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Conservative investing these days means consigning yourself to returns between 1 to 2 per cent at best, which seems extra horrible with stocks up by double-digit amounts from last year’s low.

So it’s no surprise that a reader did a double-take when reading a recent Carrick on Money newsletter with some thoughts on how a 57-year-old could ramp up his retirement saving. The suggestions outlined by a financial planner used a conservative rate of return of 4 per cent.

“My question is where on earth does one invest to obtain a 4 per cent ‘conservative’ return without undue risk these days?” this 62-year-old reader asked.

What we have here is a disconnect on the meaning of conservative return. This reader is looking for safe investments yielding 4 per cent. Unfortunately, there aren’t any. Some blue chip dividend stocks yield 4 per cent and more, but they could easily fall in price and thus are in no way safe in terms of keeping your principal intact. The same applies to preferred shares. The only bonds yielding 4 per cent would be in the high-yield category, which also goes by the name junk bonds.

So what’s the deal with the conservative 4-per-cent return? In this case, the term “conservative” refers to the estimate of future returns for a diversified portfolio of stocks and bonds.

The S&P/TSX Composite Index jumped 44 per cent on a total return basis over the past 12 months, and the S&P 500 made 54 per cent in Canadian dollars. Even with a solid weighting of low-yielding bonds in a portfolio, 4 per cent seems decidedly conservative as an estimate of returns. And yet, an investor would have to take on a fair amount of risk to get it – maybe 60 per cent of the portfolio in stocks and 40 per cent in bonds.

Both stocks and bonds could fall in price as we look ahead to the rest of 2021 and beyond. The FTSE Canada Universe Bond Index was down a little over 5 per cent for the first three months of the year. Stocks are having quite the party during the pandemic, but a pullback is coming at some point.

The investor wondering about conservative returns is obviously well-acquainted with disappointing yields – that’s why he got in touch to ask about 4 per cent gains. We won’t see returns like that from conservative investments until the economy ignites and interest rates surge from current levels.

Four-per-cent gains for diversified portfolios are another matter. With a conventional mix of stocks and bonds, that’s a reasonable after-fee estimate of your average annual returns over the long term.

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