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Temper Your High Return Hopes

November 25, 2019

The next decade doesn’t look good for those counting on stock returns. Breaking even may be considered a victory.

That’s a serious problem if you need to fund a long retirement because stocks won’t continue their incredible performance of recent times. And if you look out a bit farther, the last two decades really haven’t been that great.

Since 2000, the S&P 500 average annual return is 5.4 percent. That’s not bad. But when you consider it took the most extreme valuations in history to get there, is it worth the risk?

I’ve seen predictions saying that, assuming 4 percent economic growth and historically normal valuations, equity investors can expect average annual returns over the next 20 years of -1 percent. For stock investors, it’s 2 percent annually.

How do you grow with those returns?

Other forecasts call for annual average equity returns anywhere from -1.8 percent up to 3.6 percent over the next decade. By the way, that 3.6 percent figure assumes stock performance will match historical peaks.

When debt is factored in, growth further slips. Plus, those paltry returns assume normal economic conditions. What happens in a recession?

We’re in the first decade without a recession ever. I doubt that’s the new normal.

What happens if we have multiple recessions in the next decade? The markets will go bananas.

The bottom line is, don’t expect great returns over the next 10 years.

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