Yes. Bonds have higher returns when interest rates fall and lower rates when interest rates rise. We have seen interest rates fall nearly every year since 1982, but they probably were at the low last year.

Bonds have kept up with stocks in the last 10 years, but their returns are 1/5 of Canadian stock market returns and 1/8 of international stock market returns since 1950.

In the long run, bond returns must be lower. Companies borrow by issuing bonds to invest in their operations. If companies did not believe their stock would outperform their bond, they would not ever issue bonds. The fact that corporate bonds exist proves that the companies that issue them believe their stocks will outperform those bonds.

Ed

Am I missing something?

You can compare: http://www.tdcanadatrust.com/mutualfunds/perforFrame.jsp

Bonds vs.Stocks: Here is another interesting post:

http://seekingalpha.com/article/134979-stock-vs-bond-performance

of course it isnt paid off so the return is higher then that

Your property pays 10% income on the full value of the property? Or are you just calculating that on your equity?

Our experience is that high returns on real estate are nearly always really a low return on the investment plus a high leverage factor.

Ed

As a matter of fact i do know those numbers.
gross works out to be a 10% return or 7.8% after tax
(income with no vacancy)
with my new property which i paid lot more for…it would work out to 6.5% gross or 5% after tax

*these number only based on only income …..not including appreciation

Thanks for the stats. That’s very interesting.

Part 3 is already posted.

Ed

We call GICs “Guaranteed Insufficient Cash”.

GICs and cash are generally safe, other than they get killed by inflation. But the bigger issue with them is that they are essentially useless in retirement planning.

We find that almost anyone that wants to just maintain their existing lifestyle (less the mortgage and kids costs, plus a bit for some travel) would have to invest a ridiculous amount (say 30-50% of their gross income) in order to build up enough of a nest egg.

With rates of 5% or less in the last decade, hardly anyone can have the retirement they want with returns that low.

Ed

Scores on the quiz seemed to be in 2 main groups – those that published their score, most of which said they scored 9 or 10 of 12, but all said they guessed on a few – and those that sent me private notes, most of which scored 2 of 12.

I have the feeling that many in the first group exaggerated or marked themselves very easy.

Our belief was that most investors know little about the market and have an exaggerated view of the risk. This was not a proper study, but it seems our belief is true.

We expected that most people would get a low score. I realize most people would not necessarily know the answer, but the idea was to take an educated guess to see if your general perception is close.

Ed

I would have separated out principal residence appreciation and income producing real estate in your analysis.

National Council of Real Estate Fiduciaries states historical cap rate in the U.S. is approximately 7.6%. However, this on commercial properties which are typically not subject to rent controls. In other words, your nominal returns on real estate income are approximately the same as real estate return using Siegel’s numbers.

But the practicality is that most retail real estate investors will be hard pressed to reach a 7.6% cap rate whereas a 7% nominal return may be realistic on the stock market (there’s also an argument about opportunity costs to achieve 7% cap rate in real estate). Having said all of that, some people love to be real estate investors and that should be acknowledged.

I am not sure if you are doing a part 3 but you should spend some time addressing risk-reward of investing in the markets. Thanks.

Thanks for sharing all this information and quizzes…how did every one do?

Rental, I am curious. You said your return on rental property was 10% plus because you leveraged and the return dropped as you paid down the mortgage. Do you have a guess what your rate of return would have been if you hadn’t leveraged and just paid 100% for the house?

You said, “The figures you show are the base TSX index which excludes dividends, not the Total Return index. The actual total returns of the stock market compounded are many times higher – about 4,000%.”

That’s a great growth with dividends in.

I’m looking forward to hearing more about what theory/strategy you believe in. I like that you’re a facts and figures guy because I’d really like to see the evidence that your strategy outperforms long term.

At the same time though if you don’t believe in EMH or use indexes then why are you basing your past market performance on the broad market returns? If you don’t invest in an index or index-like broad basket of highly diversified stocks I think you would experience significantly different short and long term returns.

Just a thought, but maybe you should be using a value index or small cap index to show us how much the worst declines have been, the lowest rate of return for 5 or 10 years, etc?

I don’t know what FT believes, but I doubt he believes the EMH much either. He does pick his own stocks, rather than using indexes.

I get a kick out of DIY investors trading indexes or ETFs using a chart system (technical analysis). Believing in charts and in indexes are opposite beliefs. They cannot both be true!

If the EMH is true, then indexes are a good investment and charts are fantasies. If the EMH is false, then charts might work along with lots of other strategies that can beat the indexes.

Ed

We used to believe in the weak form of the EMH, but have come to believe that even that is only partly true.

On a line from believing it is true to the strong form to the weak form to completely false, our belief is somewhere between false and weak.

As Bobby mentioned, there have been some consistent ways to beat the market, such as value investing and small caps. However, investors that use charts to time the markets normally underperform.

However, the market is quite manic and irrational, and seems to be getting more irrational. The EMH claims investors are rational, which is hard to believe.

Myth #1 also shows that the market is not random, since big gains are consistently just before or after big losses. In other words, the market is far more consistent over time than random chance.

This will be the subject of an article in the near future.

Ed

The figures you show are the base TSX index which excludes dividends, not the Total Return index. The actual total returns of the stock market compounded are many times higher – about 4,000%.

Ed

The legal fees to purchase and sell are probably $2,500 to $4,000 if I’m not far off. And the commission to sell ones house can easily be 4-6% of the house value.

It is absolutely possible to purchase and sell $400,000 of a broad index ETF for $20.

The figures in the article are from the Toronto Real Estate Board and are for capital appreciation. They relate to what home owners experience.

Rental real estate would include the rent, less all the expenses. I have not seen a broad study of this, but rental properties have some pluses and minuses, that probably roughly equal.

Plus – principal portion of mortgage payment & possible positive cash flow.
Minus – opportunity cost on the down payment & work involved in managing.

To net them, if you had a mortgage of 100% of the value of the property and paid a property manager to manage the property, you would likely have a negative cash flow, but be paying down the mortgage slowly, and the 2 would probably roughly offset.

Rents and home prices usually balance out over time. Otherwise, it becomes too advantageous to be an owner or a renter. In Toronto recently, home prices have risen quite a bit quicker than rents. Renting is generally quite a bit cheaper than owning the same property. This can only be maintained if prices keep rising.

There seems to be a mini-bubble in rental property. Many people have bought rental properties, but the profit is usually low because rents are low.

I am not a real estate expert and would like to see a broad study of rental real estate, taking into account the pluses and minuses I listed.

Ed