(Click on the chart to see a bigger version)

This chart represents my attempt at defining a normal or ”equilibrium” return to equity markets. The data starts in 1970.  Each value represents a 15 year compounded return for a portfolio comprised of one  third Canadian equity, one third US equity and one third international equity.  I think this is a reasonable period in that each data point considers at least two market cycles.The lowest 15 year period equals 8.5% and the highest, just shy of 20% compounded return. If this year ended at the values we are at today the 15 year return will be about 6%.

So how can this data help us?  Should we expect better return in 2009 and can we define what that amount might be? Unfortunately, with all due respect to market strategists and technical analysts, the investments markets are not so easily mined . The risk to equities is not altered by recent experience. We continue to have a random outcome in the short term. Cheaper doesn’t mean less risky. As my friend Brad Steiman from Dimensional Fund Advisors likes to say “stock prices have no memory.” While our expected return may be higher after a large correction  it comes with the cost of higher risk.

I think the most sensible approach is to build more efficient portfolios. If we focus getting the return provided by  the broad markets we end up with ample reward to our efforts. Our investment success should not be determined by “when” the return shows up but rather by how we participate when it does.

I will provide more detail on how we build better portfolios in future posts.