Historical Return Tool
Tool: Historical Return
To access the tool, simply click the link above. It leads to a macro-free Excel file. For more information on how to use the file, see below.
Analysis :
Stock market returns can be analyzed in multiple ways. I invite you to open the file and review the Compilation Source tab. It contains a large dataset covering the period from 1928 to 2023, with over 1,000 data points. In this tab, the figures on the left represent unadjusted annual returns (i). The figures on the right are adjusted for inflation (g) using the following formula: Adjusted return = (1 + i) / (1 + g) − 1
Faced with this vast amount of information, it is easy to get lost. To simplify the analysis, we can map returns into two broad categories: Equities (ownership of a share in a company) and Bonds (ownership of a company’s debt). In addition, media-driven market chaos tends to fade over time. Let us therefore consider results over multiple time horizons: 1 year, 2 years, … 10 years, and 20 years.
Tables of Returns in Today’s Dollars
The darker the shading, the closer the return is to the median (i.e., 50% of outcomes are above it and 50% are below).
Over a one-year period, returns are chaotic. 50% of the time, they fall between −4% and +20% per year. Over two years, more than 75% of historical returns are positive. Over three years, 75% of returns outperform bonds. Over the long term, in 50% of the observed periods, returns range between 5% and 8% in today’s dollars. Over one-year periods, 10% of returns fall below −21%.
When looking at the bond universe, returns are less volatile, but also lower. Bonds do not guarantee positive returns: 31% of one-year periods have been negative. Even over the long term, 25% of periods show negative results. Over long horizons, in 50% of observed periods, bond returns fall between 0% and 5% in today’s dollars.
Over one-year periods, as well as over five years and longer, 90% of bond returns are lower than the median equity return. Ultimately, bonds are not purchased to maximize returns, but to reduce the short-term volatility of equities.
Inflation
It is easier to analyze everything in today’s dollars. We have a good sense of what one dollar can buy today, and adjusting returns for inflation makes the numbers much easier to understand.
Since 1992, inflation in Canada has averaged around 2% per year. Since then, the Bank of Canada has aimed to keep inflation between 1% and 3%. Between 1946 and 1991, inflation was much higher, averaging about 5%, with some years experiencing inflation above 10%. Between 1970 and 1980, the Bank of Canada focused on bringing inflation under control and ultimately succeeded by the late 1980s. Before 1946, inflation was generally low, with some periods of negative inflation. Prior to the world wars, Canada carried little debt. With low levels of debt, the Bank of Canada had limited influence over inflation.
If you earn a 5% return in an environment with 5% inflation, your purchasing power does not increase. If inflation is 0%, a 5% return allows you to buy 5% more goods and services. In an inflation environment between 1% and 3%, protecting purchasing power requires generating returns. In that sense, invested money helps protect against inflation.
- Equities help protect against inflation. An equity represents ownership in a company. With 2% inflation, prices in the economy tend to rise by about 2%, and over time company revenues and returns should also increase. This is not automatic or perfectly direct, but the relationship is directionally true.
- Bonds also help protect against inflation. A bond is essentially a loan. If inflation is expected to be 2%, lenders will typically demand about 2% more return before lending money. Again, this relationship is not automatic or exact, but it is directionally true.
In both cases, it is inflation expectations that influence expected returns. Today, with the central bank communicating an inflation target between 1% and 3%, investors tend to anticipate equity and bond returns about 2% higher than in a world without inflation expectations. Historically, when inflation expectations were closer to 5%, nominal returns were also higher. By adjusting returns for inflation, it becomes much easier to compare different historical periods.
Various asset classes, bonds, and other investments.
The file contains statistics for several types of financial products. Below, you will find a definition of each one, along with selected return percentiles expressed in today’s dollars over one-year and twenty-year periods.The 25th percentile means that 25% of historical returns fall below this level, while 75% are above it. For the twenty-year periods, I use rolling investment windows, such as returns from 1930 to 1949, 1931 to 1950, … up to 2000 to 2019. This approach helps illustrate short-term and long-term behavior, as well as probable and less probable outcomes.
- Canadian equities are relatively concentrated in a few key sectors, such as banks, energy, and mining. Investing in Canada supports the local economy. In addition, it helps reduce part of the risk associated with our currency, the Canadian dollar. If the value of the Canadian dollar rises, Canadian equities allow you to purchase more.
- U.S. equities have historically delivered higher returns and benefit from much broader sector diversification. The returns presented here account for the impact of currency conversion into Canadian dollars. This helps reduce the other side of currency risk. If the Canadian dollar weakens, U.S. equities allow you to purchase more.
A short detour on the Canadian dollar:
- During the disastrous year of 2008, U.S. equities declined by −36.6% in U.S. dollars. In Canadian dollars, the decline was only −21.2%. This difference was driven by the sharp depreciation of the Canadian dollar in 2008, which moved from about 1 CAD = 1.01 USD at the beginning of the year to 1 CAD = 0.82 USD by the end of the year.
- Before 1969, exchange rates were fixed by governments, which largely eliminated currency risk. Since 1970, exchange rates have been floating. Between 1970 and 2023, currency movements have been relatively stable: the 25th and 75th percentiles are −5.4% and 2.8%, respectively, with a median of 0.4%.
- Since 1965, we have data on equities from developed markets such as Europe, Japan, and Australia, whose historical returns are comparable to those of Canada.
- Since 2007, we also have data on emerging markets, although the available history is much shorter.
- “90-day T-Bills” are very short-term government bonds. They are often described as “risk-free.” However, inflation frequently erodes their real returns entirely.
- “Bond Universe” represents the full range of available bonds. If one wishes to include bonds in a portfolio, this category alone can be sufficient. It includes both short- and long-term bonds, as well as government and corporate issues.
- Long-term bonds in this analysis are based on the returns of 10-year U.S. government T-Bonds. They are particularly useful because of their long duration. A long duration means that payments extend over a long period of time, with interest-rate sensitivity similar to that of an annuity.
- The corporate bonds considered are rated BAA+. A company with a BAA+ rating has a low probability of default. These bonds offer relatively strong returns compared to other bonds, but they also tend to move more in the same direction as equities.
- U.S. real estate returns since 1928 are presented in Canadian dollars. Recall that inflation includes, among other things, increases in housing costs.
- Gold is a very volatile asset. Over a one-year period, it experienced the best return in my dataset at 115.9%, as well as one of the worst one-year returns at −35.4%.
- I also include U.S. equity returns expressed in U.S. dollars. Since the U.S. dollar has remained relatively stable over time, these returns are close to those expressed in Canadian dollars.
- Finally, I have added the returns of a mixed portfolio composed of 50% Canadian equities and 50% U.S. equities, expressed in Canadian dollars.
Scenarios - tab EN
The tool can also simulate annual investments that increase by inflation plus 1%, to reflect salary growth and therefore higher savings over time.
You can also simulate the impact of a change in asset allocation after a certain number of years and/or model annual withdrawals of x% starting in a future year (Scenario 1: 50% US/50% CAN; Scenario 2: 50% US/50% CAN for 5 years and then 60% Universe Bonds/20% US/20% CAN)
How to use the tool:
- Save the file to your computer.
- Go to EN or FR tab.
Tabs:
- EN et FR tabs Tool to view statistics
- Graph tab Some charts on returns
- Compilation Source tab Historical return
- Calc-> tabs (to the right of Calc)
- Retour positif tab Checks if returns are positive after 1-5 years
- Oblig vs Actions tab Compares which would have performed better (bonds, stocks or a mix) and evaluates the risk of financial ruin
- Retour apres x ans sans IPC tab Shows real returns (net of inflation)
- Retour mix apres x ans sans IPC tab Shows net of inflation returns for mixed asset portfolios (ie : impact du rebalancing or lack of)
- Compile +1 tab Helps with calculations
- Reference tabs (tab to the right) - All publicly accessible:
- IPQF Data Source: Contains historical returns for various indexes.
- Libra Data Source: Another data source with additional indexes Some differences exist to IPQF. Due to IPQF's more frequent reviews, I tend to trust its data more. Copyright © Libra Investment Management Inc. 2005-2015. All rights reserved. Data herein may be reproduced only with attribution to the copyright holder and its sources.
- Damodaran Data Source: A professor of corporate finance at NYU Stern School of Business (http://www.damodaran.com) Offers many free historical series in USD going back to 1928!
- UStoCAN Dollar Data Source: Historical comparison table of the Canadien vs US dollar (1858-2005). Shows that the exchange rate was essentially 1:1 before 1970s.
- Robert Shiller Data Source Table : Contains some references including data from the BlackRock target date fund.
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