Coming low stock returns? "treat every nickel like a manhole cover"

The New Era of Low Stock Returns


Leading investment analysts think you will be lucky to squeeze out an average return of 2% annually, after inflation and fees, from a typical portfolio of stocks and bonds over the coming decade or so.

.... Over time, the return on stocks after inflation has tended to come very close to the sum of two numbers: dividend yield—total dividends over the past year divided by the current share price—plus the inflation-adjusted growth rate in dividends. The yield on the S&P 500 is 2%. For more than a century, the growth rate has averaged about 1.5% after inflation. Add those two numbers and you get 3.5%. Now consider that the yield—interest income divided by price—on 10-year U.S. Treasury notes is 2% and that the government’s core measure of inflation is running at about 1.7% annually. If you have half your portfolio in stocks that return 3.5% and half in bonds that return 0.3%, you will earn about 1.9% after inflation. If stocks average the 2.5% return from Prof. Shiller’s data, then a balanced portfolio will return only 1.4% after inflation. (These numbers assume no fees, taxes or trading costs.)
Comment: Image source: Manhole cover - Oslo. Quote "treat every nickel like a manhole cover" is from the article with a context of using low-cost index funds or ETFs and minimizing advisor fees. As for us, we do not use a financial advisor. Our mistakes and successes are our own. My own target is 3% return from dividends and growth that matches inflation.

1 comment:

  1. This will never happen to me because I don't trust brokers. (Not saying that I will not suffer financial (investment) loss. But that any losses will be because of my own mistakes):

    Small investors blame losses on brokers they once trusted -
    Single mom, retirees say nest eggs hit after they put too much faith in fee-hungry brokers

    Susan Bernardo trusted her stockbroker. She wound up losing a fortune.

    Her broker, David Harris, advised her to sell $400,000 worth of relatively safe municipal bonds, she says, and sink the proceeds into real estate and energy partnerships in hopes of earning more income. She had received the cash from a settlement after her husband died in an accident and needed money to raise her small son.

    More than six years later, those investments are in trouble. The stream of interest payments she used for living expenses has mostly dried up and the value of her portfolio is half of what it was, according to a financial planner who helped her file a claim against the broker.

    Bernardo says Harris never told her how risky the new investments were, or about the fat 5 percent commission that brokers typically get selling them. Harris hasn't returned calls seeking comment.

    That her broker might not have acted in her best interest never occurred to her, until recently.

    "I thought, 'OK, someone is watching over me,'" says Bernardo, now 57, of Wantagh, New York. "Maybe I was naive."


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