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The hardest job in investing these days is trying to eke out a decent return from a conservative portfolio.

Bonds and bond funds have slipped in price this year, even as yields remain paper thin. Stocks are doing great, but conservative investors typically don’t hold enough of them to pump up returns much.

Future return potential for conservative investors was raised by a reader recently. “I am a risk-averse retiree,” he wrote. “I manage my own registered retirement income fund. The current composition of the RRIF is 80 per cent fixed income and 20 per cent stocks. What do you think are realistic returns in the future for this kind of portfolio?”

Let’s take a quick look backward before discussing future returns. We’ll use the Vanguard Conservative Income ETF Portfolio (VCIP), with a 80/20 mix of bonds and stocks, as a proxy for a conservative, risk-averse investor. For the 12 months to June 30, VCIP produced a total return of 4 per cent.

To get an idea of what the future might bring for conservative investors, I crowd-sourced an answer on Twitter. The consensus seems to be annual total returns averaging about 2.5 per cent to 3 per cent, before costs related to fees, commissions and advice, if applicable. On an after-fee, after-inflation basis, a portfolio mix of 80 per cent bonds and 20 per cent stocks could be under water.

All the usual workarounds are worth mentioning here for conservative investors seeking better returns – emphasizing corporate bonds, working in preferred shares and blue-chip common shares paying dividends. But the cautious investor who wants to avoid stocks may have to just accept weak returns. This will be the price to avoid the kind of volatility that slashed the S&P/TSX Composite Index by 33 per cent in the winter of 2020.

Rising interest rates would help. The bonds and bond funds you already own will fall in price as rates rise, but there’s an opportunity to buy new bonds and guaranteed investment certificates set at higher yields.

This is where the laddering strategy makes sense. Divide your bonds or GICs into five segments invested in terms of one to five years. When a bond or GIC matures, reinvest it into a new five-year term that, with luck, will be a higher interest rate.

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