What stock market average do you use to forecast investment returns? 10%? 12%? Maybe something a little higher or maybe a little lower?
Try as we might, chance (or luck or whatever you want to call it) is the biggest predictor of how your investments will fair over a 30 year period. Or so says a current Wall Street Journal article.
The biggest factor in long-term returns is how the financial markets happen to perform during the 30 or so years an investor puts money away for retirement.
As recent history has shown, those hoping to retire in the last few years have seen a stock market drop nearly 40%. You may have been careful and committed to your savings for 28 years only to have it disappear in short order. What does it mean when all of those hard earned gains disappear in a few months? It had nothing to do with your sacrifices over the last three decades. It had everything to do with luck.
It’s a sobering thought. If so much of your fate as an investor is out of your hands, what can you do? Focus on the things you can influence…[like] saving as early as possible, save as much as possible, diversify and pick low-cost investment options.
But what about historical norms? The percentages we use to gauge the success of our portfolios?
The problem is, there really is no historical norm. [There are] a tremendously wide range of returns for various 30-year periods. For instance, $100,000 invested in 1946 would have grown to about $1.15 million in 1976, but the same amount invested in 1976 would have delivered about $2.27 million in 2006.
And, of course, there’s the human element. Which tends to be wrong most of the time.
It’s well established that people attribute bad luck to randomness, but then attribute good luck to their own skill.
We also know that we shouldn’t eat too much or linger at the bar too long. But we do anyway. And then blame our something outside ourselves for the consequences.
Maybe we should just be crossing our fingers instead?
Read the entire article at the Wall Street Journal Online.