Is 10% A Pipe Dream?

Is 10% A Pipe Dream?: Chuck Jaffe had an interesting column titled "Kiss 10% Returns Goodbye" which was about the need for investors to set their expectations a little lower. Roger Ibbotson is quoted that 8% might be more like it.

While the article is worth reading I would add one bit of caution to the discussion. Returns are not linear. The average annual return of the stock market over any reasonable sized sample is a combination of big moves in both directions and small moves in both directions.

This is where we get to how people end up faring worse than the market's average annual return for selling at the wrong time and/or buying at the wrong time without learning from past mistakes. In the past I've mentioned the studies that show numbers like the market averaging 10%, actively managed mutual funds averaging 9% and holders of actively managed funds averaging something like 3-4% annually.

The notion of markets averaging out to a smaller return over time is something I've been writing about here for a long time. The expectation here has never been never ending calamity just a series of headwinds that will result in generally lower but still positive returns, I think 8% for domestic markets is a little too optimistic.

I continue to believe that something close to normal returns can be had from foreign markets (ex-Western Europe and Japan) but to hedge all bets, it wouldn't hurt to save more money.

DIGITAL JUICE