Since when is a 6.8% return unreasonable?

Comments on a recent Toronto Star story are a perfect example of misplaced expectations held by many investors.



Online only.



Two Toronto Star writers are probably shaking their heads at the outrage one of their articles elicited yesterday.

The Star’s Moneyville site features an article based on a press release from TD Canada Trust, illustrating the virtues of investing early in life.

In a nutshell, it says that if you start investing $100 a month at age 25 and increase your contributions as you age, you’ll end up a millionaire by the time you retire.

At first glance I had no problem with the article. You save money — on an increasing scale — for 40 years, and wake up wealthy on your 65th birthday. Time to bust out the champagne!

But then I noticed this line:
This chart assumes contributions are directed into an RRSP account, benefiting from the tax deferred growth and earning a 6.8% rate of return per year, compounded monthly.

Readers, to put it mildly, did not like this. The comments section lit up like it was Chinese New Year in Shanghai.

“6.8% rate is not realistic,” ripped one reader. “The Toronto Star should be embarrassed for putting this forward as ‘news’.”

“Who is getting 6.8% or even 5% interest?” asked another. “I want to know what financial outlet is giving that kind of interest on GICs, RRSPs, TFSAs? It is not true.”

And finally, “Anyone with a [sic] some sort of common sense knows this is next to impossible which is the same as winning the lottery.”

6.8% … Seems kind of high, right? As it turns out, the answer is yes, and no.

With interest rates currently somewhere between “very low” and “why even bother having an interest rate?” investment vehicles like savings accounts, money markets and GICs don’t offer a whole lot of growth. Bonds are slightly better, but are wobbly these days thanks to European and Middle Eastern governments either spending like drunken sailors or reaping the dubious rewards from decades of authoritarian rule. Stocks have been on fire as of late, but we all know that they too, can end up in tears.

However, from a historical perspective 6.8% is completely within the realm of possibility. According to our Canadian Couch Potato investing expert Dan Bortolotti, global stock markets have delivered returns of 9%-10% annualized over the past 30 years. Even bond markets have returned 9%, although current conditions make it unlikely to repeat that feat anytime soon. However, a balanced portfolio can reasonably be expected to return 6% to 7% annualized.

From what I can see, people are still suffering from myopia due to the legacy of the financial crisis. Markets took a big hit three years ago. Economies went into recession. Interest rates plunged and investment returns of all types followed suit.

But it wasn’t always this way. Map out investment returns over 30 or 40 years and TD’s math makes sense, even with calamitous events such as what we saw in ’08.

Despite the din from hysterical naysayers, the point of the article is sound. Investing works best if you start early, choose investments wisely and increase your contributions whenever you can. A return of 6.8% may sound high to those who stare at their feet, but if they lifted their gaze to the horizon they would see a much different picture.

24 comments on “Since when is a 6.8% return unreasonable?

  1. great article!


  2. Reminds me of back in the late '90s when I was just out of high school and putting every extra penny into dot-com stocks. A friend bragged about a stock that made them a 70% return in a year, and I scoffed, saying that if I couldn't make 200-300%, I wasn't interested. Of course we all know how those dot-coms stocks ended up. 70% was seen as terrible back then… a decade later, 6.8% is seen as outrageously aggresive? Myopic indeed…

    Very good article.


  3. Says a lot about the mentality of Toronto Star readers


  4. Well, to defend the Star readers, the title of the article was "How $100 a month can make you a millionaire", when in fact you had to increase your contributions far beyond that. As well, no company is currently offering that on any guaranteed investment.


  5. yes, u can buy preferred shares thru any brokerage acct such as with td waterhouse (incl a tfsa acct) – as with any share, they are normally sold in multiples of 100 … they all range in the $21-$25+ per share but there are standard brokerage commisions so the more u purchase at 1 time, the lower the fee per share

    beware that some trade above $25 (yield is still roughly 5.5-6%) so if u plan on keeping them a while, banks can eventually redeem them at the $25 issue price … income is treated as dividends which is taxed at a much more favourable rate than gic interest

    as for a tfsa, i won't offer advice other than to say if u plan on occasionally withdrawing funds, beware of commissions for selling etf's


    • Thanks. Can you explain the comment about trading above $25? My plan would be to hold onto them for the long term?

      Will keep the TFS/ ETF commission cost in mind for sure.


      • Marie, you should really do more research and learn about what you're doing rather than just taking the advice of some random person in a comment section.


        • Thanks for the reminder but have no fears, as co-owner of a small but sucessful business, I do use due dilligence and suggest self education on many of my comments. I was simply asking for some input from a different source. I have willl continue to do my own research as well. I also dont buy anything in terms of consumer good without legwork of the best qaulity for the best price. What I learn in these columns and articles is for interest sake for me to consider during future discussions with our CA, various business advisors/ collegues etc. But thanks again for looking out for my interest albeit not necessary.


  6. The financial investment industry keeps lowering it's long term rate of return. I can remember at first it was a 12% rate of return for 40 years in 1995 for a million dollar rrsp and then 10%, 8% and now it is 6.8%. I personally have always used a 4.5% to 5.0% long term rate of return for my rrsp and other investments for the last 15 years. I do not trust the banks and financial advisors projections of a million dollar rrsp or investment portfolio.It is too optimistic and personally have invested $1000 a month for the last 15 years in gic's and provincial bonds and have a portfolio mostly in rrsp's of $250,000.The new tax free savings accounts will make it more easier to reach a million dollar investment portfolio over the next 20 to 25 years. People should be more realistic and conservative with their long term expectations for long term rates of return on their investments. The fees charged by managed mutual funds and other investments make it very difficult for achieving retirement and other financial goals. In order to earn 4.5% most mutual funds and other high fee investments must earn about 6.25% to 6.75% before fees. The last 12 years most mutual funds did not achieve this. If most people would save about an hour a day of their paycheque we would all be closer a million dollar rrsp or investment portfolio.It is just something to think about.


  7. The financial industry is too optimistic in projecting a long term rate of return for RRSPS other investments. I personally have invested $1000 a month in provincial bonds and Gics for the last 15 years.I remember 15 years ago it was 12% and then 10%, 8% and now it is 6.8% for a million dollar RRSP. People need to be more conservative and realistic with their long term investment expectations and projections. I never trusted that a $100 a month would make me a million dollars in 40 years. People don't understand that in order to earn 6.8% in a mutual fund or high fee managed investment account a gross rate of return before all expenses and fees , your investments must earn 9% to 9.5% rate of return for the next 40 years.If people would save an hour a day of their paycheque a $500,000 to $1,000,000 investment portfolio would be closer than most think. I personally used a 4.5% to 5.00% long term rate of return for my RRSP and other investments.The new tax free savings accounts will make it easier for me to achieve a million dollar investment portfolio over the next 20 to 25 years.An hour a day to save is easier than you think and a small sacrifice for future peace of mind.


  8. Actually:

    investing; laying out money or capital in an enterprise with the expectation of profit

    ie – a GIC (which actually isn't 100% guaranteed)

    banking: transacting business with a bank; depositing or withdrawing funds or requesting a loan etc.

    ie could include buying a GIC, or even stocks/ETFs/mutual funds

    You're right, preferred shares are a big leap return wise from GICs, but they are also a big leap risk wise.


  9. Recently looked at your article "we rank canada's best mutual funds"…what a crock! you failed to mention Sprott's gold fund that netted over 70% last year and has averaged better than 27% over the past 10 years (managed 30%+ myself over the same time frame). Are you not permitted to talk about real money?


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  12. The 6.8% long term rate of return used by the financial industry is optimistic but I prefer a 4.5% to 5.0% long term rate of return for my rrsps, tfsas and other investments. If we get an economy like japan for the last 20 years a 1.5% to 2.0% long term rate of return is likely the reality. This ultra low rate of return may be possible only if an investor buys government bonds and not equities. The nikkei 225 has lost about 73% of it's value in the last 20 years. Hopefully this is not going to happen to us.It is just something to think about.


  13. Mutual funds are for investors that lack the knowledge and education of how to invest their own hard earned money.Also, there are so many restrictions, costs, fees,terms and conditions that may change at any time with little or no notice to the unitholder. It is like a prison for investment dollars. People be street smart and research any investment you make before being caught holding the bag. The best financial education is learning to not loose money in the first place.


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