Accepting Market Returns

A few readers have expressed concern about their recent investment performance. In most cases, these investors are holding a sensible, low cost, globally diversified portfolio of index funds ranging from conservative (40% stocks, 60% bonds) to balanced (60% stocks, 40% bonds). One reader said:

“Psychologically, it’s tough to put money in when returns have been so low.”

When you invest in a passive portfolio that tracks broad market indexes you can expect to earn market returns minus a small fee. This is far and away the best and most reliable way to invest for the long term.

But sometimes market returns can be disappointing in the short term. Investors might be experiencing that right now. In fact, if you’ve recently moved away from actively managed funds or stock picking to embrace a portfolio of passive index funds, you might be wondering if that was a wise decision.

Market returns have been dismal this year compared to returns from the previous two years. But context matters. FP Canada’s projection and assumption guidelines suggest future expected returns of approximately 4.78% per year for a global balanced portfolio.

Meanwhile, an actual global balanced portfolio represented by Vanguard’s VBAL and iShares’ XBAL returned about 15% in 2019 and 10.5% in 2020. Even a global conservative (40/60) portfolio returned about 12% in 2019 and 10% in 2020. This is highly unusual.

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