What should you expect from your investments?

Equity markets have offered amazing returns these past nine years, but be prepared for the tide to turn, says Morningstar's Shehryar Khan.

Shehryar Khan, CFA 20 March, 2018 | 5:00PM
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Shehryar Khan: Now that the RRSP deadline has passed, many investors are sitting on some extra cash and may be wondering what the most effective way to invest those additional savings may be.

As regular viewers will know, it is important to stick to your long-term investment plan. However, in the current environment where we see low but rising interest rates and higher equity valuations, investors might wonder about what return expectations they should have for the next few years, in equity markets especially.

While not predictive, history can be illustrative in helping us gauge our return expectations for the future. Using my lifetime as an example, the S&P 500 has returned an annualized 10.5% per year over the last 30 years -- an attractive return for investors to be sure. Canadian equities haven't fared quite as well, the S&P/TSX Composite has delivered 8.1% over the same span. The same goes for the MSCI World Index, which has returned 7.9% per year. Based on these, we can start to get a better sense for what investors might expect long-term from equity markets, a baseline of 8% to 10% per year.

Since the financial crisis in 2008, however, the equity markets have been extremely kind to investors. Since March of 2009 -- a nine-year span -- the annualized return on the S&P 500 is 18.2%, 15.3% for the MSCI World and 10.6% for the TSX. Apart from telling us how well equity markets have done in these last nine years, these numbers also demonstrate the drawbacks facing many Canadian investors, who have too much domestic exposure, a topic for another day.

As we frequently speak to portfolio managers across the country, a common theme we hear is that investors should prepare, at some point, for the tide to turn on these high returns. One manager put it well and said investors should view the flattering gains of the last few years as borrowing from future returns. Eventually, we have to repay what we've borrowed in the form of lower future returns, which will bring us back in line what returns have been over longer periods in the past. On the bright side, having benefited from these higher returns, investors are now ahead of where they could have expected to be nine years ago, and are closer to reaching their investment goals.

So, while we all may have gotten used to the rosy mid-double digit return the past nine years, as we all prepare to put our RRSP money to work, it is worth tempering expectations for the future and planning accordingly.

For Morningstar Investment Management, I'm Shehryar Khan.

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Shehryar Khan, CFA

Shehryar Khan, CFA  Shehryar Khan, CFA, is a senior investment analyst for Morningstar’s Investment Management group.

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