Canadian Returns

When I want to demonstrate something involving stock market returns, I usually turn to the U.S. markets 'cause info is more readily available.

Aah, but Norbert Schlenker at Libra Investments has collected info on (mostly) Canadian returns so ...

>So you thought you'd steal his stuff, eh?
Uh ... yes.

Anyway, here are some charts using his data

>What's "real" and what's not?
There's inflation to consider.
If you get a return of 5% and inflation for that year is 3%.
then the 5% ain't "real", is it?
In fact, your "real" return is more like 2%. (See real returns.)

Note that there are several ways that people calculate "real returns".
For example, here's something I found on a website:

As you can see, the author just subtracts the change in CPI (used to measure inflation) from the "nominal" money market return.

Then again, one can multiply the portfolio value at the start of a year by the increase in CPI for that year and compare to the portfolio at the end of the year.

For example:
You start a year with $1M.
Inflation (or the increase in CPI) for that year is 5%.
To break even, you should end the year with $1M * 1.05 = $1.05M.
Suppose you end the year with only $1.03M.
Your "real" return is $1.03M - $1.05 = -$0.02M (measured in dollars).
That's a -$0.02M/$1M = -2.0% return (as a percentage of original amount)
or -$0.02M/$1.03M = -1.9% return (as a percentage of final amount)

Then again, one can use (nominal - inflation)/(1+inflation)
... and that's what Norbert uses.

>Where's the chart of ...?
Again, from Norbert's website:

>So what are you gonna do with this data?
Uh ... I dunno. Maybe pick returns at random and see how long a portfolio would last if you withdraw 4% annualy, increasing with inflation and ...

>Please ... just do it!

"Safe" Withdrawal Rates

Suppose we start with a portfolio worth $1M.
The assets in the portfolio are chosen from Norbert's list.
We pick some allocation and rebalance yearly.
We withdraw, say 4% of $1M. That's $40K each year.
That withdrawal increases by the annual inflation.
How long would our portfolio last?

>I give up. How long?
That depends upon our allocation and our withdrawal percentage and ...

>Where's the spreadsheet?
What we'll do is select a year at random and the returns and inflation for that year, and apply it to our portfolio.

Then we'll repeat for, say 40 years (withdrawing each year our $40K, increasing with inflation) and see if our portfolio survived.

Then we'll do that again and again, a jillion times, and determine the percentage of times that our portfolio survived.

>Aha! Monte Carlo!
  And you'll proudly announce that an 85% survival rate is possible ...

Hardly. In order to make that claim I'd have to use this.

a Spreadsheet

Click on picture to download spreadsheet.

Note that the spreadsheet only uses asset data that goes back to 1970.
That's 36 years worth and the random selections are from these 36 annual returns.
P.S. It's now August, 2006