11/6/2012 3:45 PM ET|
Kiss 10% market returns goodbye
Bad news for your nest egg: Many experts now say investors should no longer expect the double-digit returns that so many strategies depend on.
As the market recently observed the 25th anniversary of the single worst day in its history -- the Market Crash of 1987 -- most investing experts warned that investors should expect similar crashes and free-falls in the future.
Lost amid those headlines, however, was an arguably more dangerous prospect for regular investors: Namely, that many market experts say the kinds of historic returns they've come to expect are gone for the foreseeable future.
If you ask most investors what they expect to get from the stock market, the answer is typically 10%. That's thanks to an old study by Roger Ibbotson and Rex Sinquefeld that shows several generations of investors that stocks average that level of return -- albeit before any transaction costs -- over time.
No matter how much the market has bounced around -- through periods where a 10% return lagged behind the overall market badly and downturns when a double-digit gain felt like a fairy tale -- investors have had the sense that if they can stick with the market long enough, they will come away with that 10% gain.
The problem is that the experts, including Ibbotson himself, don't believe it.
"Starting in 1926, the return on the large-cap market has been 9.8%, but this was during a period when inflation rates are higher than they are today, and risk-less rates were higher than they are today," said Ibbotson, a Yale professor who also serves as chairman and chief investment officer at Zebra Capital Management. "You have to knock it all down by a couple of percent, because we really are in a risk-less rate environment where the rates are close to zero."
For the next quarter-century or more, Ibbotson said he would "not predict more than an 8% return on the market, but that's not bad. That's a great return."
Likewise, Vanguard Group founder Jack Bogle -- who, like Ibbotson, recently appeared on my radio show -- said the current market, which he called the "most challenging he has ever seen" is going to deliver smaller returns than what experienced investors have in their heads. He pegged the return in the 6% to 8% range for stocks going forward, also citing low yields and low inflation as key reasons to alter long-term expectations.
Of course, a lot of investors would be thrilled to get 8% from the market these days, a far sight better than the returns they have earned over the last decade. But if history has not been suspended -- and the experts don't think it has been, they just believe returns will be lower -- the lowered expectations do significantly change long-term financial and investment planning.
Consider someone who starts investing in his 20s and has a long life ahead of him. A 10% market return would double his market return every 7.2 years, compared with a nine-year time frame when the return is just 8%.
If his initial investment was $10,000, it would be $160,000 in 36 years if it compounds at 10% annually. It would be half that amount over the same time period if the return is 8%.
The challenge is that inflation is still in the 2% to 3% range, and investors can't get to where they want to be with a less than 2% Treasury bond, combined with a 6% to 8% stock market, said Jeffrey Coons, the president of the mutual fund firm Manning & Napier. "You combine those together and you never really get to those numbers you use in your retirement calculators, or that a pension plan would use for its actuarial assumptions. Those absolute returns really are the issue."
Aside from changing the assumptions they plug into those calculators -- a move that makes the ultimate outcomes look significantly more bleak and doubtful -- experts are split over what investors should do as a response to this less fruitful environment.
Average long-term investors have always tried to capture the long-term trends; it's why low-cost indexing has delivered so strongly over time.
Now, however, those indexes are poised to return less, which Coons suggested could pull investors away "from buying the whole stock market and bond market and focusing on individual investments that are priced to give you better returns."
Ibbotson has other ideas, namely to get a realistic handle on spending needs, and to save more.
"We've been talking about these lower returns for a few years now," Ibbotson said, noting that the stock market's volatility and lack of strong returns over a decade has scared off a lot of investors. "But I don't know that most people have responded. They haven't changed their expectations, or increased their savings or tried to figure out if they will really have enough if the market isn't as good over the next 25 years, as it was for the last 75.
"One way or another, however, I think most people have to change their behavior, change their equation. That's the only way this turns out over the coming decades the way people expect and hope for."
More from MarketWatch:
MORE ON MSN MONEY
VIDEO ON MSN MONEY
Question, are there any experts? They are only opioniated.DOW and other indexes vibrates
without any meaning.Weather,sickness,madness,winers,loosers etc,rather anything that
out of brain could linked to wallstreet volatility.
Just what strategery is that Chuck? Your account in Sweden? Where have you been for the last 4 years??
Double digit returns??? Unless you are saying that the dividend trail is drying up, we don't know what your talking about other than maybe for insiders like yourself. We do not recommend msn for any investment decisions. You can take that to your local bankrupt bank.
Anybody notice how the market always reacts badly when ever the media sings Odumbo's praises? After the second debate when they said he had "won" the DOW dropped 140 points. Now that he has purchased the second term, it is plunging into unknown depths. I'd say that is a huge DUH to most that pay attention. Expect more of the same until we are at bankruptcy - which we technically already are. I've been selling off like crazy for the last month and now sit in a good position to go scoup up those lovely profits. I'm going to need it when that dividend tax kicks in. Those of you not prepared for it need to begin stretching exercises so you can bend over and kiss your asses good-bye.
Copyright © 2013 Microsoft. All rights reserved.
Quotes are real-time for NASDAQ, NYSE and AMEX. See delay times for other exchanges.
Fundamental company data and historical chart data provided by Thomson Reuters (click for restrictions). Real-time quotes provided by BATS Exchange. Real-time index quotes and delayed quotes supplied by Interactive Data Real-Time Services. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by SIX Financial Information.
[BRIEFING.COM] S&P futures vs fair value: +0.30. Nasdaq futures vs fair value: +2.50. The S&P 500 futures hover near their unchanged line after climbing off pre-market lows. Equity futures have spent the overnight session in a four point range amid quiet overseas trade.
With no market-moving economic data at home or abroad, the pre-market sentiment has been shaped by quarterly earnings. Notably, Home Depot (HD 79.46, +2.70) is higher by 3.5% after beating on ... More
More Market News
|There’s a problem getting this information right now. Please try again later.|