As investors approach the new year, they dream of profits to come and the risks that might accompany them. When pondering the future, I like to set my expectations by looking to the past, because it offers clues to the rewards, and risks, associated with investing in stocks. Today I’ll focus on the Canadian stock market, as represented by the S&P/TSX Composite Index, and start with its happier moments, which have predominated over the long term.
The market index produced average annual total returns of 9.2 per cent from the end of January, 1956, through to the end of November, 2024. The gains aren’t too far off the commonly expected long-term annual growth rate of 10 per cent. But the happy 9.2-per-cent annual returns do not, alas, account for inflation, which is the propensity for the purchasing power of the dollar to decline over time. Whilewas modest and largely ignored by investors in recent decades, it resurfaced with a vengeance after the COVID-19 pandemic struck in 2020. Adjusting for inflation, the market index gained an average of 5.4 per cent annually from the end of January, 1956, through to the end of November, 2024, which is still mighty fine all things considered. (The returns herein are based on monthly data from Bloomberg and include dividend reinvestment but not fund fees, taxes, commissions or other trading costs. The figures that follow are adjusted for inflation.) Most people aren’t lucky enough to invest for 70 years, but the market index also produced strong returns over shorter periods that reflect the experience of many investors. For instance, the accompanying graph shows the market’s average annual returns over rolling 30-year periods. You can see that the market’s annual return rate varied depending on the 30-year period in question. Its lowest inflation-adjusted return rate was 3.3 per cent over the 30 years to the end of January, 1995. Its top rate was 8.4 per cent over the 30 years to the end of October, 200
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