Many investors must be delighted with the 10-year performance of their equity funds. International and emerging markets stocks, as measured by MSCI market indices, delivered 10.5% and 11.1% annual returns, respectively, for the decade ended Feb. 28, 2019, while the S&P 500 composite index sported a stunning 17.1% annual return. Even the lacklustre Canadian market posted double-digit returns, with the S&P/TSX composite index returning 10.2% per annum.

Unfortunately, these returns represent only the bull phase of the market cycle. To obtain an accurate, full-cycle picture of long-term performance, the losses of the prior bear market must be incorporated. The initial gain in any bull market is a recovery of the declines in the preceding bear market – and the deeper the decline, the greater the gain must be in order to reach break-even. The extraordinarily severe 56.8% decline of the S&P 500 from its October 2007 high to its March 2009 low meant that the first 131.3% of this bull market’s gain simply restored investors’ previous U.S. equities’ values (currency changes and dividends excepted).

The U.S. market now is at the more richly valued, late stage of a market cycle. Hence, full-cycle returns are best measured from a similar valuation point in prior cycles. The Shiller cyclically adjusted price/earnings ratio for the U.S. market of approximately 30 today can be used as a guide to select similar late-stage points in the two prior market cycles: June 2007 and June 1997.

From June 1, 2007, to Feb. 28, 2019, the S&P 500 returned a respectable but not awe-inspiring 7.5% annually. The Canadian stock market returned a disappointing 4.1% per annum, while international and emerging market equities earned 2.5% and 5.3% annual returns, respectively. Overall, the global stock market, as measured by the MSCI ACWI index, returned 5.2% per annum.

Returns that incorporate two prior cycles vary by region, but, globally, are within the same range. From June 1997 to February 2019, the S&P 500 earned 7.6% per annum; the S&P/TSX composite returned 6.8%; international stocks fared poorly, with a 4.7% return; and emerging markets led with an 8.6% return. Globally, stocks returned 6.4% per annum.

These historical, full-cycle returns indicate a fundamental capital market reality. Ever since the valuation run-up of stocks in the 1980s and 1990s, equities’ long-term returns are anchored in the mid-single-digit range. Current dividend yields and full-cycle earnings growth rates ultimately dictate this low-return level. Recent bull market returns distort the real picture of equities’ achievable long-term returns.

And future global returns look to be no different. J.P. Morgan Asset Management recently released its 2019 Long-Term Capital Market Assumptions report, which forecasts a 6% annual return for global stocks over a 10- to 15-year horizon.

In this environment, financial advisors need to use realistic return assumptions in their financial plans, particularly for retirees. Cost management becomes vital in a world of low returns. Fortunately, there is a growing array of low-cost ETFs available. More active funds also are cutting their fees to provide more choice in portfolio construction.

Michael Nairne, CFP, RFP, CFA, is president of Tacita Capital Inc. of Toronto, a private family office and investment-counselling firm.