Hey everyone,

It’s been a real pleasure writing this for two and a half years, +150,000 words written and 135 issues published. This is a high calibre group of individuals, from students just starting out, young professionals earning more money, new parents looking at securing their children’s futures, and seasoned investors who are far wealthier and wiser than I am, whose advice I borrow, and share, as much as I possibly can.

Assuming you forward this email to a friend, the Journal is simple: in 5 minutes or less, I share a mix of personal finance ideas, stock market and investing insights, and commercial real estate learnings. Sometimes it’s a story from my experience in the investment business. Sometimes a good rant on the ways corporations (lions) target consumers (gazelles), and how to counteract that so you can be a lion, too. Often it’s a dialogue with readers, which are usually the most interesting.

As usual, thank you for being here, all 1,078 of you.  

Eddie

People get upset when I talk about the 10% stock market return, for various different reasons. They’ll say things like:

Golly, some people!

Take it from me (worth what you pay for 😉), as a CFA, having worked in the investment business for 15 years (stock research, portfolio management, financial planning, private real estate limited partnerships), I have a decent idea of the opportunity set.

Doesn’t mean I’m Warrent Buffet and going to make you 20% for 65 years, but gosh darnit I’m going to help you get the 10% return.

It is worth discussing from time to time what a 10% return looks like, how it compares to other opportunities, and why it’s probably the best you’ll ever get over a long period of time.

So let’s talk about a few broad asset classes for a minute: bonds, real estate, commodities, and stocks.

First, we have bonds and short term interest securities (i.e. bank deposits, GICs). These are typically the safest investments because they’re either backed by a government or, in the case of a company, come a liquidation scenario, you are priority over the stock holders. So, lower risk, lower return, 3-5% interest ish. Assumes you aren’t “trading the bonds” and instead holding them to maturity.

Then we have residental real estate, the roof you live under. Generally with existing homes/apartments, it is a decent hedge against inflation, but not much. The land value may increase, but the home value decreases over time due to depreciation. Unless you get lucky picking a jurisdiction where an explosion of population and investment will occur, once that matures, the housing market growth will gradually reflect inflation or a little more than that.

Commercial real estate is a little different, because you run it like a business. Improve rents, manage your expenses, use leverage, and improve margins. In the LPs we structure, we target annualized ~15% returns. Not all have worked out like that, but the average over the last 20 years has been around 20%. Exemplary, to be sure, but the risk comes from leverage and the illiquid nature of the investment; you can spend it when we sell it. Furthermore, since our structures are “deal by deal”, while the average return of an investment might be 15-20%, that’s pretax, and there’s no guarantee you can redeploy into a new investment returning 20% right away. Time in between illiquid investments reduces the true compound return to the investor. Still, a good component to a long term, diversified investor’s portfolio.

Then you have commodities like oil, natural gas, copper, etc. Supply demand mechanics rule here. These commodities become more economical to extract when the price goes up, this brings on more supply, eventually too much of it, naturally leading to future price declines. A barrel of oil at the peak in 2008 was $150. Compare that to the recent oil price spike to $115 per barrel during this Iran war. Not only is the price lower today despite the War, but if you factor in 3% inflation on the $150 peak all those years ago, that 2008 peak would be $255 today, a far cry from $85 today. Oil would have to go up 3x from to reach the peak of the last crisis, inflation adjusted. That said, over 30 years, oil in nominal terms is up about 4.5% compounded. Copper has gone up, but over 30 years it’s annual growth is about 3-4%, largely tracking inflation.

Yes, you can have incredible short term returns from these commodities; we have an AI race, and these companies need huge amounts of energy and critical metals. There may be some great “trades” (not for me to opine on), and the explorers and producers can make a ton of money, if they get the cycle right. But for the general return of these commodities, expect inflation.

Gold is a little different because it truly is more scarce (1.5% of supply gets mined every year vs total stock), people wear it for jewelry and it’s been one of the world’s most widely recognized forms of money for thousands of years. It is also a component of some electronics and dentistry, but it doesn’t do much, and there are no cash flows. Simply the widely held belief that it is a monetary hedge and store of value vs fiat currency debasement and geopolitical turmoil. Over 30 years, Gold has returned 8.45% annualized vs the US dollar.

Bitcoin is similar, only much newer, more scarce (less than 1% issuance per year vs total stock), digital based, and still highly risky. 10 year CAGR on Bitcoin is 40%. But it’s down 50% this year, so….tread carefully.

And then we have the wonderful thing called the stock market. The market of companies in which the public can own shares in big businesses.

Let’s look at the chart I shared last week.

The average return of the S&P 500, a selection of some of the best companies in the world, since 1990, is 12%. Sounds nice, sounds smooth. In reality, it’s hardly smooth:

Despite the potential (guarantee) for painful intra year drawdowns, we can see that the majority of annual returns are positive for US Equities.

For over 100 years, the average return of the S&P500 is indeed closer to 10%. The past few decades of exemplary growth and Michael Jordan management teams surviving and improving margins through the plethora of crises including the dot com crash, 2008 crash, covid, etc, have led it to be 12%.

Going further back, of the 202 years since 1825, 145 years have shown positive returns, about 72%.

Hopefully this is sufficient evidence to substantiate using a 10% return. If you buy and hold the low cost index, and hold it for long enough, that’s what you get. The risk is short term volatility, as 5%, 10%, 30%+ drawdowns have and will happen again.

Finally, to those that say 10% is amateur hour, you are either part of the 5% of the human race that has an entrepreneurial edge to outperform the market, or you’re new.

The data is clear: over time, retail traders average portfolio returns are 3-4% (JP Morgan). Even the best hedge funds in the world with access to the best information and the best researchers, still manage to find a way to underperform the simple index over time (see Warren Buffet's Infamous Bet).

And to show you the compounding power of a 10% return, think about the rule of 72. At 10%, you double your money every 7 years.

Over an investing career of 35 years, that’s roughly 5 doubles.

Extend that out, think in terms of your newly born children. 65 year time horizon. 7 goes into 65 approximatley 9 times.

All on one $100,000 investment today and assumes no further contributions. Assuming you add more money every year to that equation, the numbers become kind of unbelievable, but that's the math.

My friend had a good tweet this week. It’s no question some private real estate funds may have NAVs that do not reflect true market value.

Investors try and sell, but the funds limit redemptions (it’s called gating the fund). This allows the private fund to minimize losses. If they honored redepmtions, the fund values would decline as sales triggered are lower and lower bid prices.

Be careful when investing in an illiquid investment vehicle. Even though it might show a low vol return profile, that’s only because it calculates its Net Asset Value periodically, and based largely on appraisals, which are often somewhat dubious.

The disconnect is quite concerning, especially for the unit holders of the private funds out there.

"If it's not yours, don't take it. If it's not right, don't do it. If it's not true, don't say it. If you don't know, be quiet.”

—Japanese wisdom

Is a 10% return amateur?

Learn to do it yourself with the Simply Investing Masterclass. Open the right accounts, choose a simple ETF portfolio, automate your contributions, and stop second guessing every money decision.

For your kids SmartMoneyKids a financial literacy app for Canadian kids ages 6 to 18. TFSA, FHSA, saving, investing, business, in language they understand.

For your specific situation wrestling with something particular? Let's talk it through → Book a 1-on-1 call

Just getting started? The simplest first move is opening a brokerage account. Wealthsimple is what I use, and you'll get $50 with code PRGS3Q.