7.3.2 Return on investment

The return that an investor receives on an investment (often called return on investment or ROI) varies greatly and, for many investments, cannot be predicted reliably. (If it could, the return would be low because there would be little risk.)

Past performance is not a guarantee of future performance. That means that the return that investors received in the past is not a reliable guide to what they will receive in the future. Market conditions and other factors can change rapidly, making an investment that was once a winner into a loser—and vice versa.

The chart below illustrates the rises and falls in the price of representative stocks on the Toronto Stock Exchange from January 1990 to December 2014.

Toronto Stock Exchange Index, January 1990 to December 2014 

In the period the chart covers, the stocks rose from $3,705 to a high of $15,626 and then fell to $13,010. (The numbers represent the value of the stocks compared to a starting point of $1,000; that is, if you had a pool of certain stocks valued at $1,000 when the index started, the pool would have been worth $13,010 in December 2014​.) Investors who had invested in these stocks at the lowest points would have made a profit on their investment if they sold it at a higher level. But investors who invested at higher points—as many did—may have seen the value of their investment drop.

An investing strategy called dollar-cost-averaging reduces the risk of investing when the market rises and falls. Under this strategy, you invest a pre-set amount on a regular basis—bi-weekly or monthly for example. When share prices are lower, your investment buys more shares, and when prices are higher, your investment buys fewer. You benefit by having a lower average cost, and by building your investment consistently over time. However, this strategy does not work for all investments, and should be reviewed with your investment advisor.