Saturday, March 29, 2003
10 percent returns? Where?
A couple of readers recently have asked: Where in the heck can an investor be earning a 10 percent annual return these days?
Stocks have been in negative territory for three years in a row; interest rates on bonds, money markets and other savings accounts are at their lowest in 41 years.
Why do the financial media continue to repeat that 10 percent figure?
Indeed, after a recent "Morning Memo" item in the Enquirer, one reader proclaimed: "That's so 1999!"
The item, by the way, encouraged long-term 401(k) participation by showing that putting away $36 a week, which can grow at an annual average of 10 percent, becomes $356,199 after 30 years and almost $1 million after 40 years.
Longer periods involved
Actually, were financial pundits stuck in the 1990s, they'd be tossing out projected annual returns double or triple that 10 percent figure.
Indeed, the Standard & Poor's 500 Index (the most often used proxy for "the stock market") gained about 20 percent in 1999.
Returns hovered around 30 percent in 1997 and 1998.
But the reason financial pundits and journalists use 10 percent when talking about long-term annual averages is because they generally look at a longer period than the last five or six years.
Despite the last three years of negative returns, it is a simple and true fact that the S&P 500 has averaged a 10 percent total return (which includes reinvested dividends) in the past 30 years.
Some years, like the late 1990s, were higher. Some years, like the last three, were lower. But over time, total returns have tended to "revert to the mean."
That's math talk for the average annual total return consistently coming in at about 10 percent.
And since history tends to repeat itself, most pundits continue to use the 10 percent figure to predict the next 30 years.
No time to wait
But the problem with this "reversion to the mean" theory - and the stumbling block for this column's curious readers - is that many don't have 30 years to wait.
Indeed, many are either in retirement now or approaching college tuition paying days. For whatever reason, they don't have time for the market to swing to the top again.
To these people, understand: The 10-percent-predicting pundits aren't talking to you.
"That's maybe not appropriate for them," said Jeannette Jones, president of The Asset Advisory Group in Blue Ash.
"For people who want to preserve and protect, we are recommending they stay in short-term bonds."
She likes shorter- over longer-term bonds because they are less likely to lose principal when interest rates start rising.
But those short-term bonds are only yielding about 3 percent.
Not quite the 10 percent stocks might yield, but at least you don't have to wait around for 30 years.
Contact Amy Higgins at 768-8373; firstname.lastname@example.org; or 312 Elm St., Cincinnati 45202. She regrets that she cannot reply to all individual questions.
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