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Stocks fell off a cliff as the pandemic took hold, then rallied furiously amid worse and worse economic news. Can you really trust them to get you where you need to go, financially?

For an answer, consider the latest Projection Assumption Guidelines for financial planners to use in their work. Canadian stocks are expected to average 6.1 per cent annually over the long term before fees; foreign developed markets (including the United States) are expected to average 6.4 per cent; and emerging markets are expected to average 7.1 per cent.

These forecasts were developed back in December and January, before the pandemic took hold globally. Do they sound too optimistic, given the market’s violent ups and downs lately? Or maybe too pessimistic, given that there’s an opportunity today to buy in at reduced prices?

“Even though the markets have been quite volatile the last while, these are still the best estimates of what the markets could do for the next 15 to 20 years,” said Martin Dupras, president of CanFor Financiers in Montreal and a member of the committee that developed these return guidelines.

The guidelines have been issued annually since 2009 under the supervision of the Institut québécois de planification financière and the FP Canada Standards Council, which oversee financial planning in Quebec and other provinces. The idea is to create a uniform set of assumptions across the industry that transcend the temptation to inflate returns to impress clients or shy away from stocks to avoid crashes such as the one in March.

The Projection Assumption Guidelines are meant to reflect the experience of investing over 10-plus years. So, don’t expect 6.1 per cent from Canadian stocks in 2020. You get that number if you average out the good and bad years over the next decade or more.

There are generally only small changes from year to year in the return projections. An exception for 2020 concerns bonds, which are forecast to return 2.9 per cent, down from the 3.9 per cent projected last year. This is why you need stocks in your portfolio to achieve a decent level of long-term growth – bonds alone might not get you where you need to go.

Mr. Dupras said bond return forecasts have in the past been heavily influenced by a 40-year trend of declining interest rates. Falling rates send bond prices higher, which creates potential for investors to get a juicy total return of bond interest and capital gains.

A decision was made to remove that long-term influence of falling rates for 2020, only to have rates reach new lows as a result of the pandemic. Ten-year bond Government of Canada bond yields were sitting around 0.6 per cent in early May, but the total return for the benchmark FTSE Canada Universe Bond Index through the first four months of 2020 was 5.4 per cent.

Returns for cash and bonds or guaranteed investment certificates maturing in one to five years are projected at 2.4 per cent for the long term, while inflation was pegged at two per cent.

The first assumption guidelines were produced just after the last big stock market crash and have held up pretty well. Mr. Dupras said the return for Canadian stocks was set back then at 7.3 per cent, which compares to an actual annual average return of 7.9 per cent since then. Bond returns were set at 4.8 per cent and actually came in at 4.2 per cent. The one disconnect was cash and short-term investments – returns were estimated in 2009 at 3.8 per cent and actually came in at 0.8 per cent.

The guidelines include an example of how returns for stocks, bonds and cash would play out in a portfolio that is 40 per cent in Canadian stocks, 10 per cent in foreign stocks, 45 per cent in bonds and five per cent in cash or short-term investments. The blended long-term return forecast comes in at 4.5 per cent, or 3.3 per cent after fees estimated at 1.25 per cent.

Low fees will be important in the years ahead in helping maximize returns, but so will smart financial planning. Some of the financial carnage we’ve seen in the pandemic could have been mitigated by effective planning that emphasized not just investing, but saving for the unexpected.

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