## The Periodic Table of Annual Returns (Updated to 2023)

### Norman Rothery, The Stingy Investor

Norman Rothery of Stingy Investor fame, publisher of The Rothery Report, and frequent contributor to The Globe & Mail and the Canadian MoneySaver, provides a lot of free and paid resources. Among the free resources is his annual “Periodic Table” of annual investment returns for Canadians, suitable terminology for someone with a PhD in Atomic Physics.

I like looking at this table because it shows that the returns of different asset classes bounce around from year to year, reminding me that diversifying your investment portfolio is probably a good idea. It also shows that the U.S. markets have been dominant in terms of overall returns for the last decade. Having said that, if you go back to the decade ending in 2013, it was dominated by Emerging Markets. What will the next decade bring? I don’t know and that’s why I think broad-based global investing is the way to go.

The web page that shows the Periodic Table allows the user to select from among 14 different asset classes in ranges of up to a maximum of ten years. I have stayed with the 10-year range but have limited it to eight different asset classes.

Two of the classes that overlap substantially are the S&P 500 and the Wilshire indices. The Wilshire is the larger index, with about 3,400 stocks, close to seven times the number in the S&P 500, but that means it tends to underperform slightly given the dominance of the so-called Magnificent Seven: Microsoft, Amazon, Meta, Apple, Alphabet, Nvidia, and Tesla. These seven have more weight in the S&P than they do in the Wilshire. The S&P 500 is also the more popular index for investing in the United States than the Wilshire. Indeed, to my knowledge, no ETF or mutual fund currently uses the Wilshire as the index to track. I will say more as I show a listing of relevant ETFs to invest in these various categories.

I have also added gold as a category this year. A commodity, rather than a security issued by a business that provides products or services, it is nevertheless a choice for many investors.

Other equity categories are the **TSX**, that is, the Toronto Stock Exchange, the **EAFE**, an index provided by MSCI, that covers the developed markets of Europe, Australasia, and the Far East, and **Emerging**, short for Emerging Markets, referring to the stock markets of countries that have developing economies. This is not a sharply defined category, as some index providers will view certain countries as emerging, while others will be considered developed.

For fixed income, I’ve selected only the Canadian All-Bond class. And finally, for cash, I’ve chosen to use the Canadian T-Bill class. It can be viewed as equivalent to a high-interest savings account or a money market fund.

### A Little Bit of Math to Interpret the Table

To interpret this table a bit, I took the returns and averaged them out. The first, the Average Return, is also known as the Arithmetic Return. You simply add up all 10 returns for the class in question and then divide by 10. The Geometric Return works a bit differently. There is some use of multiplication and square roots. A simple example of the Arithmetic Average would be to take the returns in 2014 and 2015, add them, and divide by two. 24% + 21% = 45%. Divided by 2 (45% ÷ 2) = 22.5%. The Geometric Mean (or Average) for the same two numbers is calculated by multiplying the square roots of the numbers in question. The square root of 24 is 4.89898. The square root of 21 is 4.58258. Multiply those two together and you get 22.45%. This is easily done when you have just two numbers to deal with but when you have ten or more, you may want to use a spreadsheet. In Microsoft Excel, the formula is =GEOMEAN. By the way, if you have some negative numbers, as you inevitably will over a decade, you will need to add 1 to the percentage figure. So, for example, if in one year you have a -12.5% return, you add 1 (or 100%) to that figure and all the other numbers in the sequence, to arrive at 87.5% (= 100 – 12.5). You then need to subtract 1 at the end to arrive at your answer.

You can see that the Average Return is always higher than the Geometric Return. The only way the returns could be identical would be if the returns year over year never varied. If you were invested in these asset classes throughout the decade being measured, you would experience the Geometric Return. An interesting example of the difference between the Average and Geometric results is how the TSX and Gold performed arithmetically versus geometrically. On an average basis, the TSX was slightly better, but the greater volatility of the TSX meant that Gold was the better performer geometrically.

### Should I Just Buy the S&P 500?

Given these results over the last decade, maybe the smart investor should just buy the S&P 500. That would be a tempting action for many, I suspect. However, as I noted before, the S&P 500 excludes the shares of small and medium-sized companies in the United States and also excludes the shares of all the other companies around the world. At the moment, we may think there is no other index that could match this collection of the 500 largest companies in the USA. However, it was different in years past, and it could easily be different in the future. I encourage broad diversification to mitigate the risk of excess concentration.

### A Few Representative ETFs for Canadians

If you want to create your own investment portfolio using these asset classes, you may want to investigate some of these Exchanged-Traded Funds (ETFs). To be clear, this is not a recommendation. I suppose you could say these are the recommendations of fellow investors in that they are among the most popular in terms of total assets for each class.

A couple of things to note: 1. While Canadians have access to U.S.-listed ETFs, these are all Canadian-listed and trade in Canadian dollars. 2. You may notice asterisks beside three of the ETFs. These funds use derivatives to “hedge” against the fluctuation of USD/CAD exchange rates. For example, in the case of XSP, a 10% return of the S&P 500 in the US should lead to a 10% return for XSP, less the costs to manage the fund. In the cases of ZSP or VFV, if the S&P 500 returned 10% in the US when the Canadian dollar went up against the US dollar, the effective return would be less than 10%. Conversely, if the Canadian dollar weakened against the US dollar, the return from the Canadian perspective would be greater than 10%.

The ETFs listed next to the Wilshire index do not, in fact, track the Wilshire. Instead, VUN tracks the CRSP US Total Market Index. CRSP stands for the Center for Research in Security Prices and originated as a research project at the University of Chicago. XUU is based on the S&P Total Market Index which is a combination of the S&P 500 and the S&P Completion Index, which includes all the smaller companies in the US. Finally, VUS is identical to VUN, except that it uses currency hedging.

I also want to comment on the EAFE and Emerging classes. If you are going to buy separate ETFs for each of these classes, you will do well to use ETFs from the same issuer. For example, if you are going to buy the iShares ETFs, buy XEF and XEC together because they both follow indices created by MSCI. Similarly, if you prefer VIU, you should buy it together with VEE as these Vanguard funds follow FTSE indices. Mixing the MSCI and FTSE indices could result in doubling up on some stocks or completing missing others, depending on how you combine them. By the way, ZEA and ZEM follow the same MSCI indices as the iShares ETFs, so the performance should be identical and interchangeable.

### What About Asset-Allocation ETFs?

You could simplify these choices to a substantial degree by simply buying one of the Asset-Allocation or “All-in-One” ETFs. They are automatically rebalanced within the fund, which makes life a lot easier. However, if you wish to deviate from these ETFs with their set allocations, and/or you would like to reduce the MER just a little bit more (you pay for that automatic rebalancing), then selecting among these ETFs may fit you better.

Of course, you may not have an interest in DIY investing. In that case, you may wish to look into a robo-advisor, a full-service investment advisor, or a mutual fund company that sells directly to its clients. And don’t forget that investing is only one part of the larger financial planning process.

*This is the 231st blog post for Russ Writes*, *first published on 2024-01-15*

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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.

2012rc, Public domain, via Wikimedia Commons