Sure, the average investor is pessimistic after a long, grim chapter symbolized by AIG and Bernie Madoff. It can be hard to remember, but there's a reason financial professionals say that the most dangerous four words in investing are "this time is different"—that is, this time the market really won't come back (or won't stop rising). There have been lots of occasions over the decades when investors were arguably more justified than they are now in giving up on equities. Imagine how you'd have felt in the summer of 1932, when the major indexes had just posted a three-year annualized return of minus 46 percent.
"Yeah, this time is different," says Matson. "It's not as bad."
Of course, what the market does is one thing, and what investors do is another. If you expect to match the market, you need to stay invested through thick and thin, something many investors can't stomach. Short on discipline and long on fear, active retail investors tend to get in and out of stocks at exactly the wrong moment, which is why they consistently underperform the market by about four percentage points a year, according to Dalbar, Inc., a Boston-based market-research firm whose annual report on investor behavior is a must-read for many financial advisers.
Jeff Layman, chief investment officer at BKD Wealth Advisors in Springfield, Mo., thinks a nominal 7 percent return is "very achievable" even if U.S. growth remains sluggish. That's going by what Layman calls a "simple, baseline model" which assumes a 2-percent dividend, 2-percent inflation, and steady stock prices, as measured by the S&P's price-to-earnings ratio, currently about 13.5 on expected 2012 earnings. "You're left with needing just 3 percent earnings growth, if you hold the PE multiple steady, to get to 7 percent earnings growth" before inflation, which would be something like 5 percent after inflation.
And as for a real 7 percent return longer-term? "I think it's very reasonable," says Layman. "The typical investor on the street is very skeptical about that, but that's another great contrarian reason why it'll probably happen."