Lower Your Expectations for Returns Over the Next Decade

My Comments: My professional focus these days is helping people retire with more money. Headlines like these don’t help much.

If your focus is just growing a larger pile of money so when you do retire, your pile is large enough to finance what could be a 30 year time span, an existential threat to your future happiness needs to be recognized.

There’s already an existential threat to Social Security on two fronts. One is that without some remedial action, by 2034 our checks are going to get smaller. How much smaller, no one knows but they will be smaller. Yes, there are relatively simple steps that can be taken to make sure that doesn’t happen, but it requires a different mindset in Congress.

Front #2 is many people want to pare back what they see as too much government influence on our lives. They confuse socialism with Marxism and that may or may not work in your favor. I describe myself as a social capitalist as I’m not willing to watch people die in the streets because they can’t pay their bills and have nowhere else to go.

But back to the point of these words from John Waggoner, who is a Senior Associate Editor with Kiplinger. We’ve spent most of the past ten years watching the stock market go up. Does this mean the decision makers have figured out how to make that happen and the rules have changed?

I don’t for a minute think there’s a new economic reality that says market crashes, recessions, and high interest rates are gone forever. If I had to bet my money, and I do from time to time, I’d put it where it’s safe. In fact, I’d arrange for a third party to assume the risk of a crash, for which I’m willing to pay a fee.

Demographics are changing, China is slowing down, American trade policies appear to be backward looking, people are increasingly uncomfortable and adjusting their buy and sell metrics. You should probably lower your expectations, which translates to making better financial decisions of all stripes, if you want your retirement to be as worry free as you’d like it to be. What exactly are your retirement goals?

Please note the last paragraph below. His solution is to increase your savings rate and then hope for the best. I can say with absolute certainty that expecting hope and good luck to work for you is a recipe for failure. You need a plan, and a good one.

by John Waggoner \ January 2, 2019

Most financial pundits will tell you that the average annual return from large-company stocks since 1926 is 10.1%. If your investment horizon is a very long way off, you may well get that much. Over any given decade, however, there is a huge variation from the long-term average.

No one has a crystal ball, but you can make assumptions based on current economic trends, corporate earnings projections and stock prices. And that can give you an idea of how much to invest in stocks, bonds and cash over the next decade.

A lot to live up to. Standard & Poor’s 500-stock index averaged a 14.0% annual gain, including dividends, over the past 10 years. Don’t expect that for the next 10 years. Brian Singer, head of the Dynamic Asset Allocation Strategies team at institutional investment house William Blair, thinks large-company stocks—such as those in the S&P 500—will gain a below-average 6% annually over the next decade.

Blame the bull market. The run that began in 2009 is the longest bull market ever, and it has gained three times the amount an average bull market does. Typically, big bull markets are followed by big losses, says Sam Stovall, chief investment strategist of U.S. equity strategy at CFRA—say, 40% or more. A bear that big would tear a hunk out of the stock market’s projected 10-year return.

You might increase your stock returns by investing abroad—especially in emerging markets, if you can tolerate the risk. It’s a matter of playing catch-up. Foreign stocks have lagged their U.S. counterparts over the past decade, particularly lately. The MSCI Europe, Australasia and Far East index has fallen 9.0% over the past 12 months, and the MSCI Emerging Markets index has fallen 8.7%. The S&P 500 is up 1.8% over the same period.

Foreign currencies have fallen against the U.S. dollar as well, and if they rebound, they could put some extra octane into your portfolio as returns earned abroad translate into more dollars here. “The odds are 90 to 10 that emerging markets will beat U.S. stocks,” says Rob Arnott, founder of Research Affiliates. He’s forecasting a 9.7% annualized return for emerging markets over the next decade—about the same as their 30-year average. Foreign developed markets, where earnings growth is slower than in emerging markets, should return 7.5% annualized over the next decade, he says.

Bonds will disappoint. Government bonds have earned an annualized 5.0% since 1926. It’s unlikely that interest rates will return to the long-term average, which includes the towering yields of the 1970s and early 1980s. In today’s global and dis-inflationary economy, the 10-year yield is unlikely to rise above 4%, up from 2.9% recently. Mix in the likelihood of principal losses as yields drift higher (prices and yields move in opposite directions), and you get disappointing bond returns over the next 10 years. “We see a 2.5% to 4% annual return from bonds,” says Roger Aliaga-Díaz, senior economist at Vanguard’s Investment Strategy Group.

Cash is the third asset class in a balanced portfolio. Barring a surge in inflation, the Federal Reserve is unlikely to push up its benchmark short-term interest rate much past 3%, and savings rates follow that closely. A 3% return from cash over the next 10 years wouldn’t be unusual: Treasury bills have returned an average 3.3% a year since 1926. What’s unusual is how close cash returns could be to bond returns. Just don’t give up on bonds. You’ll want them in your portfolio if there’s a recession and a bear market in stocks.

If the next decade produces lower-than-average returns on stocks and bonds, your best bet is to save more. If you increase your saving rate, and your investments provide more than the middling returns expected, you won’t just reach your goals, you’ll roar past them.

Source: https://tinyurl.com/yake5bjz