Stock market returns are expected to fall short of historical averages: here's how to adjust your portfolio now
Stock market returns are expected to fall short of historical averages: here's how to adjust your portfolio now
The average Canadian equity portfolio still assumes an 8% annual return. That assumption worked from 2009 through 2021, the longest bull market in modern history. It stopped working in 2022 and has not resumed. Portfolio models built during that decade are now pricing risk against a baseline that no longer exists.
The arithmetic underneath has changed. Long-term bond yields sit near 4% as of September 2026, up from under 2% for most of the prior decade. When risk-free instruments yield 4%, equity risk premiums compress. The expected return on stocks, once comfortably north of 10% in spreadsheet models, is trending closer to 6% or 7% in forward-looking capital market assumptions from major Canadian asset managers. This is repricing.
The conventional response to lower expected returns is to do nothing and wait. The better response is to recalibrate the portfolio around three specific adjustments.
Lower your equity concentration if retirement is within ten years
A 70% equity allocation made sense when bond yields paid nothing and stock valuations were supported by central bank liquidity. It makes less sense now. Bonds are competitive again, and stocks are trading near historical average price-to-earnings ratios without the tailwind of falling rates.
If you are within a decade of retirement, a 60/40 split between equities and fixed income aligns with the new expected return environment. The risk is holding too much equity through a correction when there is no longer enough time to recover.
Broaden beyond the TSX top ten
Canadian investors have a home-country bias problem that got worse during the past five years. As of 2026, the top ten holdings on the TSX Composite represent roughly 40% of the index's total market capitalization, dominated by financials and energy. A portfolio overweighted to Canadian banks and oil producers is a bet on two sectors that move with domestic interest rates and global commodity prices.
The fix is geographic diversification. A straightforward allocation to U.S. and international equity index funds reduces concentration risk without requiring stock-picking or currency hedging decisions. The goal is to stop correlating your entire equity position with the Bank of Canada's next rate decision.
Accept that cash equivalents are part of the portfolio now
For fifteen years, holding cash was expensive. Money market funds and high-interest savings accounts yielded under 1%, and inflation was above 2%. Real returns were negative. Advisors rightly told clients to stay invested.
That trade-off reversed. As of September 2026, Canadian high-interest savings accounts are paying around 2.75% to 3%, and inflation is running near 3.0%. Real returns are positive. Cash is no longer dead weight. It is a position.
This does not mean moving half your portfolio into a savings account. It means holding 5% to 10% in cash equivalents as dry powder for rebalancing when equity prices drop, instead of treating every dollar not in the market as a mistake.
Position for lower growth without timing the downturn
The mistake most portfolios make in a lower-return environment is trying to predict when the drop happens. Positioning is adjusting the mix now so that the portfolio can survive the next correction and still meet its long-term goals with lower average returns baked in.
The adjustment is not dramatic. Cut equity allocation modestly, diversify beyond Canada, hold some cash. These are calibrations to a forward return environment that is simply less generous than the one that ended in 2021.
Stock market returns are expected to fall short of historical averages: here's how to adjust your portfolio now
The average Canadian equity portfolio still assumes an 8% annual return. That assumption worked from 2009 through 2021, the longest bull market in modern history. It stopped working in 2022 and has not resumed. Portfolio models built during that decade are now pricing risk against a baseline that no longer exists.
The arithmetic underneath has changed. Long-term bond yields sit near 4% as of September 2026, up from under 2% for most of the prior decade. When risk-free instruments yield 4%, equity risk premiums compress. The expected return on stocks, once comfortably north of 10% in spreadsheet models, is trending closer to 6% or 7% in forward-looking capital market assumptions from major Canadian asset managers. This is repricing.
The conventional response to lower expected returns is to do nothing and wait. The better response is to recalibrate the portfolio around three specific adjustments.
Lower your equity concentration if retirement is within ten years
A 70% equity allocation made sense when bond yields paid nothing and stock valuations were supported by central bank liquidity. It makes less sense now. Bonds are competitive again, and stocks are trading near historical average price-to-earnings ratios without the tailwind of falling rates.
If you are within a decade of retirement, a 60/40 split between equities and fixed income aligns with the new expected return environment. The risk is holding too much equity through a correction when there is no longer enough time to recover.
Broaden beyond the TSX top ten
Canadian investors have a home-country bias problem that got worse during the past five years. As of 2026, the top ten holdings on the TSX Composite represent roughly 40% of the index's total market capitalization, dominated by financials and energy. A portfolio overweighted to Canadian banks and oil producers is a bet on two sectors that move with domestic interest rates and global commodity prices.
The fix is geographic diversification. A straightforward allocation to U.S. and international equity index funds reduces concentration risk without requiring stock-picking or currency hedging decisions. The goal is to stop correlating your entire equity position with the Bank of Canada's next rate decision.
Accept that cash equivalents are part of the portfolio now
For fifteen years, holding cash was expensive. Money market funds and high-interest savings accounts yielded under 1%, and inflation was above 2%. Real returns were negative. Advisors rightly told clients to stay invested.
That trade-off reversed. As of September 2026, Canadian high-interest savings accounts are paying around 2.75% to 3%, and inflation is running near 3.0%. Real returns are positive. Cash is no longer dead weight. It is a position.
This does not mean moving half your portfolio into a savings account. It means holding 5% to 10% in cash equivalents as dry powder for rebalancing when equity prices drop, instead of treating every dollar not in the market as a mistake.
Position for lower growth without timing the downturn
The mistake most portfolios make in a lower-return environment is trying to predict when the drop happens. Positioning is adjusting the mix now so that the portfolio can survive the next correction and still meet its long-term goals with lower average returns baked in.
The adjustment is not dramatic. Cut equity allocation modestly, diversify beyond Canada, hold some cash. These are calibrations to a forward return environment that is simply less generous than the one that ended in 2021.
Sources
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