8-10-12% Investment Returns? Really?

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What Returns Can I Expect From My Canadian Mutual Funds?

February 1, 2019

Many hear about good returns that they are not experiencing from their own investments. We also hear from industry ‘experts’ that we shouldn’t expect more than 5, 6, or 7% for our Canadian mutual fund returns. Are there Canadian mutual funds that do better than this? Today we look at a few examples of high-performing Canadian mutual funds.

Today’s Download: The Financial Fitness Checklist

Welcome to the Simple Plan Podcast, our first podcast for 2019. I’m Brad MacBeth your host and today, we’re going to take a look at rates of return. What can I expect from some of my investments? I have a special download for you today, our free financial fitness checklist so if you’re wanting to get your finances in order, this is a great place to start. You can get that from our podcast home page, that’s at http://GetTheSimplePlan.com/podcast.

I want to address a question today that I see a lot in the online groups I participate in. The question is some variation on what kind of rates of return should I expect for my investments, am I getting what I should, is it good enough, etcetera, etcetera.

I want to start by saying there’s no single correct answer to this question and that it’s a controversial topic. For a lot of groups I participate in, people wonder when they hear things from people they respect and follow such as Dave Ramsey, when he says things like you should be able to get 10 to 12% rates of return on your actively managed mutual funds

So today, I’m simply going to show you some examples of Canadian mutual funds that are widely available and give you some idea of what kind of returns that they’re offering. We’re also going to take a look at a major stock index to see what kind of returns you might expect there.

Now, I’m going to start by wading into the controversy and saying that those who say that you can’t expect better than 5, 6 or 7% rate of return from your mutual funds are just wrong on the evidence. Now, let me clarify that. They may be absolutely right based on your level of risk tolerance. So, if you are looking at minimizing or reducing risk, it’s possible that the investment expectations that you have should be properly set around 4, 5, 6 or 7%. However, if you are looking for better rates of return and willing to embrace the higher risk that comes from something such as an all equities portfolio, you should be able to expect better rates of return.

And I want to caution you that everything I say here today is not investment advice. We only provide that in a direct relationship with individual clients and we tailor that kind of advice to their very specific and nuanced needs based on their unique situations. We can’t present something like that in a presentation like this. These are simply illustrations and examples to stimulate thinking and conversation. Please, don’t go out and make investment decisions about the rest of your life based on what you’re about to hear and see.

Now, let’s look first here at a few currently available Canadian mutual funds available from some of the larger mutual fund companies. Let’s start by looking at a widely available Canadian mutual fund; Dynamic Power American Growth. This fund invests in large publicly traded American companies. The period illustrated is the maximum period available. In this case, 15 years from February 2004 to the end of January 2019. You can see that they’ve conveniently illustrated that $10,000 invested at the beginning of this period would have grown to $75,039 over that time frame. Over 15 years, that is a 14.24% rate of return.

Looking at the performance chart for this fund over 10 years, we see the $10,000 would have grown to $68,064. The fund returned an average annual 21.14% while the S&P 500, the benchmark for this fund returned only 5.67% average over the same period. Funds in the same category, this fund beat by 8.24% ranking first in the category for this fund, the first percentile so 99% finished behind it and there are 240 funds in this category. Looking at further profile information, we see that the fund is comprised primarily of large companies, 97% of which are publicly traded US equities. So, for you Dave Ramsey followers out there, this fund would fit nicely in one of his four categories.

Let’s look at another fund, the Fidelity Small Cap America. The maximum period from October 2000 to January 30th, 2019. This is another Dave Ramsey category type fund often called aggressive growth. This would have grown $10,000 to $54,880 over the 19-year period which is a return of 9.78% over that time frame.

Looking at the performance chart for this fund, we see that over a 10-year period $10,000 would have grown to $60,549. The fund returned 19.73% average annual return while the benchmark category only returned 4.67%. This made the fund perform an average of 6.44% over the other funds in the category ranking at number one percentile, 99% below it and there are 53 funds over that same time period in that category.

Now, let’s turn to what is arguably the most well-known fund in the history of mutual funds, the Templeton Growth Fund. Look at this chart, maximum period November 1954 to January 30th, 2019. $10,000 invested in 1954 would have grown to $10 million 377,972 by the end of January 2019. That is an average annualized rate of return of 11.27% over 65 years. That defines long term performance.

Looking a little closer, we see this fund is 100% equities. Geographically, it is a global fund 30% US and it is well diversified across many economic sectors. Finally, it’s also diversified among large cap, medium cap and smaller size companies. All in all, the kind of diversification that people like Dave Ramsey advocate. You’ll notice from Templeton’s own marketing piece that it has endured and prevailed with many ups and downs over the 65 years of its existence across many different political and economic events.

Now, if you prefer the lowest fee alternatives, you can go with index investing. Here for example is what the S&P 500 has done over the last 66 years in a chart form. You can probably get this at about a quarter of a point for management fee. Over the last 60 years, it’s done 9.85%. Since 1979 the past 40 years, 11.5%. Over 25 years, 9.22% since 1979 and finally, over the last 10 years, it has averaged 14.2%.

Lastly, if you like a solution that combines some support, some management, some oversight but gets you some lower fees, this is the type of portfolio that we use with many of our clients. In this particular portfolio especially for the Dave Ramsey folks, you get the kind of diversification that he recommends. We’ve got 32% US, 24% Canadian and about 24% international and for each of those regions, combined growth and aggressive growth types of stocks.

So, we’ve looked at a bunch of mutual funds. Canadian mutual funds well-known, widely available in the Canadian investment marketplace with returns ranging from a little over 9% all the way up to 19% and over. And you’ve seen an example of the largest stock index in the world and the types of returns you can experience there. You’ve also seen what types of returns one of the longest running and oldest most respected mutual funds in Canada has been delivering for many, many years.

I hope this helps you in your thinking about what kinds of rates of mutual fund returns you might expect given your situation. Of course, as I said, please don’t go out and make any kind of investment decisions based on what you’ve seen here. You really need to put together a proper and comprehensive financial plan and an investment plan and strategy with the discipline to follow that.

You can do that with a financial professional, which we highly recommend, or you can do it on your own, which if you’re prepared to put in the time to understand it, that’s good too. In either case, it’s always you that needs to be managing your finances. You’re the one that’s going to live in your future with the results and consequences of the investment planning choices that you make today.

I hope this has been helpful. Thanks for listening today, don’t forget you can download your financial fitness checklist at http://GetTheSimplePlan.com/podcast. Start your financial fitness journey today, we’re here to help you. Thanks very much for taking the time to listen today.