Sorry, stocks don't earn 10% a year
Investors need to rethink that often-repeated belief, because times have definitely changed.
Do you believe in magic?
Fifty years after the Lovin' Spoonful first posed the question, we have to ask it yet again. And it seems that for a lot of people on Wall Street the answer is emphatically . . . Yes!
They believed in magic in the late 1990s. Maybe it was the influence of Harry Potter. They believed in magic in 2006. Maybe it was due to "Twilight" and all those vampires. And apparently they believe in magic today. Can we credit "The Walking Dead" and the appearance of zombies on our TV screens? Who knows?
Stock market investors still believe in the supernatural, to judge by their enthusiasm for the Standard & Poor's 500 Index ($INX) at current prices.
Magic? Supernatural? What am I talking about?
Wall Street's version of magic is the belief, often-repeated, that stocks earn about 10 percent a year "on average," with annual returns distributed randomly around that magic number.
Wall Street's version of magic also includes the belief that stocks earn that number regardless of valuations.
It's based on the pseudo-scientific belief that finance is a natural science, like biology or chemistry. Stocks "earn 10 percent a year," they say, the way water boils at 100 degrees centigrade at one atmosphere. It's in the scheme of things. The order of the universe.
And to support the claim, they will point to data going back to the 1920s, showing that stocks have earned, indeed, about 10 percent a year on average over that time, with annual returns varying around that number apparently by magic.
Your money people may have one of those charts on their wall, showing average returns by year bunched around the central number.
OK, so there are two alternatives.
The first is that stocks do, indeed, earn 10 percent a year as if by magic. The second is that there is no magic involved.
Someone who bought stocks in the 1920s locked in a dividend yield of 4.5 percent.
Then they got growth on top of that. Corporate profits rose in line with the economy, and the economy grew by about 3.5 percent a year. Then they also got about 3 percent from inflation.
Add it all up and you get about 11 percent.
Then investors lost about 1 percent a year from the creative destruction of entrepreneurial capitalism -- namely they had to keep selling some of their old stocks to buy into the new stocks that joined the market, like Polaroid and Xerox (XRX) and Microsoft (MSFT) and Apple (AAPL) and Google (GOOG) and Facebook (FB) and Twitter (TWTR). (Microsoft owns and publishes Top Stocks, an MSN Money site.)
That leaves . . . about 10 percent a year.
Stocks are not runes. They are not magic totems. They are not invisibility cloaks or quaffles in a game of Quidditch. They are simply claims on a future stream of dividends.
They can only generate returns of today's dividends, plus growth, plus inflation, minus any dilution from new companies. If we strip out inflation, which is purely an illusion, we are left with returns since the 1920s of about 7 percent a year in "real" returns.
Here's the problem.
Today’s dividend yield is no longer the 4.5 percent you got back in the 1920s. It's less than 2 percent. (And no, stock buybacks have added nothing to that over the longer term, although they can provide short-term boosts).
And modern economic growth no longer looks like the 3.5 percent you got back in the 20th century. On the contrary, it's been getting slower every decade, and for the past 20 years the U.S. economy has only been growing by about 2 percent a year (plus inflation) or less.
Meanwhile new companies continue to join the market, costing you, say, 1 percent a year. Based on this, the math says long-term returns from investors are only likely to be about 3 percent "real," not 7 percent.
But not according to Wall Street. What returns should you expect from stocks yielding 2 percent and offering 2 percent growth? Why, about 10 percent, says Wall Street.
More from MarketWatch
Whoever truly believed that 10% per year anyway?
~ oh, the company 401K presenter who came in every year to do his sales pitch
It's actually more like 9%. Another article posting a fallacy position to start a dialog. Taking the market since the 20's or so through today will yield you around 9% or so CAGR, which is the geometric mean and not the average. CAGR is lower than average and is smoothed out.
I think the key in the headline is earn, as in dividend -- maybe. Total returns on a good high quality portfolio have a CAGR of about 10% or more. Through about the worst times in history as far as volatility 1999 - Now, a good portfolio has done an easy 7-12% or more. The key is individual stocks and not MF's, and reinvesting dividends and rebalancing as needed.
In general, 401k's because of the restricted / limited investment choices, don't do as well as an investor that has the whole market to choose from and weight it accordingly. Also, keep a big chunk of cash on hand to buy into the market when there is a dip boosts things even more.
Just buying a bunch of stock or MF's and holding them will generally keep you above inflation if you picked at all well in the fist place.
65 million Baby Boomers retiring in the 10 years without a clue how deal with things like $60,000 per year plus annual Cost of Nursing Home Care for an increasing number of our Seniors. If the past generation of Seniors are declining in health, just what the heck do folks think the current obesity epidemic will effect folks health moving forward. It's An aging population that won't have the money to spend on the ever increasing costs of healthcare. When the next election cycle hits, the same folks will be calling for massive cuts to the working poor and the fading middle-class healthcare plans, government or private.
What is 100% Bogus, telling folks what returns were in the past and telling them to expect the same moving forwards. Folks are doing this without any real consideration to the massive Global Debt and Leverage problem that keeps getting worse. Buy and hold to infinity died the day the Global Feds went insane. Locking in profits is never a crime, folks bragging about the past will find that out soon enough.
One more thing. Economic growth is not the same as it used to be. We are now "Globalized". A company like 3M once garnered 90% of its revenue in the good old USA. Now it is less than 40%. The USA has not grown much -- flat. The rest of the world is booming. 3M has more then doubled in size and revenue in 10-15 years and continued to increase it dividend. The same companies -- 3M's -- are doing a lot more with less -- making more money with less inputs -- and selling more product then ever -- just not here.
There are just too many variables to toss in to actually measure growth on global scale when comparing it to the old standard measure. GDP, etc.
However, if my portfolio doubles in value ever few years as it has, then it is getting me better than a 10% return -- see rule of 72/69, etc. As a unit of measure, one portfolio I have has a 4.55% Dividend Yield and 6.81% CAGR minus the dividend 15 years running. The other very old portfolio, 3.57% Dividend yield and 2.98% CAGR minus the dividend -- since 1963. Lots of cash positions there and it took a big hit when some really great stocks like "GE" tanked.
They will come back be back at around the "Magic" 10% numbers.
I cannot complain.
Hmmm, I think this totally depends on who's doing the stock-picking.
Is it POSSIBLE to make 10% a year in the market? ABSOLOUTELY!
However, if you are dodging the bullet of making your own decisions by just playing the major averages like they are a slot machine, then, NO, you are at the mercy of the masses.
Even so, the natural human tendency to be bullish will usually save you, or at least keep you above water. If you want to find that 10% return, you have to do the hard work of research and constant analysis.
Figures can lie and liars can figure is an old adage and this article corroborates that saying.
One can easily earn a 10% return with the proper diversity of equities and MF'S. This guy injects extraneous factors into his deductions in support of his theory which would apply in any economic environment e.g. inflation, new technology etc. If it were not for these new companies , he would have a point. The market is and still remains very dynamic regardless of these foolish articles and the number of increases in population wealth, regardless of the disproportionate distribution is proof positive. Article is 100% bogus.
I don't call them stock markets; I call them stacked markets. First, the real value level for dow without government propping is around 6000. Second, as soon as any company in the dow ceases to grow or certainly if they fold, the jokers who run the dow pull them out and dump them, and replace them with a new golden boy. The dow handlers will do anything to make its numbers look good. We'd all be better off without stacked markets.
But here it comes folks, HOWEVER, that's yesterday's news. Anyone telling you to expect on average the same for the next 6 years much less the next ten is merely pumping booster needles up your you know what. These past great returns are a Gift, and they should be treated as such.
Everyone thinks they are a stinking Genius when Markets are rising and they quickly find out they aren't' when it doesn't. Buy and hold to Infinity is dead, the Highly Insane level of Global Debt and Leverage has assured that for decades to come. Of course, most folks won't believe this until it smacks them, right in the Pocket Book.
Look at the frequency of Recessions and ask yourself this, what can the Central Banks do to pull us out of the looming next one. Exactly. They are already all in. It's great on the Ride up, not so much on the Ride down. Most Speculators will be doing exactly that. Those with the most money are always locking in profits. Bulls make money, Bears make money, but PIGS always get slaughtered. Always.
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. 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 Morningstar Inc.
It's time for a reality check in advance of the Chinese e-commerce giant's much anticipated initial public offering.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.