This post is was originally published on Freedom Thirtyfive Blog

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For long term investors, earning 5% to 7% annual returns (after tax) is a suitable target to aim for. But this may be difficult to do today. The current expected returns of the financial markets are extremely low by historical standards. Traditional asset classes such as stocks and bonds are generally overvalued now.

Stock Market Expected Return = 3.2%

The Shiller P/E ratio is currently about 31 for the S&P 500 stock market index. This is much higher than the historical average ratio of 16. The Shiller P/E ratio is based on average inflation-adjusted earnings from the previous 10 years.  The inverse of the ratio (1/31) is how much the market is expected to earn for investors going forward.

Bond Market Expected Return = 2.3%

Here are some popular bond ETFs.

  • BMO Aggregate Bond Index ETF (ZAG) – Weighted Average Yield to Maturity = 2.34%
  • Canadian Aggregate Bond Index ETF (VAB) – Weighted Average Yield to Maturity = 2.28%
  • iShares Core Canadian Universe Bond Index ETF (XBB) – Weighted Average Yield to Maturity = 2.35%

As we can see, all their Avg YTMs are below 3%. The 10 year Canadian government bond is paying only 1.9% as of writing this post. 🙁

As a long term investor I don’t see the point of buying a bond that pays less than 2% interest when the Bank of Canada openly declared it wants to erode the Canadian dollar’s value by 2% a year. That effectively creates a projected negative real return on investment, 😮 ouch. This is why I stay away from ETFs like these which primarily hold low yielding government bonds. These funds aren’t necessarily bad investments. I’m just saying they’re not for me. We can find slightly higher yields in U.S. bonds, but not much better.

Where Can We Still Find 5% to 7% Return Today?

There are still good opportunities out there. But we need to think outside the box and look at alternative ways to use our money. I don’t have all the answers but here are some ideas that are worth thinking about. 🙂

  1. High yielding dividend growth stocks – These could potentially be strong, dominant pipeline companies. I recently wrote about why ENB is a good buy right now for long term investors looking for income. Enbridge Income Fund (ENF) and Inter Pipeline Ltd (IPL) are also utility companies paying over 6% dividend yield with little risk of cutting their dividends in the foreseeable future. The idea is to get paid 6% in eligible dividends while waiting for the broader stock market to cool down. 🙂
  2. Peer to peer lending – I started to invest in Lending Loop about a year ago.  So far my annual return, net of fees, is 12%. 😀 After accounting for potential loan losses and taxation I expect to ultimately earn 7% a year from this investment.
  3. Cryptocurrencies. – Earlier this year I wrote about buying some Ethereum. Since then I have also bought some Bitcoin and Litecoin. There is a lot of upside potential in this new asset class, but it’s very speculative. I wouldn’t recommend putting more than 5% of one’s net worth in digital currencies.
  4. Consumer Goods. – Sometimes we need to invest in ourselves. We can treat ourselves to a well deserved vacation, a 4K television, a wardrobe upgrade, or winter tires. Since the expected value of monetary gain through investing is low right now, using money for other purposes (such as buying instant gratification) will have relatively more value. Happy Black Friday! 🙂 Go buy yourself something fun. 😉

These 4 ideas will most likely pay higher rewards than the low, single digit returns expected from traditional asset classes such as stock and bond index funds. Feel free to share your thoughts in the comments if you can think of other ideas. 😀


Random Useless Fact

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