnings. A high CAPE — as we have right now in the U.S. — implies stocks are overvalued and future return expectations are low.

The Shiller P/E ratio has its criticisms, some of which suggest today’s CAPE cannot be compared to historical ratios due to low interest rates, different business and regulatory conditions, and changes in accounting methods.


So, what does all this mean for investors and advisors? One takeaway should be that future stock market returns could be lower than they have been in the past. This prognostication has nothing to do with the pandemic or trying to make a call on what stocks will do for the balance of 2020. It has more to do with the fact that today’s low interest rates and inflation suggest future returns must be lower.

Long-term stock market returns of six to seven per cent are probably reasonable for most public stock market investors, and potentially seven to eight per cent for private equities and public emerging markets.

Most investors will not earn six to eight per cent simply because of fees and fixed-income exposure. Investors cannot invest for free, cannot consistently beat the market net of fees, and few investors are exclusively invested in stocks.

Advisors should be continuously monitoring an investor’s risk tolerance, using the pandemic volatility as a barometer for how much risk an investor is truly willing to take.

For purposes of retirement planning, long-term returns of three to six per cent as a range may be appropriate assuming a two per cent inflation rate, depending on asset allocation and fees, and contingent on whether a retirement plan includes a Monte Carlo simulation or stress testing.

Appropriate expectations about investment returns from year to year and over an investor’s lifetime can help improve short and long-term investment outcomes. Developing a financial plan based on those expectations can help set monthly saving and spending targets, evaluate insurance needs, determine tax and estate strategies, and keep an investor invested when the going gets tough.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.