Your Money and the Stock Market

Can investors still count on average annual returns of 10 percent?

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Investors planning to keep their money in the stock market for the long term have come to expect returns in the region of 10 percent, the historical average for the 20th century. But since 2000, returns have been significantly lower. From the start of 2000 through the end of this past May, annual returns for the S&P 500 Index were 1.1 percent. Since then, things have only gotten worse.

The popular press, for the most part, tells us not to worry and says we'll see 10 percent average returns once again. On My Own Two Feet, a personal finance book for women, bases its savings suggestions for today's 20- and 30-somethings on the assumption of 10 percent returns. Vanguard's chairman, John Brennan, assured his customers earlier this year that he believes the markets will return to historical averages, but not necessarily anytime soon. In its October issue, Martha Stewart's Body + Soul magazine took an even more optimistic perspective, advising a reader that the historical average is closer to 11 percent. (Perhaps they didn't adjust for inflation?)

But can we really count on repeating the growth of the 20th century over the next several decades, given the performance, so far, of the 21st? The past few weeks have only made investors more nervous. Yesterday alone, the S&P 500 lost 8.8 percent of its value, and it's down almost 14 percent for the month.

I put that question to Brad Sorensen of the Schwab Center for Financial Research. Here's what he had to say:

"If your portfolio is mostly in stocks, at this point, [10 percent] would probably be a little on the high side. My advice would be a little more conservative. Six to eight percent annual returns would be safer going forward. After the excesses and returns of the 1990s, we expect to see slower growth for the next few years. It's impossible to predict over the next 40 years, but I wouldn't go to 10 percent. Somewhere around seven to eight percent is a relatively safe idea of what returns would be."

In other words, it's time to forget about that golden 10 percent figure and to start being more realistic. That might mean saving more money now so more modest 6 percent returns would generate the kind of savings you want down the road. There's always the possibility that we'll be pleasantly surprised, but I'm no longer counting on it.