Returns through the windshield, not the rear-view mirror

What kind of returns are you expecting over the next 5 to 10 years?

Most people look at history as a guide to answer such a question, but is that really the right approach?

The Wall Street Journal published a good article last week on just this issue.

Most investors expect 5-10% returns because that's what they've seen in the past.  Those same investors thought 15-20% returns were possible in 2000.  Not so much.  They also thought housing prices would go up much faster than inflation back in 2006.  Wrong, there, too.

Why can history be a poor guide?  Think about throwing a ball into the air.  If you project the first part of its upward flight into the future, you'd think it would keep going up.  But, that doesn't factor in good ole gravity.

The same is true with investing.  You can look at the past, but you have to factor in where things started, where they ended, and what forces may cause projected trends to change.

By looking at such underlying factors, I think you can expect 1% to 7% returns over the next 5 years, 4% to 8% returns over the next 10 years, and 6% to 8.5% returns over the next 20 years.

Keep in mind, those numbers include inflation, so you have to subtract around 2.5% from each figure to get the real return (what your dollars can actually buy in the future).  And, yes, that means we could experience negative real returns over the next 5 years.

Those numbers aren't terrible, but they aren't what most people are expecting (especially after a year when the S&P 500 was up over 32%!).

If you need to drive from Colorado Springs to Denver and need to arrive at 4 pm, you can't get there by leaving at 3:30 pm and driving 120 miles per hour.  Assuming the wrong rate prevents you from reaching your destination on time.

The same is true with investing.  Assuming the wrong rate of investment growth will cause you to save too little, and not have enough to retire when you want.

To plan a safe retirement journey, plan accordingly.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.