In today’s investing environment, should we expect yearly double digit returns? I ask this because so many people use the 10% historical average that the S&P 500 has returned over its history when doing calculations on compound interest. While there are certainly individual stocks that will produce double digit returns in 2006, for the average person is it realistic to assume a double digit return with the current state of stocks and bonds. This from Yeske.com – a fee-only financial planning asset and management company in regards to 2006:
Have realistic expectations of performance. The years of exceptional annual returns for stocks, on the average, are a memory now. Annual returns averaging below the long-term average of about 10 percent annually seem more likely in the foreseeable future. Whatever they are, the average returns for balanced portfolios are likely to be single-digit.
I’m curious if people believe that they will only receive single digit returns on their money. I highly doubt that most of the people reading this post think they will end the year with only single digit increase results in their net worth.
While I advocate saving money as the best investment which combined with even single digit returns will usually result in double digit net worth growth making the investment return a lot less critical when calculating future worth, my opinion is still in the minority. That doesn’t mean I don’t want to maximize the earnings of the money I have invested, just that it isn’t near as important to me as compared to someone that relies solely on the investment for savings growth.
If it is true that investors should only expect single digit returns for the near future, that will probably change quite a few people’s outlooks on when they will have the money they want to retire. Personally I think using a lower number in the single digits when calculating your retirement funds makes sense. I think it’s better to prepare on the conservative side and if you do get the double digit returns, that’s an extra bonus. That is better than counting on double digit returns and ending up with single digit returns and not enough to cover your anticipated expenses.