TD Bank economists are forecasting portfolio moderate returns in the coming years – just 6 % to 8%. “The key message is that expectations for double-digit gains are likely to be disappointed, and investors should make conservative assumptions in making their financial plans,” they say in a new report.

“After all, a higher-than-expected return is a windfall, but a lower-than-expected income flow could imply a reduced standard of living during retirement years.”

After combining the forecasts of labour force growth and productivity, TD economists are saying that the long-run potential growth rate for the Canadian economy is roughly 2.7% and that national income will rise at 4.5% per annum.

They’re predicting that 3-month T-bills will offer a yield of 4.25%. “GICs, savings accounts and other cash instruments will deliver a lower return, while corporate paper will carry a premium to T-bills.”

“A well-balanced portfolio of Canadian bonds, as captured by the Scotia Capital Markets Long-term Bond Index, is expected to deliver a real return over the long run of roughly 175 basis points above 3-month T-bills. This implies an average annual real return on Canadian bonds of 4%, or 6% including inflation. Canadian bonds will continue to provide a modestly higher yield than their U.S. counterparts in the years to come. However, a balanced portfolio of international bonds may deliver a return roughly equivalent to that in Canada, as the positive interest rate spread versus U.S. instruments can be offset by negative spreads vis-à-vis bonds of other countries.”

Equities are by far the most difficult asset class to predict, the TD economists concede. “In coming years, both the risk premium and the dividend yield on equities are likely to continue to be compressed, but at a significantly slower pace than during the 1990’s. All told, these trends suggest that Canadian equities, as measured by the TSE300 index, should not be expected to deliver an average annual total return of greater than 8% over the long run, or 6% after removing the impact of inflation.”

However, it suggests that stronger productivity growth and a tolerance for slightly higher inflation is likely to translate into a 9% return in U.S. equities, as captured by the total return on the S&P500 index.

“So, using conservative economic and financial assumptions, investors can reasonably expect average annual returns of 6% to 8% on RSP portfolios, before fees and inflation. In terms of a non-RSP portfolio, with higher foreign content, the same portfolios could provide average annual returns of roughly 0.5-to-1.0% higher,” TD concludes.