Should We Expect Double Digit Returns?

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 – 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.

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7 Responses to Should We Expect Double Digit Returns?

  1. mbhunter says:

    I don’t count on double-digit returns. 10% is way too high to expect for this year. I think one of the best places for extra money above and beyond tax-advantaged retirement accounts is paying down a mortgage. Now, if interest rates hit 6-7% again, then start saving more there.

  2. RS says:

    I don’t count on double digit returns either. I used to since I had just finished college durig the tech boom and started investing then. I thought that I was going to be rolling in money. Let me tell you, that didn’t turn out well.
    1) I knew nothing about the stock market yet…just that everything seemed to be making money at the time.
    2) Turns out that most of the stocks in my E*Trade account are pretty useless now.
    3) Now I am an index fund investor and I do not expect 10+% returns each year (though it would be nice).

    I was wondering if the mbhunter would elaborate a little more on his comment about paying down the mortgage. I posted the following article on the Young Professionals Financial Blog about that exact question. I would love a few comments on what I should do in the coming year. Thanks.

  3. Karteek says:

    The Superman of the bond world, Bill Gross, wrote a book in 2000 called ‘Everything You’ve Heard About Investing Is Wrong’, where he argues (in the middle of soaring valuations) that a reasonable long-term return going forward is 6%. Seemed crazy at that time, but as we all saw, markets that exaggerate one way tend to correct themselves.

    I agree with mbhunter that in such a situation, reducing debt leverage is great. Paying off your mortgage early is an assured return, even more rock solid than Treasuries if you will, although I’d probably not push all my non-retirement money towards this purpose. It’s incredible though how much just a couple hundred bucks a month can shrink your debt.

  4. trip says:

    I do all of my planning with an 8% return (as does Jonathan Clements). Jeff Opdyke suggests planning for a 7% return. I like the higher 8% because if forces me to make sure my portfolio is working as hard as I can make it work. Fortunately it looks like I will almost double that this year! I am pleased but not complacent.

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  6. baselle says:

    People have such short memories! 2000, 2001, 2002, and some of 2003 gave us negative returns. When I first started with this particular 403B in 2000, I distinctly remember that my contributions made up for the losses. My dollar holdings stayed steady while the price went down and the NAV went up. It was definitely a red-queen running in place feeling.

    And it wasn’t that long ago.

    6% – with enough diversification that something in your portfolio will be going up that you can watch and cheer, even if your core holding is flat or dropping.

  7. Jack Miller says:

    I must be straight up with you. Many of the comments show a lack of confidence in the markets and in the investors ability. For example, it is not a good investment move to pay off a mortgage. This idea is for those who want to hunker down, live a modest life and avoid the work of investing. It reminds me of the fellow in the bible who hid his talents in the ground.

    The after tax cost of a home mortgage for most folks is less than 4%. Stocks average better than 11% long term. Those who hide their money are giving away a fortune in order to feel good. Pooh on 6% diversified.

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