Despite the turbulence investors encountered throughout the year due to lingering problems in Europe and political wrangling in the US, asset class returns in 2012 turned out to be quite satisfactory. Bonds provided modest, low single-digit returns. Canadian stocks also provided modest, high single-digit returns. Foreign stocks had a banner year with returns from the United States, Developed Markets excluding North America and Emerging Markets all in the mid-teens despite the Canadian dollar appreciating modestly against the US Dollar.

REITs had another fantastic year returning 17 percent and extending the 24 percent, 22 percent and 55 percent win streak of the pervious years. One wonders how long the good times are going to last.

Asset Class 2012 Returns
CAD/USD 2.21%
DEX Universe Bond Index 3.60%
DEX Short Term Bond Index 2.01%
DEX Real Return Bond Index 2.85%
Canadian REITs 16.97%
   
TSX 60 8.07%
TSX Composite 7.19%
   
S&P 500 (in CAD) 13.49%
MSCI EAFE (in CAD) 14.78%
MSCI Emerging Markets (in CAD) 15.66%

Asset Class Returns for 2012

If you are interested in asset class returns for previous years, Norbert Schlenker of Libra Investments maintains a spreadsheet of total returns for various asset classes going back to 1970.

Sources: Bank of Canada, PC Bond Analytics, MSCI Barra and S&P Dow Jones Indices.

PS: Note that percentage returns are inclusive of dividend or interest or distributions.

This article has 22 comments

  1. I think some of your tags are broken…

  2. As a comment on the actual returns… this reminds me of some comments I saw to the effect that there is no sense in buying international equity because international markets are highly correlated. In the short run, returns may be highly correlated (days, weeks), but over the longer term, the correlation is weaker.

    • I’ve fixed the tags, I think. Thanks Andrew.

      I agree that longer term returns are not correlated. Even short-term returns are not perfectly correlated for those who take currency risk. When stocks underwent the downturn in 2008-09, the CAD dropped in value cushioning the fall in foreign stocks.

  3. I’m disappointed by how much the prices of the EAFE and S&P 500 indexes have risen. I was hoping the news would contain the prices more.

    We don’t track REITs yet but probably will start in the next year, so I’m not sure what’s normal for them. The iShares ETF shows a 12-month distribution yield of 4.3% and a P/E ratio of 7.2, better than any of the equity indexes. I’m guessing they trade at a somewhat higher yield than regular companies due to their restrictive structure and business opportunities. They may not be overpriced now but 4 years ago was a much better time to buy!

    • I’m not sure p/e is appropriate for REITs. p/AFFO would be a more appropriate measure.

      While REITs appear elevated, I think it still has a place in a portfolio because of imperfect correlation with stocks.

      • That sounds like a better measure, unfortunately it’s not published quite as widely as the P/E.

        A little overvaluation isn’t necessarily a bad thing. You can expect lower returns until it’s corrected but in addition to the diversification there is the potential for the trend to keep going.

  4. While I don’t want to detract from the thesis of the post which I agree with, calculating returns based on arbitrary (Jan 1 YOY) fixed dates seems more and more senseless to me. No person, individual or institutional investor puts all their money in at the same time. Even if the monies have been in the market for some time, it really is the rate of return of each invested dollar that matters.

    I am starting to believe that one doesn’t have to consistently time the markets, just time them properly once and a while – in obvious disaster moments – that can result in real, significant returns. Once I have some free time (like when the boys turn 12 or something) I’ll do some portfolio modeling with purchases made only every few years during significant downturns. I won’t bet my money on this strategy yet, but I find that we are accumulating more and more cash in the portfolio.

  5. @ Sampson – if you ever do get around to modeling that scenario, of course the returns will be eye-popping. But you know that too without even doing the math.

    But, hindsight is 20/20. It is unclear how one would define a “significant” downturn, one which would justify a “buy” decision.…. if one embarked on such a strategy today, the markets could just as easily embark on a 15 year period of consistent 5% positive returns – leaving those who practice the “buy on the big dips” stamping impatiently and regretfully on the sidelines.

    I, along with countless others in history, have been tempted by the idea you put forward, but I just don’t think the dips are that obvious to spot in the heat of the moment.

  6. Hi there,

    I have a few questions regarding my own portfolio. I’m 31 years old with 2 kids (ages 1 and 4), with $19,000 invested in RRSP and about $5000 in RESP for a total of $24,000.

    My question is, am I better off having two seperate portfolio’s, one in each account? For example, 30% bond, 30% Cdn Index and 40% US index for RRSP,, and 30% Bond, 30% Cdn index and 40% US index?

    Or.. is it better to lump the $24000 into one portfolio?

    Thanks.

  7. Hard not to notice what happened during the Dot com bubble burst, 9/11, or 2009. If you miss those events, or don’t realize they are big dips, then you are in some trouble.

    I guess what I am starting to stop believing is the fear of ‘losing’ money to inflation. Keeping cash on hand seems wise, but there is so much hype about getting your money working for you. I don’t know if you follow the Canadianmoneyforum.com threads, but most inexperienced investors begin their posts with something about how they don’t want their money idle.

    Like you say, it is very clear how the returns will come out. Its a question of whether you have the fortitude when everyone else is scared out of their pants.

  8. The question is how beneficial would such a strategy be compared to the opportunity cost.

  9. Forward looking, there is no answer to that question. :-)

  10. @Sampson: I don’t know if you’ve read The Intelligent Investor, in which Graham recommends something along the lines you are suggesting. i.e. keeping the bond/stock allocation anywhere between 25/75 to 75/25. When stock levels are elevated, Graham recommends going for a higher allocation to bonds and to go for high stock allocation when levels are depressed. The question is whether an investor is confident that tactical changes works out on average for them. Otherwise, it is best to stick to a strategic asset allocation.

    • Ibbotson did a near-40 year back-dated analysis on the value of precious metals in a portfolio.
      He found that allocating 7-16% of a portfolio to precious metals (SPMI), reduced volatility and increased rate of return.

      There is also Harry Browne’s ‘Permanent Portfolio’ to consider if you enjoy less risk and more return than with a stock/bond only portfolio.

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  12. Great post. I think the low interest rates on bonds are catching up to the returns. Graham also recommended comparing the earnings yield of stocks to the bond yields, and these continue to move in favour of stocks. With P/E of the indexes around 15-16, and earnings yield of about 6.5%, there is nearly a 5% advantage over the 10 year government bond. If anything, it seems like you’d be better off keeping your bond allocation in cash or a high interest savings account, such that you can rebalance into stocks if there are any major market drops.

  13. Reits really did great last year. I’m a big fan of them since they tend to be high dividend payers.

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  15. Total return spreadsheet link isn’t correct (missing a dash).
    Should be: http://libra-investments.com/Total-returns.xls

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