What Returns Can You Expect?
Posted by Gail | Filed under Investing
One of the questions I get most frequently is, “Where can I get the returns you quote to people when you tell them how much they’ll have at retirement?”
I know interest rates are low right now. But you know it hasn’t always been this way, right? Or maybe you’re not old enough to remember. I am. I remember 17% interest rates and my ex who is even older talks about when he had to renew is mortgage at 20%. It only lasted six months, but that was a killer six-months in terms of interest costs!
When most people think of saving for the long term they use a formula like this:
“I’ll contribute $a for b years and earn c% on my investments.” It’s the “c” that’s got everyone discombobulated.
When I quoted investment returns on TDDUP, I started using 7% and then dropped down to 5% as the markets slipped. BTW, that’s “investment returns” not “interest rates.”
The average long-term returns from the S&P 500 from 1926 until 2012 was 11.8%, with the best streak showing up from 1991 to 1999 when the returns were almost 450%. There were 63 years when the S&P gave positive returns compared to the 24 years when it dipped into the red.
Five-year T-bonds, naturally, produced lower returns but better than non-investors might expect. Over the same period of time, they returned 5.6%, spent 78 years delivering the goods and sputtering for 9.
Too long for you? How about from 1980 until 2012? That’s just over 30 years, about as long as most people have for their retirement portfolios to grow, unless they’ve been particularly diligent and started really early. The S&P delivered an average return of 12.6%, while bonds delivered 8.7%. My 7% and 5% are looking pretty average now, eh?
If you want the returns I quoted on TDDUP, you have to have a long-term investment time horizon and you have to be willing to assume some of the risk that comes with market investing. You also have to remember that markets rise and fall, as do interest rates, and the only thing you can count on absolutely is that things will change. No one knows when or how, but they’ll change.
Don’t use today’s interest rates as your excuse not to put something aside for tomorrow. If you’re very conservative there are still options you should check out. As one of the rules in Money Rules says, even chickens can be investors. (If you know the correct rule #, I’ll send you one of Jen Phillips’ two pears in a pod. budget wallets. Just leave your comment here with the correct rule number and I’ll randomly draw a name.
February 21, 2013 at 6:41 am
#30 : even chickens can invest safely.
I am a chicken, so this chapter was for me:)
February 21, 2013 at 7:43 am
my remote control is sitting on top of your book next to my laptop and Monica is right it’s #30. Have a good day
February 21, 2013 at 8:29 am
Yep … rule 30!
February 21, 2013 at 8:33 am
Rule #30.
Thanks for the post, Gail!
February 21, 2013 at 8:49 am
rule # 30
yep remember the days of high interest rates in 1982 when my first job during high school was to work as a teller every Saturday for Vancity. Lots of people lost their houses……
February 21, 2013 at 8:52 am
Rule #30!
February 21, 2013 at 8:56 am
Love rule # 30! I am a conservative chicken for investing, but a vegetarian liberal in life. LOL.
February 21, 2013 at 9:16 am
Your investment returns also depend greatly on what your asset allocation looks like. There is no “one size fits all”.
February 21, 2013 at 9:20 am
Rule #30. My parents had to renew their mortgage during the 20% interest rate era. It was a great time for savers, but not borrowers.
February 21, 2013 at 9:37 am
LOVED Money Rules and refer back to it often. It’s definitely #30.
February 21, 2013 at 9:37 am
Rule #30!! And I’ll take this opportunity to say that I love, love, love Money Rules!
February 21, 2013 at 9:42 am
Rule #30.
February 21, 2013 at 9:46 am
Rule #30 – We also lived through the 20% mortgage era – an experience to be sure.
February 21, 2013 at 9:51 am
Rule 30 is right!
February 21, 2013 at 9:53 am
I remember the late 80’s interest rates. First house was 16% mortgage rate which was a great rate for then. My husband and i made10.50 an hour ( our kids make that at fast food restos part time now)
rule #30
February 21, 2013 at 10:13 am
# 30 is the answer
February 21, 2013 at 10:16 am
Rule #30
February 21, 2013 at 10:17 am
#30 … Money Rules is a great investment
February 21, 2013 at 10:19 am
I remember Celebrating when our interest rate went all the way down to 13%! Now it’s just under 3% crazy.
Thanks for explaining the interest rate vs rate of return. I never really understood that , but trusted that you knew what you were talking about so I believed. I’m not a chicken (rule#30) but I do put my eggs in several baskets. BTW you had me snorting with laughter many places in the book. I love it that you write the way to speak. Thanks!
February 21, 2013 at 10:30 am
Rule #30. I debated whether to buy the book or follow your rule “never pay for what you can borrow” but then decided that my number of usages may make it worth the buy. I’m glad I did as many rules are now highlighted and for the first time since July I’m in the black at the end of the month.
February 21, 2013 at 10:31 am
Loved the book! Rule #30!
February 21, 2013 at 10:31 am
Rule #30.
February 21, 2013 at 10:31 am
Rule #30.
My parents locked in their mortgage at 11% for five years, just before interest rates dropped in the early-mid 90’s. They still paid it all off in 8 years.
February 21, 2013 at 10:35 am
Rule #30!
February 21, 2013 at 10:39 am
Rule #30
Thank goodness those interest rates aren’t here now!
February 21, 2013 at 10:41 am
#30 it is
My parents tell stories of having their mortgage at 18% when I was young. They said for that mortgage term they paid the bills, bought groceries and didn’t have another penny. (Of course, as a wee one, I had no idea. We still had fun, even without money). I think of this now, and it would be like having your mortgage on a credit card! Insane, considering we just locked our new mortgage in at 2.99%. Thanks for the reminder to think long term!
February 21, 2013 at 10:45 am
Rule 30!!
I’m on a disability with 2 young kids(4&2). But reading Gails blog everyday I am looking for work. Paying down my debt and saving for my future is a priority now. I have a moderate risk portfolio with a few dollars but would like to increase it. I don’t think I’m a chicken just poor. With a job I can be broke instead.
February 21, 2013 at 10:47 am
Rule # 30.
I am definitly a LOW RISK investor. TFSA, RSPs, RESPs and diversified investment for my pension plan at work. Something is better than nothing!
My parents bought their house in the 80s with 17% interest rate. We were thrilled this past December to get 3.69% on our first mortgage.
February 21, 2013 at 10:51 am
Rule #30!
February 21, 2013 at 10:51 am
Rule #30!
February 21, 2013 at 11:08 am
Rule #30!
February 21, 2013 at 11:10 am
Rule#30. Passed the book along for the kids to read, but I think I will buy them copies so I can get it back!
February 21, 2013 at 11:10 am
Rule #30!
A great read!!
February 21, 2013 at 11:15 am
Rule # 30. Great tips in that write up. I will have to research strip bonds and segregated funds. Can I buy those through a Self Directed RSSP or Self Directed TSFA? Sounds like an appropriate investment tool for us chickens to still have the opportunity to take part in any market upswings in the next 10 years. Thanks for the historical perspective on rates of return. Although the market has been slow and sluggish, we can look at the bright side and say what is down must eventually go up.
February 21, 2013 at 11:31 am
@Elizabeth, you’re right, the allocation mix would affect the return. I like the approach used for my kids’ RESPs, more risk now while they’re 4 and less risk, almost exclusively bonds and gics, when they’ll be 16 and almost ready for post secondary education.
I haven’t read your book but from what others are saying I guess I’m a chicken investor. But it’s my money and I sleep just fine at night so who cares. I have put a small amount of $ in a much higher risk investment, an amount I am comfortable with losing if it came right down to it, so I can “practice” and get familiar with higher risk investing since overall, I prefer a higher rate of return.
February 21, 2013 at 11:34 am
Rule #30.
These low interest rates (both for investing and borrowing) won’t be forever. It is just a momentary downturn in the timeline of the financial world. Nothing lasts forever. Long term investment strategies just need to ride these out. Short timelines is where the low rates hurt.
February 21, 2013 at 11:42 am
Rule #30!!!
February 21, 2013 at 12:15 pm
Rule # 30:D I remember getting so much interest on my chqing account in the ’80’s it paid for my using other banks ATM’S! LOL – if only I knew then what I know now
February 21, 2013 at 12:17 pm
Rule # 30! (I’m a chicken!!!).
February 21, 2013 at 12:20 pm
rule # 30
February 21, 2013 at 12:24 pm
Rule #30.
February 21, 2013 at 12:27 pm
Rule #30! I’m definitely a baby chicken when it comes to investing but your Money Rules have helped me to start to break out of my shell. Thanks for all the great advice in your books/blog/website!!
February 21, 2013 at 12:28 pm
Rule # 30
Always love the advice and wisdom you have, Gail. Thank you.
February 21, 2013 at 12:33 pm
Rule # 30!
February 21, 2013 at 12:43 pm
Rule 30… I just finished “money rules “.
What a great a fun book. I love the. No nonsense approache.
February 21, 2013 at 12:52 pm
“the only thing you can count on absolutely is that things will change. No one knows when or how, but they’ll change.” Absolutely. Keep underscoring this for people, wouldja?
Rule #30!
February 21, 2013 at 12:57 pm
Re: “If you’re very conservative there are still options you should check out.”
Gail I would love it if you could write a series of columns on conservative investing – it would be so helpful to know what minimal risk investing looks like.
February 21, 2013 at 1:14 pm
#30 is the right answer!
February 21, 2013 at 1:20 pm
it is number #30
February 21, 2013 at 1:46 pm
Rule #30!
February 21, 2013 at 1:53 pm
Rule #30.
February 21, 2013 at 1:53 pm
Rule #30!!!!!
February 21, 2013 at 2:19 pm
Rule #30!
I was a kid during the days of 20% mortgage rates so no one thought to discuss these things with me. They should have! Rule #49 (about financial education for your kids) – I’m a big fan of that one.
February 21, 2013 at 2:26 pm
Rule #30!
February 21, 2013 at 3:06 pm
Rule 30! I’d love to enter the draw.
February 21, 2013 at 3:06 pm
Rule #30. Just got your book. Love it.
I remember when my interest rate dropped from 19% to 11% and I thought I was in heaven. Amazing how low they are now.
February 21, 2013 at 3:30 pm
#30 loved the whole book.
February 21, 2013 at 3:34 pm
BTW, that’s “investment returns” not “interest rates.”
That point seems to be missed by people who keep asking about where you get your rates. I’m glad you mentioned it.
February 21, 2013 at 3:43 pm
Rule #30
February 21, 2013 at 3:46 pm
This is too funny…I just bought your book on my Kobo…definitely rule 30!
February 21, 2013 at 4:01 pm
Gail rules!…..rule #30….I love that book!
February 21, 2013 at 4:10 pm
Rule #30 Gail:) Thanks for the investment encouragement!
February 21, 2013 at 4:13 pm
Want the book but in the states it’s not easy to come by. But am definately a chicken and need to move my investments around this year in a way that they can earn something. Thanks for the nudge!
February 21, 2013 at 4:42 pm
Rule #30! This book is good. I have tabbed items to re read all over again.
February 21, 2013 at 4:47 pm
Rule #30, I love the book!
February 21, 2013 at 5:06 pm
Great post. Rule #30!
February 21, 2013 at 5:32 pm
Rule number 30!! Great book.
Two pears in a pod budget wallets are a great idea.
They would make a good addition to one of your shows along with the jars.
I still love the jars Gail and think everyone should give them a try.
February 21, 2013 at 5:53 pm
Rule 30
February 21, 2013 at 6:39 pm
Rule 30! (should be obvious by now, lol)
February 21, 2013 at 8:29 pm
Rule 30. Great advise!
February 21, 2013 at 9:03 pm
rule 30
February 21, 2013 at 9:05 pm
Rule #30 – love your show and like your no-nonsense approach to finances.
February 21, 2013 at 11:16 pm
Rule #30!
I had a lot of fun seeing you speak at Mohawk college last Tuesday. Thanks for the great tips.
February 22, 2013 at 12:09 am
Rule 30
February 22, 2013 at 8:14 am
#30 Gotta save and even a GIC at 1.5% is still saving if you are a chicken!
February 22, 2013 at 8:15 am
If you are chicken even a GIC at 1.25% is still saving!
February 22, 2013 at 8:54 am
Rule #30
February 22, 2013 at 9:04 am
Rule #30. I am in a quandary …would love higher interest rates to help out my retirement plans, but want lower interest rates for my kids who are just getting married and starting out…yea, the hopes for the kids always wins out!
February 22, 2013 at 10:42 am
Rule 30.. although I’m not a chicken. I work with a bunch of chickens, but then they’re always talking about the new iphone they bought, or their daily trip to starbucks, or their new car they want – and I’m like, yeah that’s right, just keep paying me my dividends suckers… :0
February 22, 2013 at 1:06 pm
Combos help. My hubby is a risk taker and I’m a safety person. We got our investment slips this week and we averaged 6.28% over the past year. He was higher in RRSP and I did better in the TFSA so we each picked a good one, but overall we’re happy with our choices. We are late 20’s and early 30’s so we have money away from 5 years already and another 30 till retirement so we will be fine.
February 22, 2013 at 1:41 pm
Rule 30
February 22, 2013 at 3:31 pm
Audrey Says:
February 22, 2013 at 9:04 am
Rule #30. I am in a quandary …would love higher interest rates to help out my retirement plans, but want lower interest rates for my kids who are just getting married and starting out…yea, the hopes for the kids always wins out!
——————————————
I assume your talking about buying a home? If interest rates go up, house prices go down, so it will be a good thing for them not bad.
February 22, 2013 at 3:59 pm
it’s rule 30! Gail, you are awesome
I’ve registered to hear you speak in Montreal in March, I can’t wait!
February 22, 2013 at 9:03 pm
Yes, unfortunately I can remember when rates were that high – and it WAS brutal for those that were paying through the nose for things like they’re mortgage. Thankfully borrowers won’t see that for some time to come. In the meantime sadly, it does mean that those waiting for those huge returns may have to wait a little longer. Still, a hundred bucks saved at 5% interest is better than money given to your local coffee shop over the course of a month!
February 23, 2013 at 12:35 am
rule #30!!!
I’m not a super-aggressive investor; however, my goal for the last quarter of 2013 is to put 18-20% of my salary, out of each paycheck, into my 403(b). I can sleep well with some risk; I’d like to have a larger amount earning those “investment returns”.
As always, love your blog!
February 23, 2013 at 1:08 am
30 it is. I’ve always wondered about the 5%. Thanks for clearing that up for me.
February 25, 2013 at 4:38 am
rule #30
February 25, 2013 at 10:52 am
Rule #30!!!
February 25, 2013 at 11:41 am
[...] rate of return. 10%? Good luck with that. Recently, Gail Vaz-Oxlade wrote a thorough post on what kind of returns to expect, averaging various indexes over time to give a bit of context. Where Vaz-Oxlade used to use 7% for [...]
February 25, 2013 at 12:24 pm
Rule #30 is correct. My first mortgage was 11% which I locked in because just a few years earlier it was I believe 19%…amazing how low they are now…but then I now longer have a mortgage since I’ve paid it off.
February 25, 2013 at 5:12 pm
>>>If you are chicken even a GIC at 1.25% is still saving!
Nope, it’s not necessarily saving. And this touches on a few other comments.
Don’t confuse risk and volatility. They are not the same thing, but they are being confused in this thread all over the place. Fluctuations are not risk. Risk is not meeting your retirement goals, i.e. not obtaining enough of a rate of return to ensure you have income at retirement.
For example, over the long term, equities have shown to consistently product better, more stable returns than GIC’s. If you want a postive rate of return, they’re actually less risky than GIC’s. They’re just more volatile – they go up and down, but mostly up. It’s like watching a drunken sailor walk, except one leg is shorter than the other. Up and down, but more up than down.
WIth the GIC rate, if you’re ’saving’ at 1.25% and inflation is at 2%, then saving is actually decreasing your value, and increasing the risk that you won’t reach your retirement goals.
Which is why asset allocation is so important. You *need* to be invested in equities for the long term. But you should use other asset classes (like possibly GIC’s) to minimize the volatility while still keeping returns high. Mixing asset classes is like a steady hand on that drunken sailor, he’s still walking upwards, but his swings aren’t so wide.
February 25, 2013 at 7:08 pm
#30…for sure.
I too remember those HIGH interest rates of the 80’s, I also remember house prices were nothing like they are now.
March 2, 2013 at 5:06 pm
I’m surprised to see so many return rates thrown around, with no mention of corresponding inflation rates. IMO, this makes this article useless.