Approximate 20 year return on couch potato? [Canada]

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Dragonprotein
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Approximate 20 year return on couch potato? [Canada]

Post by Dragonprotein »

Hi all,

I'm a bit confused about a reasonable average expected return rate for a couch potato portfolio. I've read that the historical market average return is 7%, but with bonds making up an age-appropriate percentage, does the cp portfolio still return 7% over the long haul? By long haul I mean 20 years minimum, adjusting bond/stock mix age-appropriately, and making regular fixed contributions adjusted for inflation.

For specifics I'm a Canadian investor planning on putting 30% in a short-term bond ETF, 35% in CAD stock ETF, and 35% in an international ETF (half of which is US stocks).

Thank you
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LadyGeek
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Re: Approximate 20 year return on couch potato? [Canada]

Post by LadyGeek »

Welcome! I retitled the thread to attract our Canadian experts.

The best advice comes from your home country. May I recommend you ask this question in our sister Canadian forum Financial Wisdom Forum? You'll get expert advice.

They have an excellent wiki. This article may help: Simple index portfolios - finiki, the Canadian financial wiki

If you want someone to look over your portfolio, consider posting in the Financial Planning and Building Portfolios forum using the My Portfolio: Seeking Advice format.

Disclaimer: I'm a member of both forums.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
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willthrill81
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Re: Approximate 20 year return on couch potato? [Canada]

Post by willthrill81 »

Try Portfolio Visualizer with the appropriate ticker symbols. I don't know of any ETFs that go back 20 years, so it would be preferable to see how your desired asset classes performed. Try this site.

Out of curiosity, why do you want 35% of your portfolio (Canadian stock) in such a tiny market, relative to total global market value?
The Sensible Steward
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Dragonprotein
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Re: Approximate 20 year return on couch potato? [Canada]

Post by Dragonprotein »

willthrill81 wrote: Out of curiosity, why do you want 35% of your portfolio (Canadian stock) in such a tiny market, relative to total global market value?
Because my future bills need to be paid in Canadian dollars. Not only that, but the market returns are what matters. And they're competitive with the global market.
Valuethinker
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Re: Approximate 20 year return on couch potato? [Canada]

Post by Valuethinker »

Dragonprotein wrote:Hi all,

I'm a bit confused about a reasonable average expected return rate for a couch potato portfolio. I've read that the historical market average return is 7%, but with bonds making up an age-appropriate percentage, does the cp portfolio still return 7% over the long haul? By long haul I mean 20 years minimum, adjusting bond/stock mix age-appropriately, and making regular fixed contributions adjusted for inflation.

For specifics I'm a Canadian investor planning on putting 30% in a short-term bond ETF, 35% in CAD stock ETF, and 35% in an international ETF (half of which is US stocks).

Thank you
I would recommend a higher non Canadian stock weighting. I would favour being say 10% in Canada, and the balance in a fully diversified international index ETF (which itself would be c 60% USA stocks). Of the 60% which would be so invested, if you don't have EM exposure in that ETF (I'd have to check the offerings by ishares.ca) then something like 52% international developed and 8% Emerging Markets.

(one problem with EM ETFs is a high weighting towards China. I have concerns that the Chinese stock market doesn't place a fair value on stocks-- there's too much government manipulation of the economy & investors, reminiscent of Japan during the bubble days. However 30% say of 8% is only 2.4% so it can be lived with).

My reasoning for the low Canadian weighting is that the TSX index is skewed. Heavily towards financial stocks and natural resources-- over 70% of the index. In particular the Big 5 banks.

So it's generally not very well diversified. But things are worse than that. If you believe, as I do, that the Toronto and Vancouver housing markets (together probably at least 60% of the country's property by total value, and probably quite a lot more) are in bubble territory, and will bust, then the banks will get hit, hard. This, even, despite the CMHC guarantees i.e. the insurance on mortgages over 80% of home value. Hilliard Macbeth's book on Canadian Real Estate is a must read, but various economists have been sounding the warning on the high personal debt to GDP and mortgage debt to GDP ratios in Canada for some time (these are now above the US 2006 levels, well above). The impact on the economy won't be pretty.

Normally what Canada does to get out of this mess (see early 1990s) is devalue the currency massively (could we see a 50 cent dollar? I think so) and export like crazy whilst the domestic economy sorts itself out-- long and painful domestic recession. However this time you have the known problems with the Chinese bubble and you have concerns over NAFTA with the US making threatening noises re trade (softwood lumber and milk are merely the first signs of that). It may not be so easy to export.

(I have a very long term view of Alberta oil sands which is quite negative, but I should note that I still hold some related stocks, and it would be too political to get into here, but Alberta's golden goose may turn out to be unable to lay more eggs).

Setting my macroeconomic prognostications (from an anonymous guy on the internet ;-)) aside I think you can see that if you put $100k into this ETF, (covering the Canadian index) roughly 20% will go into 4 banks. That's a big bet.

https://www.blackrock.com/ca/individual ... -index-etf

One reason to ignore me is the tax treatment of Canadian corporate dividends vs. dividends from foreign companies. And to be honest, I have lost track of that (haven't lived in Canada in a long time) and you need to have a mental idea of how big a drag that is on foreign stock performance (depends on location of investments RRSP v. TFSA v. cash account etc.).

The Financial Forum is a sister site to this one (Canadian) and is run by some excellent people.

As to your other question, I think equities generally will return around 6% going forward, given that 10 year bonds are returning 2%. 5 to 6% which would be the low end of historic ranges, but consistent with the high valuations of equities we see. Emerging Markets you might get a bit more, but you will also endure greater volatility. Maybe we get 7%, if we are lucky.

Bonds will return around 2% (for funds with durations of 5-10 years). I would have to check yields on short Canadian bonds (less than 5 years to maturity) but a good guess is return around 1%. Term Deposits may offer slightly better returns (it's really important that you stay within government guarantee limits- some of these Credit Unions and non bank lenders (Home Capital Group! ;-)) are going to go down, if the housing slump plays out as I foresee).
Valuethinker
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Re: Approximate 20 year return on couch potato? [Canada]

Post by Valuethinker »

Dragonprotein wrote:
willthrill81 wrote: Out of curiosity, why do you want 35% of your portfolio (Canadian stock) in such a tiny market, relative to total global market value?
Because my future bills need to be paid in Canadian dollars. Not only that, but the market returns are what matters. And they're competitive with the global market.
OK. On the first point, it's not the currency of reporting, but the actual economic currency (of transaction, of cost and revenue) that counts.

Canada being a relatively small country attached to a big one, the USD/CAD rate is of course the most important thing. Basically as Canadians, we import a lot that is priced in USD, and export a lot that is priced in USD (natural resources, cars, aerospace). A fall in the CAD lowers our standard of living.

For natural resource stocks (40% of the index) they largely price their products in USD and probably only engage in limited hedging. Technically that's a natural hedge, if the CAD falls they increase their revenues and profits. The oil patch would be in even worse shape if it weren't for the fall in the CAD -- their revenues go up when that happens, but their cost base remains (largely) in CAD.

For the financials (another 40%) this is a much more complex question. Although most of the Big 5 banks have significant US operations (TD in particular, also BMO, Scotia has its Carribean/ Latin American exposure) they are still, predominantly (not sure with TD) Canadian based banks. CAD falls, their earnings are worth less in CAD.

Companies like Brookfield (Fin Services) Manulife Sun Life Thompson-Reuters also have fairly large US operations.

So to some extent (I've never seen a number) Canadian stocks hedge a fall in the CAD against the USD. However against other currencies the effect is likely to be minor, there are not sufficient operations in Europe, say, to give a hedge.

When the CAD falls (or rises) the stock market does not move enough the other way to compensate. Take an opposite extreme. Post the Brexit vote, the GBP has fallen by double digit amounts against the Euro and USD. But the top 100 stocks, the FTSE100, is heavily weighted towards multinationals. Roughly speaking for a 10% fall in GBP, FTSE100 goes up 6-7%. So to a great extent, (I am UK based), the fall in GBP was hedged by a rise in my equity portfolio (which is fairly globally diversified).

US stock market and Canadian one are also highly correlated.

BUT if you dig into the performance of the 2 markets, the US one has seen outstanding performance because of tech stocks. Canada? It is the banks. The banks have gone up something like 10x in share price since the 1980s, barely blinked during the financial crash etc. If you see my other post, and my prognostications (and really Hillard Macbeth, if I am honest), Canadian banks are going to have trouble with the property bust.

It is just not the case that Canadian bankers and regulators are brilliant, and the people running American banks are all stupid. Rather, different regulatory and corporate environments led to different outcomes 2007-09. Canada's banks are strong enough that we are unlikely to have a full run banking crisis, but if you look at the UK, Ireland, Spain before the Crash, they all looked pretty good too. I don't imagine another Royal Bank of Scotland (a state owned basket case, has lost money for 9 years now, was the world's 5th largest bank by assets before the crash) but Canadian banks just aren't going to perform like that.

Tech? Well, we've had Nortel (;-)), JDS Uniphase (remember them?), RIM/ Blackberry ... ;-). Canada just doesn't have big listed tech stocks (Shopify! Shopify!).

So in essence by having such a heavy weighting to Canada, plus CAD dollar bonds, you are seriously cutting your diversification. Why own the Canadian index only when you can diversify over 6,000 listed companies by diversifying into international markets?

You *can* buy ETFs which hedge the currency exposure back into CAD, but track US and international indices. In truth that adds to costs (and the last 2-3 years it's really cost in performance) but that would address your first concern.

But you really should not neglect international equity diversification. Your bonds are in CAD, your income is in CAD, your CPP pension is in CAD, your home equity is in CAD. Your career and future income depend on Canada's economy to some extent (as do your taxes).

Why would you want to throw away the only opportunity you have to diversify that risk?
Stryker
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Re: Approximate 20 year return on couch potato? [Canada]

Post by Stryker »

Dragonprotein wrote:
willthrill81 wrote: Out of curiosity, why do you want 35% of your portfolio (Canadian stock) in such a tiny market, relative to total global market value?
Because my future bills need to be paid in Canadian dollars. Not only that, but the market returns are what matters. And they're competitive with the global market.
Agree wholeheartedly. Don't let others put you off in regards to your Canadian allocation. I have an internet friend I've known for many years who's been investing only in individual Canadian dividend growth equities since the early 80's and he's done very well for himself and his family. He started at a time long before we had index funds here in Canada. You basically bought equities DIY or purchased expensive active funds at the time. He chose the former and stuck with it all these years. He hates bonds, doesn't invest in foreign and the dividend tax credit on his Canadian equities has given him a big boost over all these past decades.

I invest the same way as him in my taxable account. The RRSP's and TFSA's I've allocated to a global index portfolio of funds and ETF's.
Stryker
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Re: Approximate 20 year return on couch potato? [Canada]

Post by Stryker »

Dragonprotein wrote:Hi all,

I'm a bit confused about a reasonable average expected return rate for a couch potato portfolio. I've read that the historical market average return is 7%, but with bonds making up an age-appropriate percentage, does the cp portfolio still return 7% over the long haul? By long haul I mean 20 years minimum, adjusting bond/stock mix age-appropriately, and making regular fixed contributions adjusted for inflation.

For specifics I'm a Canadian investor planning on putting 30% in a short-term bond ETF, 35% in CAD stock ETF, and 35% in an international ETF (half of which is US stocks).

Thank you
I can only go by Eric Kirzner's easy chair portfolio which was started just over twenty years ago. His prediction at the time was 8% annually and it says he actually did better than that, but unfortunately no final rate of return figure given in the article.
Valuethinker
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Re: Approximate 20 year return on couch potato? [Canada]

Post by Valuethinker »

Stryker wrote:
Dragonprotein wrote:
willthrill81 wrote: Out of curiosity, why do you want 35% of your portfolio (Canadian stock) in such a tiny market, relative to total global market value?
Because my future bills need to be paid in Canadian dollars. Not only that, but the market returns are what matters. And they're competitive with the global market.
Agree wholeheartedly. Don't let others put you off in regards to your Canadian allocation. I have an internet friend I've known for many years who's been investing only in individual Canadian dividend growth equities since the early 80's and he's done very well for himself and his family. He started at a time long before we had index funds here in Canada. You basically bought equities DIY or purchased expensive active funds at the time. He chose the former and stuck with it all these years. He hates bonds, doesn't invest in foreign and the dividend tax credit on his Canadian equities has given him a big boost over all these past decades.

I invest the same way as him in my taxable account. The RRSP's and TFSA's I've allocated to a global index portfolio of funds and ETF's.
I take the point about the tax credit: the tax drag on these strategies is an important factor.

One needs to be aware how much of the performance of the Canadian index is the banks, and how much of the total dividends paid by the TSX is banks.

I don't have numbers to hand on this, but I do know bank stocks have risen roughly 10x since the mid 1980s, and dividends by banks have kept pace.

A Canadian investor can easily be heavily overweighted into financials (about 40% of the index) vs. investing in other indices.

This performance will not go on forever.
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