My Investment Return for 2024

The 2024 investment return for my overall portfolio measured in Canadian dollars was 18.0%, which is below my benchmark return of 19.0%.  The difference is primarily due to my choice a few years back to adopt an automated plan that shifts gradually away from stocks when stock prices are high as measured by the cyclically adjusted price-to-earnings ratio (CAPE) of world stocks.  My benchmark doesn’t take CAPE into account.

In years when stock prices are high but they give good returns anyway, this automated plan costs me money.  That’s what happened in 2024.  But I’m content with this outcome.  By shifting away from stocks when they’re expensive, my portfolio risk is lower at a time when stocks are riskiest.  I don’t expect my strategy to pay off during normal times.  I’m reducing my losses if we have a scenario where stock prices are high, and then they crash.  This is a kind of insurance, and it has a price during normal times.

The method I use to decide how to shift away from expensive stocks is entirely formulaic.  I’m not interested in making emotional decisions with large sums of money.  A spreadsheet determines when it’s time for me to make trades, and the trade amounts tend to be modest compared to the size of my overall portfolio.

Another reason to control risk is that, in a sense, I’ve already won the game.  I retired 7.5 years ago having saved up enough to cover my desired spending for the rest of my life, even if stocks had crashed 25% or 30% shortly after I retired.  I was protecting myself from sequence-of-returns risk.  Instead of a stock crash, my compound average annual return since retiring has been 5.9% above inflation. I got the upside of sequence-of-returns risk. As a result, my need to take on investment risk has diminished significantly.

The following chart shows my cumulative real (above inflation) returns since I began controlling my own investments.

Over this period my compound average real return has been 7.9%.  A big chunk of this is due to some extremely risky bets I made in 1999 that paid off.  In normal times, I expect the compound average real return of stocks (for planning purposes) to be 4% less investment costs.  At the current CAPE level of the world’s stocks, my compound average real return expectation from stocks is only about 3% for the rest of my life.

Although I look decades out to make a plan, I only commit to this year’s spending level.  Whatever happens in the markets makes me update all the planning numbers (all automated in a spreadsheet).  This means I adapt my spending level to what the markets do rather than commit to a real spending level for the rest of my life.

This flexibility makes it safer to spend a little more from my portfolio right now.  The less flexible you are with your spending level each year in retirement, the lower your return expectations need to be for planning purposes.