Planning for the Lean Years
If the past two years' losses have lowered your expectations for stock returns, you might want to keep them there -- or even take them down another notch.
That's the message from financial planners, fund managers and even Warren Buffett. Through the 1980s and 1990s, stocks rang up an 18% average annual gain, according to data from the Charles Schwab Center for Investment Research. That's far above the 11% historical average. The past two years' losses might lead you to expect a surge back to 1990s-type gains. But with a sluggish economy, interest rates due to rise and stocks looking far from cheap, experts are seeing more reasons for stock returns to stay below 11% than above it in coming years.
"If someone came to me and said, 'I have to make 15% a year over the next decade,' I'd tell them there's no way to do it," said Bill Nygren, manager of the (OAKMX)Oakmark fund and the reigning Morningstar fund manager of the year. Citing slower growth and high stock valuations, Buffett wrote that he had "lukewarm feelings about the prospects for stocks in general over the next decade," in his annual letter to shareholders of his holding company, Berkshire Hathaway (BRK.B), last week.The upshot for fund investors: Sock away more money and expect lower growth. Slimmer gains shouldn't make you abandon stock funds, but they are reason to save more, spread your bets and stick with cheap, tax-efficient funds. If you're prudent now, you'll still reach your goal, and if stocks do exceed your expectations, then you'll be saddled with the pleasant problem of having extra money. Let's look at why we might see lower gains than we saw in the 1990s and then how we might invest accordingly. Part of the case for lower gains over the next year are all those gains we've already seen. Yes, stocks have lost ground and trailed bonds over the past two years, but those lousy years cap a stretch of breathtaking gains. Thanks to low interest rates, a solid economy and surging confidence in the equity markets, the S&P 500 gained more than 20% each year from 1995 through 1999, its finest five-year stretch ever. A $10,000 investment in the (VFINX)Vanguard 500 Index fund, which tracks the S&P 500, at the start of this period would've grown to more than $35,000 by its close, according to Chicago research house Morningstar. "We have to pay for the excessive returns we've seen," says Steve Henningsen of Boulder, Colo.-based financial adviser The Wealth Conservancy. "You just can't get 20% returns year in and year out." Even with the last two years taken into account, stocks have still averaged a 13% annualized gain over the past 10 and 15 years, through Feb. 28.
Experts aren't sure stocks can keep up their white-hot pace
|11%, stocks' historical annual return. SSource: Charles Schwab Center for Investment Research.|
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