Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Trump Stocks and Crypto Mania 2025 Incoming as Bitcoin Breaks Above $100k - 8th Dec 24
Gold Price Multiple Confirmations - Are You Ready? - 8th Dec 24
Gold Price Monster Upleg Lives - 8th Dec 24
Stock & Crypto Markets Going into December 2024 - 2nd Dec 24
US Presidential Election Year Stock Market Seasonal Trend - 29th Nov 24
Who controls the past controls the future: who controls the present controls the past - 29th Nov 24
Gold After Trump Wins - 29th Nov 24
The AI Stocks, Housing, Inflation and Bitcoin Crypto Mega-trends - 27th Nov 24
Gold Price Ahead of the Thanksgiving Weekend - 27th Nov 24
Bitcoin Gravy Train Trend Forecast to June 2025 - 24th Nov 24
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

How Unrealistic Return Assumptions Are Ruining Your Stocks Portfolio

InvestorEducation / Learning to Invest Jan 10, 2019 - 04:57 PM GMT

By: Jared_Dillian

InvestorEducation There is no shortage of stupid things in the financial market. But probably the worst thing people can do is to have unrealistic return assumptions.

Question to you: On a long-term basis, what annual returns do you expect in a broad-based stock market index?

  1. 6%
  2. 8%
  3. 10%
  4. 12%

The answer is E.

We have no freaking clue!

All we know is what stocks have returned in the past. We have no idea what they will return in the future. The conditions that led to prior returns may not be present for future returns.

Stocks Might Not Return the Long-Term Average

Most people will tell you that you can expect to earn 8% from the stock market per year. That is about what it has returned historically.

So, a little perspective. That 8% annual return (over a period of about 100 years or so) easily beats any other stock market in the world. Why is that?

It’s because America has the rule of law, property rights, all that jazz.

We have something special here in the United States that other countries don’t have. We have a legal framework that protects private property. This lets financial markets flourish.

You see that in varying degrees as you travel around the world. The really dastardly places don’t have stock markets at all.

Anyway, it makes sense that a loss of respect for private property rights or the rule of law might lead to diminished stock market performance. That is one reason the stock market might not return 8%.

I can think of a bunch of other reasons why stock markets might not return in the future what they have in the past.  And a big one is that they have just become so freaking expensive.

When stocks get overvalued, forward returns go down. Few people disagree with this.

There are lots of smart people out there who expect future stock market returns to be much lower than they have been in the past. It is not just me being a crank.

Stupid Assumptions Lead to Irresponsible Decisions

The problem is, people take this 8% number and extrapolate it out in the future. They break out Microsoft Excel for the first and only time to figure out how much they need to save every month in order to retire at age X.

The FIRE dillweeds have made big news because they think that you can retire at age 35. And yes, they are relying on that generous 8% number (or higher) to reverse engineer a future standard of living.

This is dangerous. If you have unrealistic return assumptions for the stock market, you will:

  • Retire earlier, when you should actually retire later—and you will run out of money.
  • Consume more, when you should be consuming less—and you will run out of money.
  • Invest, instead of paying down debt, which could result in capital losses to go along with increasing debt balances—and you will run out of money.

The worst example of this comes from a competitor of mine. In his book Total Money Makeover, he claims that an allocation to “growth-stock mutual funds” will lead to 12% returns.

After all, the main small-cap growth ETF (IWO) is down about 19% from the highs—losses that are difficult to recover from.



Not to mention: in that book, there is no discussion of an allocation to bonds.

A 12% assumption for stock market returns is irresponsible. It’s ignorant of decades of global financial markets history.

The stock market is not a bank account! It doesn’t pay interest. It isn’t a magic money machine. Average investors can find themselves in a position where they sustain losses over a very long period of time.

I’ll tell you how crazy this is. If someone came up to me with a pitch book for a hedge fund claiming they could make 12% a year, I would probably report them to the SEC.

The best, smartest, most amazing investors in the world have a hell of a time making 6-8% over Fed funds.

Have Realistic Return Assumptions

So what are realistic return assumptions? Well, I think 5% for stocks is reasonable, and maybe 3% for bonds. So a 50/50 portfolio will get you to about 4%.

Sounds like absolute crap, but that is the reality. If financial assets only return 4% going forward, what are people going to do?

They are going to have to save more.

This is the no-spin zone. People should spend a lot less time thinking and dreaming about 8 or 10 or 12% returns, and more time thinking about shovelling cash into a bank account. There they can link it up to Treasury Direct and earn 2.5% on Treasury bills risk-free.

Sure, 2.5% would be suboptimal, but not the worst thing in the world. It’s capital preservation.

Here’s the real reason not to be loaded up on stocks and hoping for a 12% return—when the 19% drawdown comes, you won’t panic into a diaper and sell, at which point the compounding comes to an end.

My ETF 20/20 readers know, the goal is to design a portfolio that you can sit in during good times and bad—so you can keep compounding.

Please temper those return assumptions. The stock market does not magically puke out 8–12% a year to a bunch of passengers along for the ride.

This is not a case of me being pessimistic. We can’t possibly know what stocks will return going forward, so we should probably prepare for the worst.

Grab Jared Dillian’s Exclusive Special Report, Investing in the Age of the Everything Bubble

As a Wall Street veteran and former Lehman Brothers head of ETF trading, Jared Dillian has traded through two bear markets.

Now, he’s staking his reputation on a call that a downturn is coming. And soon.

In this special report, you will learn how to properly position your portfolio for the coming bloodbath. Claim your FREE copy now.

By Jared Dillian

© 2019 Copyright Jared Dillian - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in