BlackRock, Inc. CEO Larry Fink stated in June that retirement savers should be happy with 4% returns for the foreseeable future. I’m sure many investors scoffed at the comment given that BlackRock’s own research suggests a diversified portfolio consisting of 65% equities and 35% fixed income has delivered an average annual return of 7.4% over the past 20 years.
It’s got to be hard for Canadian investors to be negative about the markets considering how well the TSX has performed in 2016, but the reality is the index’s 11.5% year-to-date return, in my opinion, is little more than a dead-cat bounce. In fact, now is a good time to temper one’s expectations—as Fink has already advised—because double-digit returns are a thing of the past.
How do I know that Teck Resources Ltd. (TSX:TCK.B)(NYSE:TCK) doesn’t have more gas in the tank after gaining 283% so far in 2016? I don’t. But here’s what I do know.
Investor expectations, especially in the U.S., are way too high given an almost uninterrupted eight-year bull market. A recent study by Schroders of 20,000 investors around the world found that the average individual expects an annual return of 9.1%, 530 basis points higher than the average stock yield on a global basis. Millennials have the highest of hopes: globally, they expect an annual return of 10.2%, while 20% of this cohort want 15% or more from their investments. Good luck to them.
For those retail investors who have advisors, you can rest a little easier knowing that about half of the advisors surveyed have their feet planted on terra firma, expecting annual returns between 2% and 5%, right around Fink’s short-term annual estimate.
Investors need to forget about double-digit returns in this low interest rate environment because the risk/reward ratio simply isn’t there.
Just look at the performance of two of Canada’s biggest pension plans so far in 2016 and you should immediately realize that hitting home runs is currently out of the question.
Caisse de dépôt et placement du Québec announced last week that it generated a 2% return on its $255 billion in assets under management in the first six months of 2016, 70 basis points higher than its benchmark, but well below its 9.2% average annual return over the past five years.
That’s clue number one.
Clue number two is courtesy of the Canadian Pension Plan Fund, which, according to my calculation, generated a return of 0% in the first six months of 2016, significantly below its five-year 10.6% annualized rate of return.
Are you getting the picture yet?
If some of the best investment managers in the world can’t do more than 4% on an annualized basis, individual investors, skilled or otherwise, shouldn’t expect to outperform two of Canada’s best-run public pension funds.
If you haven’t adjusted your financial plan to reflect lower returns for the foreseeable future, you’d better, because you can kiss double-digit returns goodbye.