Terry Wright, CIM

Portfolio Manager
Investment Advisor
www.terrywright.ca
Real Returns of Stocks vs. Bonds/Cash for
Long Term Investors May 12
Many investors today are focusing on nominal returns, instead of
focusing on real returns (after inflation). For example, 5 year GICs
are yielding around 3%. Taking into account an average marginal
tax rate of 30%, and an inflation rate of 3.5%, an investor will lose -
1.4% in purchasing power each year, or -7% in real terms in 5 years.
Most investors dont consider this, and instead focus on getting a
guaranteed 3% yield per year. For investors with a long term time
horizon, this can be detrimental to their retirement and significantly
increases their risks of outliving their money.
What does this all mean for the average investor? Protecting your
purchasing power (compared to protecting your principal) should be
the focus of every long-term investor. With an inflation rate of 3.5%,
your purchasing power will be cut in half every 20 years, and with
government bonds currently having a negative real yield, focusing on
growth and preservation of inflation adjusted capital is essential in
todays environment.
Jeremy Siegel (famed finance professor from the Wharton School of
Business) has done extensive research, looking at over 200 years of
past data on stock and bond markets. From his research, he has
shown that over long periods of time, investment returns on stocks
not only surpassed those of long term bonds and cash, but are far
safer and more predictable when inflation is taken into account.
Even during large negative market shocks such as the 1929 stock
market crash, or the 2000 internet bubble, stocks still out-performed
bonds and cash for investors with a long-term time horizon.
Long-term returns in equities have dominated all other assets and
have shown incredible long-term stability after inflation. The
compounded annual real return of stocks (return minus inflation) over
the past 200 years was 6.8%*. This data holds true regardless of
how significant inflation has been. From 1802 to the fall of the gold
standard in the early 1930s, there was barely any inflation. But
since then the government has had the ability to print money and
there has been constant inflation since (sometimes significant hyper-
inflation). Yet through-out all of this time, stocks have continued to
produce stable real returns for long-term investors.
One of the worst periods for stocks was from 1966 to 1981 when
Continued
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Email: terry@terrywright.ca
Fee Structure
Annual fee based on the total
portfolios assets under management,
paid monthly from the cash balance
from each account.

<
$125,000
1.7% annual fee

$125,000 - $500,000
1.6% annual fee

$500,000 - $1,000,000
1.35% annual fee

$1,000,000 - $5,000,000
1.1% annual fee

$5,000,000 +

negotiable annual fee
Park Place, 3300 - 666 Burrard St., Vancouver, BC V6C 2X8
REVENUE PORTFOLIO

80% - Fixed Income

20% - Equities
You want to preserve your capital or
establish a periodic income to finance
ongoing expenses. You do not find the
stock market very attractive because of its
volatility, but you are not against the idea of
investing a small part of your portfolio in
stocks, mainly to counteract the effects of
inflation. Your tolerance for risk is very low.
CONSERVATIVE PORTFOLIO

65% - Fixed Income

35% - Equities
On the whole, you want your portfolio
invested in fixed-income securities.
Although you can tolerate limited volatility to
ensure that your assets will grow, you prefer
having a portfolio consisting mainly of fixed-
income investments for reasons of stability.
Your tolerance for risk is low.
BALANCED PORTFOLIO

50% - Fixed Income

50% - Equities
You give equal weight to income & capital
growth. You can tolerate moderate volatility
to ensure growth of your capital, but you
prefer having a portfolio with significant
exposure to fixed-income securities for
reasons of stability. Your tolerance for risk is
average.
GROWTH PORTFOLIO

35% - Fixed Income

65% - Equities
Your main goal is capital growth. Although
you can tolerate greater volatility in order to
increase the value of your assets, you are
not prepared to invest your entire portfolio in
stocks. Your tolerance for risk is high.
MAXIMUM GROWTH PORTFOLIO

20% - Fixed Income

80% - Equities
You want to maximize the eventual return
on your capital by investing all or most of
your portfolio in the stock market. In doing
so, you accept higher volatility of your
investment returns in the hope that these
returns will ultimately be higher. Your
tolerance for risk is very high
the compounded annual real return for US stocks was -0.4%.
However this was still better than the -4.2% compounded annual
real returns produced by long-term bonds.* Equities have fully
compensated long-term, patient investors for increases in the cost
of living since World War II; unfortunately, the same cannot be said
for bonds and the risks are even higher today with interest rates so
low.
Stocks are unquestionably riskier than bonds or cash over 1 and 2
year periods. However, looking at 5 year rolling time frames since
1802, the worst 5 year real return for stocks was -11%
compounded annually per year, which was only slightly worse that
the worst 5 year performance of bonds (-10.8%). Increasing the
time horizon to 10 year periods, the worst performance of stocks (-
4.1%) which was better than the worst performance of long term
bonds (-5.4%) and cash (-5.1%). Lastly, there has never been a
17 year period where investors in stocks have lost money after
inflation. The worst 20 year period real return for stocks,
was1% compounded annually while the worst 20 year period for
bonds was -3.1% and -3.0% for cash (compounded annually, after
inflation).*
Going over 200+ years of data, it has been proven that stocks
outperform bonds around 60% of the time over all 1 year periods,
almost 70% of the time over all 5 year periods, over 80% of the
time over all 10 year periods, and over 99% of the time over all 30
year periods.*
A common mistake that investors often make is underestimating
their holding period. Although it may appear riskier to invest in
stocks rather than in bonds or cash over long periods of time,
precisely the opposite is true. The safest long-term investment for
the preservation of purchasing power has clearly been shown to be
a diversified portfolio of equities.
I have prepared this commentary to give you my thoughts on
various financial aspects and considerations. This commentary
reflects my opinions alone, and may not reflect the views of
National Bank Financial Group. In expressing these opinions, I
bring my best judgment and professional experience from the
perspective of someone who surveys a broad range of
investments. Therefore, this report should be viewed as a reflection
of my informed opinions rather than analyses produced by the
Research Department of National Bank Financial.
If you would like to discuss this or any other financial matters, feel
free to contact me.
Terry Wright, CIM Portfolio Manager & Investment Advisor
*Stocks for the Long-Run Jeremy Siegel
National Bank Financial is an indirect wholly owned subsidiary of the National Bank of Canada. National Bank of Canada is a publicly traded company whose shares are listed on the
Canadian stock exchange (NA TSX). Terry Wright an Investment Advisor with National Bank Financial prepared this information. The particulars contained herein were obtained from
sources that we believe reliable, but are not guaranteed and may be incomplete. The opinions expressed herein do not necessary reflect those of National Bank Financial. National Bank
Financial and/or its officers, directors, representatives, and associates may have a position in the securities mentioned herein and may make purchases and/or sales of these securities
from time to time in the open market or otherwise. The securities mentioned in this article are not necessarily suitable to all type of investors and are not to be construed as
recommendations. Please consult your investment advisor. The opinions expressed are based upon our analysis & are not to be construed as a solicitation or offer to buy or sell a security.
National Bank Financial is a member of the Canadian Investor Protection Fund.