TD Bank Estimates Future Long Run Returns of T-bills, Bonds and Stocks

A couple of weeks ago, TD Bank Financial Group published the six page report Evaluating Long-run Returns in Uncertain Times. The report suggests to expect the following annual rates of return for a time horizon (holding period) at least a decade beyond the next three years of "uncertain times".

4% - Cash / T-bills
5.25% - Bonds
8% - Stocks

These returns are before inflation, which they assume to be 2%, or around the average of the last 15 years or so, and before taxes, fees and foreign exchange effects.

Within stocks, TD estimates that the US will slightly outperform Canada and EAFE countries (rest of the developed world) by 0.5% or so.

TD also presents how this would produce a combined total return of 5.8% to 8% for several sample portfolios with various mixes of cash, bonds and the three equity classes.

It is interesting that these are more optimistic, especially for Cash, when compared with other estimates I have found:

• Review: Bradford Cornell in his book The Equity Risk Premium - Cash was only 0.5%, Bonds only 2.5%, Equities 5 to 7.5%
• Post: Credit Suisse Global Investment Returns Yearbook 2009 - Equities for Canada 5.9% and USA 6%
• Post: Canada Pension Plan (after inflation) - Canadian Equity 4.6%, Foreign Equities 5.0%, Bonds 3.4%, Cash 1.5%; US Social Security Administration Chief Actuary - Long Term Treasury Bonds 3.0%, Equities 3.0 to 6.5%; Author Richard Ferri / Portfolio Solutions LLC (after inflation) - USA Cash 0.5%, Long Term US Treasury Bonds 2.0%, US large cap 5.0%, Foreign Developed Market Equity 5.0%

It is always worthwhile to get a different perspective on what is a critical assumption for long term investment planning towards a sustainable retirement. My own view is to use the lower figures and hope the higher ones come about.