{"id":316902,"date":"2017-02-15T00:30:00","date_gmt":"2017-02-15T05:30:00","guid":{"rendered":"https:\/\/www.investmentexecutive.com\/uncategorized\/curb-your-enthusiasm\/"},"modified":"2019-10-30T05:53:43","modified_gmt":"2019-10-30T09:53:43","slug":"curb-your-enthusiasm","status":"publish","type":"post","link":"https:\/\/www.investmentexecutive.com\/newspaper_\/focus-on-products\/curb-your-enthusiasm\/","title":{"rendered":"Curb your enthusiasm"},"content":{"rendered":"

Several academic studies<\/strong> have determined that investors’ future return expectations are heavily influenced by recent performance. With the Canadian stock market delivering an exceptional 21.2% in 2016 and the U.S. market up 17.4% annually over the past three years, many investors are likely ratcheting up their return expectations.<\/p>\n

But caution is in order. The sizzling returns of Canadian stocks were, for the most part, a recovery from the bear market of September 2014 to mid-January 2016. Over the past three years, the annualized return of the Canadian market was a more ordinary 7.4%. The stellar three-year U.S. market returns were primarily due to Canada’s plummeting dollar. In U.S. dollar terms, U.S stocks were up a solid, but not eye-catching, 8.6% per annum.<\/p>\n

Yet, even this U.S. return is arguably on the high side for forming future expectations. Although Canada had a rough ride with the commodities bust over the past three years, the U.S. economy was in an expansion mode. A longer retrospective view that begins in 2006 when the U.S. unemployment rate was similar to today’s results in a more modest 7% annual return over the past 10 years.<\/p>\n

Certainly, today’s valuations are not supportive of lofty future long-term returns. Even after allowing for a bullish earnings recovery in 2017, Canadian and U.S. markets remain fully priced. As of Dec. 31, 2016, the forward price\/earnings (P\/E) ratio for the Canadian market was 16.3 while that of the more expensive U.S. market was 17.9. International and emerging markets were more attractively priced with forward P\/E ratios of 14.9 and 12, respectively.<\/p>\n

With slowing population growth and declining productivity, future global growth prospects are middling. Aging developed nations, in particular, face real gross domestic product (GDP) growth rates in the 1%-2% range. Fortunately, more rapidly growing emerging markets have better prospects. Still, the Organization for Economic Co-operation and Development has forecast global annual real GDP growth of 3.1% per annum over the next 20 years.<\/p>\n

Hence, future stock return expectations should be modest. This is reflected in the Financial Planning Standards Council’s (FPSC) Projection Assumption Guidelines for long-term financial projections. The FPSC’s 2016 report sets out annual return guidelines for Canadian equities at 6.4%; foreign developed-market equities at 6.8%; and emerging-market equities at 7.7%.<\/p>\n

Investors’ recent experience with bonds is even more problematic for return expectations. Despite a challenging 2016, the Canadian bond market as measured by the FTSE TMX Canada universe bond index earned a 4.6% annual return over the past three years.<\/p>\n

Unfortunately, past bond returns tell us little about future returns. Instead, the expected future nominal return of a high-quality bond is closely approximated by its yield to maturity. With today’s yield to maturity in the 2.2% range, Canadian investment-grade bonds will most likely deliver low single-digit returns over the next decade.<\/p>\n

Low long-term equity and bond returns are the stark future facing investors. Advisors must incorporate these realistic assumptions in their clients’ financial plans, particularly for those facing retirement.<\/p>\n

Customizing investment strategies, managing investment costs, reducing unnecessary taxes and assisting in proper budgeting are critical advisory functions in a world of uninspiring future returns.<\/p>\n

Michael Nairne is president of Tacita Capital Inc. of Toronto, a private family office and investment counselling firm.<\/em><\/p>\n

\u00a9 2017 Investment Executive. All rights reserved.<\/p>\n","protected":false},"excerpt":{"rendered":"

Don’t assume that today’s high returns predict future gains<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[3013,3017],"tags":[2550],"yst_prominent_words":[],"acf":[],"_links":{"self":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/316902"}],"collection":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/comments?post=316902"}],"version-history":[{"count":1,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/316902\/revisions"}],"predecessor-version":[{"id":368028,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/316902\/revisions\/368028"}],"wp:attachment":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/media?parent=316902"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/categories?post=316902"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/tags?post=316902"},{"taxonomy":"yst_prominent_words","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/yst_prominent_words?post=316902"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}