Many investors are referring to the poor returns in the past 10 years as the “lost decade”. But, as you can see below, with six out of eight asset classes showing positive returns in the past ten years, whether the decade was lost or not depends on who you ask. Without a doubt, Canadian investors have earned poor returns in US and EAFE equities. The poor returns in these markets were compounded by the appreciation in the Canadian dollar and if you take inflation into account, the real returns are even worse.

Cash: 3.17%
Short Canadian Bonds: 5.74%
Real-Return Bonds: 8.92%
TSX Composite: 5.61%
S&P 500: -4.04%
MSCI EAFE: -1.59%
MSCI Emerging Markets: 6.68%
Canadian REITs*: 6.1%
Inflation*: 2.2%

Unless you started the past decade as an aggressive investor with a high exposure to US and EAFE stocks, you earned real returns that, albeit modest, are positive. Even the Sleepy Portfolio, which has a 45% combined allocation to US and EAFE markets, managed to return 2.4% over the past ten years (assuming yearly rebalancing). But very few investors tend to put all their money to work precisely at the start of 2000 and stop investing thereafter. An investor adding the same amount to the Sleepy Portfolio at the start of every year from 2000 to 2009 would have earned 3.6% on their investments (computed by the internal rate of return method). Compared to the roaring 1980s and 1990s, these numbers are rather modest but a 1.4% real return is still better than nothing.

* – Approximate 10-year annualized returns

This article has 18 comments

  1. Confirms how crazy the “buy-and-hold” mentality is… There are always buying opportunities, but it’s important to know when to sell too and put those profits in your pocket. It’s surprising not to see a single 10% or greater asset class.

    Keep your eyes on opportunities! Oh, and yes, any profit is better than a loss.

  2. Useful figures CC– thank you.

    It’s funny how the financial advisors keep pushing investment and retirement scenarios based on 7% plus annual returns. As William Bernstein shows in the “Four Pillars of Investing”, a bad decade (or two) in the markets can put a major crimp in the best laid plans of most investors.

    Yes, DS, probably a good time to take some of those profits off the table and wait for the pull-back.

  3. Doctor Stock and BC Doc – your comments confuse me.

    You guys sound like you are fans of the CC site and would therefore, I presume, be fans of the passive style of index investing.

    Yet at the same time you are saying you need to actively trade your portfolio.

    I find many readers of this site think that indexing their money is the best way to go but then they feel they need to trade their indexes actively.

    Other than a very disciplined rebalancing strategy (like the one CC uses in his sleepy portfolio), your strategy (ies) are working against each other.

    Doctor Stock – you say this confirms “how crazy the “buy-and-hold” mentality is” – buy and hold IS passive investing.

    Am I the only one seeing this? CC, care to weigh in? Or can Doctor Stock and BC Doc maybe address my comments.

  4. Very Eye-opening.

    I have only been tracking my returns (instead of relying on the bank generated ones) for a couple of years now but really would not have guessed the market indices were doing so poorly. While this particular 10 years has been bad, it was largely due to a single bear market event. Had you done this evaluation in the summer of 2007, things would be significantly different.

    If we use Mar 8, 2009 as our next ‘decade’, I’ll bet (or intelligently allocate) my money that the returns from equities will outpace cash or bonds.

    What I’m surprised the most about is that cash returns outpaced inflation. I thought that was the fundamental reason for not socking away income under the bed… Maybe I have to rethink this all and buy a bigger bed.

  5. Canadian Capitalist

    @Doctor Stock: Perhaps “buy-and-hold” is crazy strategy for your average DIY investor. It’s just that the alternatives tend to be crazier. Of course, starting valuations always matter and one reason why returns for all equities are so modest is because valuation was sky high at the start of the time period.

    @B. C. Doc: Unless a portfolio is off-balance, it is hard to justify selling stocks at this point, even with a 60% or so bounce off the bottom. TSX valuations seem reasonable, not outrageously excessive.

  6. I take it these are aggregate returns, not annual. One can forgive the confusion, as one would expect these sorts of meagre returns on an annual, not decade, basis. A lost decade indeed!

    Re: passivity, I believe you can be passive in diversification and passive in timing (i.e. do not try to time the market). Dr. Stock seems to favour the former but not the latter. There is no discontinuity.

    I happen to be of the same view. When tech stocks were selling for absolutely mind-boggling valuations during the tech boom, you would have been foolish to hold those equities. Unfortunately, it’s usually much harder to spot irrational exuberance (or excessive fear at the trough) than during the tech boom.

    Even Graham, IIRC, advocated an equity weighting of between 25-75% depending on individual circumstances and market conditions. He didn’t like market timing, but he hated buying expensive equities even more. I’m of the same opinion.

  7. Rob:

    I think CC brings some great info. forward and I appreciate a balanced perspective; nevertheless, I have my own style which limits my risk and creates potential for gains. Generally speaking, I’m not passive… but that doesn’t mean one shouldn’t listen and learn from others.


  8. I will make a comment regarding index investing. Passive (“buy and hold”) and index investing are not one and the same thing. Even Gragam would not endorse “buy and hold”. His philosphy was to sell when an asset becomes too expensive – not hold on it no matter what. Problem with index investing is that you can’t easily figure out the intrinsic value. For example, how do you assess intrinsic value of the S&P500? One way is looking into historical ratios, interest rates etc. However historic ratios carry a significant statistical error due to a limited time history of the stock market. So this is why index investing is inherently problematic as an investment tool – you never know when you hold an overvalued asset. With individual stocks it’s a different story. Looking into fundamentals you can see if the company is over or under valued, healthy or a bad choice etc. I thik a well diversified portfolio of individual stocks and perhaps index ETF as a part of the portfolio is a much better tool then just index investing.

  9. Canadian Capitalist

    @MJ: The returns posted here are not aggregate. They are annualized returns.

    @Basil2: It is much easier to value index levels than it to value stocks. You can easily estimate expected returns from stocks and compare it to bonds. The problem is this method isn’t foolproof. Around 2000, it was clear that stocks were overvalued (Warren Buffett famously wrote a Fortune article explaining why) but it wasn’t so in 2007 or 2008. I’ve written many posts myself that investors should have modest expectations from stocks before the downturn.

  10. CC, assume that we can value any asset (including index) one way or another. Responding to the Buy and hold discussion I think B&H is not a way to go with investing. It’s a potentially disastrous approach to one’s capital given that indexes are susceptible to bubbles (remember Internet crash). I’m not here advocating frequent trading or anyting like that. What I mean is that due diligence should be exercised and decisions should be made based on reality. It’s dangerous to ignore changing fundamentals and B&H approach to investing sort of goes the route of least resistance of not doing anything in face of the changing reality. If one doesn’t want to spend time doing intrinsic value analysis and time the market appropriately I think that it’s much more sensible to go with long-term government bonds or GICs.

  11. Does anyone have an opinion on bond ETFs, i.e. which might be the best? I have yet to perform my DD, but have the following available to me:

    XBB – Canadian Bond Market Index
    XRB – Canadian Real Return Bond Index
    XSB – Short Bond Index
    BND – Vanguard Total Bond Market


  12. Basil2, while indexes are susceptible to bubbles, so inherently are the underlying individual stocks. And while due diligence is a good thing and necessary, there are factors to consider in the B&H strategy. What is the investing time frame? Markets always go up in the long term because there will always be innovation and growth. How often are you investing? Contributions at regular intervals will flatten out the dips and valleys in the long run. What is your risk tolerance? Those who are lose sleep easily then may be best going the long term GIC/Gov Bonds route. However, you’re not gaining much ground on inflation.

    The problem with your conclusion is that you’re assuming people can time the markets well. Emotions aside, can you tell me anyone was prepared for the 40% drop all stocks took as a result of the mortgage collapse? Even if you saw it coming (which would make you better than most analysts), when should you have gotten out? A year before, 6 months before, a week before – assuming you knew when it would hit of course.

    How about this gold bubble developing? When should you start selling stocks that are tied to gold? It will inevitably crash, the question becomes can you time when? And can you emotionally let go of stocks that are flying hot? Greed will always say hold on just a little longer.

    A further thought. If you could find the best managed stocks out there, you wouldn’t be the only one. So, others would be clammering for the stock, driving up the price, resulting in an a premium price that results in an average return…the same return you’d find in an index over the long run.

    B&H with consistent contributions is the only way to avoid the stress and the extra analysis.

  13. Canadian Capitalist

    @Basil: I’m not entirely unsympathetic to paying attention to valuations when buying. For instance, I avoided Emerging Markets and REITs entirely for 2 years until prices became more reasonable to buy (I started buying early but that is a different story). However, once I buy in, I’m in for the long-term. I don’t sell even if valuations seem stretched because it becomes a game of constantly double guessing the markets.

    A well-thought out asset allocation strategy helps because if an asset class becomes bubblish, the asset allocation dictates putting money in trailing asset classes. If that’s not enough, the policy forces us to take some profits from the hot asset class.

    @Matt: You may want to check out posts on bonds in the blog archive:

    Quickly though, I use short-term bonds (XSB) for the bond component. I don’t hold XRB. When prices are attractive, I intend to hold real-return bonds directly. I don’t buy foreign bond funds because they introduce foreign exchange risk in what is supposed to be a “safe” holding.

  14. Thanks CC, I appreciate the reference and the quick run down.

  15. “Doctor Stock and BC Doc – your comments confuse me.

    Yet at the same time you are saying you need to actively trade your portfolio.”

    Hi Rob– thanks for your question.

    No, I’m definitely not actively trading. I went completely into cash in my investment accounts between January and July 2008 having a sense that a major correction was coming (my educational background is political science, my career is in healthcare)– previously they had been held in mutual funds with my professional association. There they did fine, but I was at the point dollar-wise where I wanted to look after my investments myself and to go the index ETF route.

    During October, November, and December of 2008, I bought like crazy averaging in over successive days. My last purchase was in February of 2009 except for a bond fund purchase a week ago.

    My equity ETFs are divided between Canadian, US, and International funds and REITs. The problem now is that some of my ETFs have done too well since the March 2009 market nadir– my Vanguard Emerging Markets ETF is now up 70% over cost. Selling off some a portion of my stars like this Emerging Market ETF isn’t trading– it’s rebalancing. The sales proceeds then get plowed back into one of my “under-performers” which I am presently underweight in.

    As a former political science student, I can’t help but look at the macro side of the political economy. In late 2008/early 2009, equities were a screaming bargain. Now, I don’t think there are any great bargains out there. The equity side of my portfolio had definitely gotten heavy with this past year’s rally– for me it’s looking like a good time to start concentrating on the bond-side of my portfolio.


    BC Doc

  16. Matt–

    Have a look at the Claymore 1-5 year bond ladders (CLF and CBO)– one holds Canadian government bonds in a “ladder”, the other Canadian corporate bonds. I hold CLF in my portfolio but not CBO. The yield on CBO is only 1/2 percent higher than CLF– for me personally, not worth the extra risk. I also hold some XSB and AGG (on the US side)– I have roots on both sides of the border so the US currency risk isn’t a huge concern.

    In general, for bonds, think short–i.e. less than five year maturity– to avoid undue interest rate risk.

  17. The last decade was more of a a correction or the overinflated values of the 1990’s and early 2000’s. Way too much speculation going on in the markets based on nothing concrete.

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