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The TSX's gains over almost 69 years

As investors approach the new year, they dream of profits to come and the risks that might accompany them.

When pondering the future, I like to set my expectations by looking to the past, because it offers clues to the rewards, and risks, associated with investing in stocks.

Today I’ll focus on the Canadian stock market, as represented by the S&P/TSX Composite Index, and start with its happier moments, which have predominated over the long term.

The market index produced average annual total returns of 9.2 per cent from the end of January, 1956, through to the end of November, 2024. The gains aren’t too far off the commonly expected long-term annual growth rate of 10 per cent.

But the happy 9.2-per-cent annual returns do not, alas, account for inflation, which is the propensity for the purchasing power of the dollar to decline over time. While inflation was modest and largely ignored by investors in recent decades, it resurfaced with a vengeance after the COVID-19 pandemic struck in 2020.

Adjusting for inflation, the market index gained an average of 5.4 per cent annually from the end of January, 1956, through to the end of November, 2024, which is still mighty fine all things considered. (The returns herein are based on monthly data from Bloomberg and include dividend reinvestment but not fund fees, taxes, commissions or other trading costs. The figures that follow are adjusted for inflation.)

Most people aren’t lucky enough to invest for 70 years, but the market index also produced strong returns over shorter periods that reflect the experience of many investors.

For instance, the accompanying graph shows the market’s average annual returns over rolling 30-year periods.



You can see that the market’s annual return rate varied depending on the 30-year period in question. Its lowest inflation-adjusted return rate was 3.3 per cent over the 30 years to the end of January, 1995. Its top rate was 8.4 per cent over the 30 years to the end of October, 2007.

In happy news, investors enjoyed positive returns over all the rolling 30-year periods shown. Similarly, moving to rolling 20-year periods was also uniformly profitable. But there were a cluster of 10-year rolling periods (that ended in the mid-to-late 1970s and early 1980s) when the average annual return rate was negative.

The 10-year returns hint at hard times that are highlighted in the second graph, which shows how far the market index fell, from its prior highs, in down periods.



You can see that investors suffered through a great number of serious declines over the almost 69 years from the end of January, 1956, through to the end of November, 2024.

The biggest downswings, in chronological order, began with the crash of 1973, which saw the market fall 41 per cent and remain below its former highs for 6.5 years. It was followed by a decline in the early 1980s, which was shorter in duration at 4.4 years but deeper with a plunge of 49 per cent.

In more recent decades, the market fell 46 per cent in the aftermath of the internet bubble, which reached its apex in the summer of 2000. The market remained below its highs for 5.3 years. It was followed by the financial crisis of 2008-2009, which prompted the market to plunge 43 per cent, but lasted only 3.3 years. Mind you, even a year spent in such a downturn can seem like a century to investors who suffered through it.

Overall, long-term investors should be encouraged by the historical record because buy-and-hold investors gained in the end.

Looking on the bright side, big downturns might come as good news to young investors who are growing their portfolios and are able to buy more shares when prices are good.

On the other hand, crashes can induce panic among retirees who must draw on their portfolios to sustain themselves. It’s a big reason why it is often suggested that retirees keep their annual withdrawal rates below 4 per cent, subsequently adjusted for inflation. Alas, some retirees might not make it through the biggest downturns with money to spare.

The historical record helps investors to set their expectations for the market. Mind you, it will eventually serve up even more extreme results and I fear 2025 might be a record breaker given the state of the world.

So, crack open some bubbly and enjoy the good times while they last, but be sure to save enough to also make it through the bad times to come.



First published in the Globe and Mail, December 29, 2024.

 
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