Seems to me that assuming an 8% rate on return on investments for the purposes of retirement, or,

[raccoon]

for that matter, the purposes of anything, is WAY too optimistic. I saw this on a financial advisor's newsletter.

(Disclaimer: I’m not an economist, financial advisor, or one of their ilk.)

Your thoughts?

[lumberjack_jeff]

1. I don't think it's all that unrealistic.

It does imply a degree of risk tolerance that many people are uncomfortable with.

The last decade has been unusually bad for investors, much like the '70's.

The DJIA index has returned 12.4% average annually since 2008.

[Major Nikon]

5. The S&P 500 has averaged an 8.6% return over the past 30 years

S&P 500:

March 12, 1984 156.34
March 12, 2014 1,867.69

[Sgent]

13. Higher than that

the index doesn't include reinvesting dividends which average about 2.2% of the S&P.

[Major Nikon]

18. Yes, return in equity, not necessarily return on investment

The figure I quoted would be the average increase in equity assuming a fixed investment over 30 years. Reinvesting dividends would be a little more complex computation, but suffice it to say the stock market as a whole has averaged north of 8% increase in equity over the last 30 years.

[muriel_volestrangler]

58. But not so good before that period, or from a more recent start

http://finance.yahoo.com/q/hp?s=^GSPC&a=02&b=12&c=1970&d=02&e=12&f=2014&g=m
Average over periods:
Mar 2004-2014: 5.2%
Mar 1994-2014: 7.5%
Mar 1974-2014: 7.8%

[Romulox]

49. The Federal Reserve Bank has pumped TRILLIONS into the markets since 2008. That's not "return",

that's a "bailout". Not the same thing.

[lumberjack_jeff]

56. People have been predicting complete economic collapse for 200 years.

So far, none of them have gotten rich from that prediction, but maybe one of them will be right someday. Maybe it'll be you.

[Romulox]

57. Nice subject change. nt

[lumberjack_jeff]

61. Neither of us can predict the future.

The difference is how much weight we respectively give past experience.

We are coming out of an unusually bad 10 year window, but even within that window, the last five years have been pretty good.

Besides, to your point, investors aren't obliged to buy only domestic investments.

[Romulox]

65. Nobody was "predicting" anything. I was point out the reality of "Quantitative Easing"

which is directly related to the post-2008 Wall Street "gains" you mentioned.

Again, another subject change.

[Blue_Tires]

60. I'm reminded at how many people jumped into Madoff's pool

with his promised 15% ROR...

I know very little about markets, but even I was thinking "Shouldn't all these people have been suspicious about a no-questions-asked 15% return?"

[lumberjack_jeff]

62. I'm reminded of how many people jumped OUT of the pool when the Dow hit 6550.

[former9thward]

2. It is very unrealistic.

It is a figure used by financial people to justify all sorts of bad plans. The U.S. is in a period of very slow growth because of global competition. That is not going to change. It will only get worse.

[Major Nikon]

8. The S&P 500 grew north of 32% last year

Just sayin'

[former9thward]

10. So?

How much did it drop in 2007-2008? What has it done this year? If you think those figures are realistic you will be welcome in every financial adviser's office.

[Major Nikon]

11. " It will only get worse."

This is the comment I was addressing. You don't know whether the long term gains will be better or worse and neither does anyone else, but 2013 was as good of a year as the stock market has had in the past 30 so there's nothing to suggest that the stock market will trend downward and plenty to suggest that future long term returns will be about the same as in the past. Good or bad it doesn't really matter what the stock market does in any given year so long as the long term returns are good and clearly they are as good as they ever have been. The stock market is best looked at as a get rich slow scheme rather than a get rich quick scheme and countless people have done exactly that over the history of the stock market. I've been buying equity investments for the past 30 years and don't need a financial adviser. YMMV.

[Warren DeMontague]

21. Best thing about DU's financial expertise- if the market is up, we're DOOMED!

if the market is down, we're DOOMED!

I remember timidly opining in March of 2009 that now might be a good time (with the DJIA around 6000) to buy. Holy fuck, did that piss some people off, when they weren't laughing at my muddle-headed naivete..

....since I clearly didn't understand that we were DOOMED!

and, still are.

DOOOMED!

[leftynyc]

23. I hope you did as I did

and ignored all the noise and invested in 2009. I've done VERY well with those investments because I listened to economists and not people who had their thumbs us their asses regarding the market.

[Warren DeMontague]

24. Oh yeah. All 20 bucks I had liquid at the time.

I did, actually, invest a very small amount at the time, but to say I wasn't flush is an understatement.

Still kicking myself, of course, but there's no point in getting too nuts about it.

Edited to add: My wallet didn't cooperate, but my timing was spot-on. I think I put money in around March 9, which was pretty darn close to the market's absolute bottom.

[leftynyc]

29. Not wealthy by any means

but money that was NOT in the market at the time went in, I'm pretty good at saving some money for stuff like this. Even $100 would have grown nicely.

[Warren DeMontague]

39. Nah, me either.

But literally, everything I could put in I did that week. It wasn't much, but I had a strong sense that a bottom had been hit. In that instance, at least, my instincts were good.

[leftynyc]

45. I have some good friends

who work on Wall Street and these guys and gals that watch the market every single day know much better than so many of the economists you see on tv. They know I'm not wealthy so when they tell me it's time to invest, I listen.

[A HERETIC I AM]

30. At one point during all that muddle, you could have bought Ford stock.....

for less then $1.50/share. It's low was $1.01.

http://www.bloomberg.com/quote/F:US Trading in the $15 range

At one point during the same time period, you could have bought Yellow/Roadway for less than $.75/share If I recall, it dipped as low as 56 cents for a very short time.

http://www.bloomberg.com/quote/YRCW:US Trading in the $23 range


Never underestimate what a small investment can do.

[Warren DeMontague]

40. It was really a matter of not having a whole lot to futz around with.

Like many people, the economic slam had hit us.

But you're right. IIRC the bottom was somewhere around there, March of '09.

[A HERETIC I AM]

41. The Dow bottomed out 7 weeks after Obama was inaugurated.

Inauguration = 1/20/2009

Dow bottom = 3/6/2009 @ 6443.27

And I understand completely not having futz!

[Hoyt]

27. If you were invested in 2000, your annual return has been far less than 8% unless you got lucky.

Things are different now. I think we could well be in a period like Japan has been for the last 20 some years.

[A HERETIC I AM]

37. It depends on what and how you were invested.

You have made a blanket statement that is demonstrably untrue.

[Hoyt]

42. Nope, we are talking about average investor, and average returns.

[A HERETIC I AM]

43. Over 8% using one of the most popular mutual funds in existance.

8.3 by my calculation from Jan, 2000 to present.

This is the kind of mutual fund owned by average investors. Millions of them

[PowerToThePeople]

3. In the past 15 years, I would be happy with 0% return

Cash in a coffee can would would have been better.

PTTP's retirement home.

[we can do it]

4. It's just shyster sales mumbo-jumbo.

Most financial advisors make their money from commissions, the more of the shit you buy, the more they make.

[Nye Bevan]

6. Much, much too optimistic. A better assumption is something like inflation+2%.

Yeah, you might get lucky, but don't count on it.

[taught_me_patience]

7. When you look at the S&P with dividends included

it has returned a CAGR of 10% over the last fifty years since 1963. I'll take 50 years of history. Also, if you dollar cost averaged, your returns would be even higher.

A balanced portfolio of 25% bonds, 25% foreign equities, and 50% domestic equities should be able to generate returns of 8-10% annually for the foreseeable future.

[PowerToThePeople]

9. Only if you can also pick up shares when the market is at it's lowest

Typical workers are always pinched when markets crash, even thrown to the unemployment lines. Typical workers are not heavily investing when the markets are low, if at all. They are investing when the markets are high and they have a secure paycheck and hopefully some disposable income.

[whatthehey]

16. That's why DCA is the best approach

We have decades of history showing that overall returns of over 8% are the norm in equities (the 8% suggested undoubtedly assumes some lower risk but lower return bonds in the overall portfolio). People screw it up in tow ways. 1) Trying to time the market buying just before a boom and selling just before a crash. Lucky people may get it right once. Finance geniuses may get it right a few times. NOBODY will get it right consistently (every time you hear "this genius predicted the 2008 crash!" always ask if the same genius predicted the 90s boom or the 2011 -13 recovery too. Roubini for example has doubtless forgotten more about finance than I'll ever know but he never stopped predicting crashes. ANY crash taken in isolation would prove him "right".) 2) and even worse, panicking in a crash and cashing out at the low point. 2008-9 was a time to buy, not sell.

So how do you avoid this? Use a 401k if you have access to it, or mimic one if you don't. Invest the same amount every week/month. You'll buy at the highs and the lows equally (getting more shares per dollar at the lows). Over time you will match the market and get the 10-11% annualized returns mentioned above. and NEVER even think of selling on bad news/momentum and NEVER reduce investment % then unless starvation or homelessness is the alternative. I would sell my valuables, cars, downsize my home, economize to the point of eating ramen noodles daily in a shared efficiency before I would cash in or stop funding my 401k during a crash. Anybody who says they lost their retirement in the latest crash is one of 3 things: a) ignorant of the facts (or economical with them) b)unfortunate enough to have been in desperate straits where they truly had to sell their IRAs etc c)stupid enough to have sold when they didn't have to. The last category is sadly the most common.

If you were a genius or lucky and stopped investing just before the crash, a balanced portfolio in SP500 would still be up 30%+ today (1400-1860). If you kept investing, buying every month as it went down to 750 and then back up, your gains would be massively higher, and that's ignoring dividends. The only way to lose was to sell. The only excuse for that is desperation.

[PowerToThePeople]

28. enjoy your stay

Did you read my post? How is the person that becomes unemployed due to a market crash supposed to continue to invest in his/her 401k while the market is low? They do not even have a job, and likely will not get a job until the market is back up again.

[A HERETIC I AM]

31. "Enjoy your stay"?!?

Why would you say that to the poster above? Because he pointed out some FACTS you don't care for?

If a person lost their job because of the crash, sure, it sucked big time and obviously they weren't investing.

But the larger points he made above can not be denied. He is spot on correct.

And FWIW, Unemployment was never 100%. Not every single wage earner lost his job between 2009 through 2011.


"Enjoy your stay"


Why don't you just come out and tell the person that you don't like what he says and hope that he gets banned soon, because that is exactly what those 3 words are code for.

[PowerToThePeople]

48. That was actually my bad

I looked at his/her post count and "member since date" and quickly inferred he/she was a brand new poster extolling the virtues of the giant ponzi scheme that is the stock market. After posting, I did notice the "2013" date, so I should have said "Happy DU Aniversary!!!" I'll do that now.

Happy anniversary to DU whatthehey!!!

But, The posting history, date, and language used in the post still did not sit well with me. I debated editing or self-deleting. Hemmed and hawed about it a bit. Could not come to any concise conclusion. So, I decided to leave the post as is, even if I was in error, rather than delete to self censor my mistake.

But, also, I believe "Enjoy the Stay" may be worthy of anyone in the Democratic Party extolling the virtues of Capitalism and Ponzi scheme stock market. People are waking up. 'Centrist' Dems, 3rd wayers, and Corporatists are a shrinking minority and getting less. Socialism's old cold war stigma is fading fast. People want economic justice. Bernie Sanders, a professed socialist, has a valid shot at the Presidency. I think near term one of 3 things will happen to the Democratic Party:

1) They make a hard turn left and get back to their labor roots, kicking free traders and bankers.
2)They continue their current trajectory right, losing their base and losing election after election to the republicans.
or (this may be a sub cat of 2)
3) The party has already become "Republican" and the Democratic party of old is dead. The only separation between the two fascist parties are guns, religion, and bigotry. Vote for "I accept every fascist" big tent fascist A or bible thumping, gun toting, bigot fascist B.

Personally, I think number 3 has already occurred. What we are witnessing now is the old Democratic party members fighting to save their party from becoming the new Republican party. Each day more and more Republicans jump ship and join the "New Democrats." We see it all right here on these boards.

You will see more socialists, greens, and indys get elected into government as the left looks for some form of representation. I do not think this trend is going away. I do think capitalism, race to the bottom free trade, and ponzi scheme theft (stock market) are going away. So to them, and all that support them, I say:

Enjoy your stay.

[A HERETIC I AM]

63. Thanks, Noob

[econoclast]

12. Survivor bias in those numbers

These long term return numbers for indices like the S&P 500 are infected with what is known as 'survivors bias'.
Example. If you bought every stock that made up the S&P 500 back in 1984 and held them until today your return is Less than 8%. Why? Because when a company does not do well enough for long enough it gets booted from the index and a new one takes it's place. To name a few ... Sears. Kodak. Radio Shack Bethlehem Steel. JC Penny. All were in but now are out. So the index is made up of an annually rotated list of survivors.

And if you think 8% is too high, fear for the pension funds. How much funding a pension fund requires is partly a function of its estimated earnings. The more it is assumed the fund will earn tomorrow, the less needs to be funded today. And 8% is a number commonly used in those calculations.

[Sgent]

14. Not really

the survivor bias assumes that you bought every stock and held it indefinitely; however, investing in the S&P500 means that you change your investment when they are removed from the index.

Survivor bias is an issue with mutual funds where the bad ones go out of business, making the whole look better. But the S&P500 has been around for a LONG time, and the DJIA even longer. If you had bought whatever was in those indexes, sold them when removed, and bought what replaced them, you would have equaled their performance.

The Vanguard S&P500 index fund has a tracking error of .02% and fees of .03% or .18% (depending on the amount invested).

[econoclast]

19. Point taken

How many can duplicate Vanguard's execution?

[Sgent]

22. The vanguard index fund

is legendary for its execution -- but even bad index funds stick to their index. The Merrill Lynch fund has consistently done 1.5% less than the S&P500 -- but that's because they have (had) a 1.5% fee instead of .18%.

[A HERETIC I AM]

33. It may be "Legendary", but there are much better funds out there that have been around as long....

or longer than VFINX

While Vanguard does a fine job at what it does, entirely too many people think that merely because they have low fees they have the best funds.

It doesn't matter if the fees are zero if you get crappy returns.

[Sgent]

15. Its a little simplistic

8% is approximately the CAGR return of a 60/40 stock/bond portfolio since records were kept. That assumes however, that you never take money out, which isn't what most people intend to do. This number only really applies to foundations and similar.

If your buying a house, paying for education, or retiring, you will be removing money at some point -- and planning for that means either investing more conservatively or taking on risk that the money may not be there when you need it. Over time, it may make up the loss, but it doesn't help you when you retire.

[retread]

17. Depends on the party in power.

"The BGOV Barometer shows that, over the five decades since John F. Kennedy was inaugurated, $1,000 invested in a hypothetical fund that tracks the Standard & Poor’s 500 Index (SPX) only when Democrats are in the White House would have been worth $10,920 at the close of trading yesterday.

That’s more than nine times the dollar return an investor would have realized from following a similar strategy during Republican administrations. A $1,000 stake invested in a fund that followed the S&P 500 under Republican presidents, starting with Richard Nixon, would have grown to $2,087 on the day George W. Bush left office."

[Warren DeMontague]

20. You find something that can pull down a steady, reliable 8%, let me know.

Seriously.

[A HERETIC I AM]

34. Steady as in year after year?

Or steady as in averaged over time?

[Warren DeMontague]

36. Yeah, no, if you've got a long enough time horizon, sure, you can do pretty well.

Clearly.

[A HERETIC I AM]

38. Pretty much everybody has or had a "long enough time horizon" n/t

[moondust]

25. Investments???

76% of Americans are living paycheck-to-paycheck

[PasadenaTrudy]

51. No shit

Investments and retirement are foreign words to many of us. Even us college educated folks who supposedly did everything right. Oh well, what are ya gonna do....

[moondust]

66. Incidentally,

Maria Shriver was on Colbert last night to promote her new HBO documentary, "Paycheck to Paycheck," about working mothers on the brink of poverty in America.

[Blue_Tires]

59. +1

[cbdo2007]

26. LOL, I love finance discussions on DU

[Fumesucker]

35. I love practically all discussions on DU

Eventually almost all of the subjects descend into poo-flinging when one, both, many or all sides start losing an argument.

It's fantastic entertainment.

[steve2470]

32. love this thread !

My $0.02: It helps tremendously to have very steady nerves and not overreact to the ups and downs of markets. Of course, better to buy when the markets go down and better to sell when they go up, timing is always the issue.

[B Calm]

44. I retired last April. I draw 4% return every month and

haven't lost a dime. My money continues to grows! Just before retiring I told my financial advisor I like my money in an income fund. Drawing out a monthly check and I'm worth more today than what I was a year ago.

[steve2470]

46. kick nt

[Hamilton Felix]

47. My retirement account has averaged 5.5% for the last 10 years. Not 8%, but not bad.

[Romulox]

50. 5.5% is 32% less than 8%. That's the difference between bankruptcy and solvency, easily. nt

[Hamilton Felix]

53. Not in my case. My nest egg should be more than sufficient to see me through my Golden Years when

combined with my retirement and Social Security.

I save a lot.

[Romulox]

54. In the case of the municipal pension funds that use 8% as an assumption it does, though. nt

[Hamilton Felix]

55. Agreed. Assuming 8% is unrealistic.

[Lint Head]

52. Interest compounds and confounds.

[greatlaurel]

64. 8% is straight from Buckeye Institute and SPN to claim public pensions are insolvent

This really is right wing Koch propaganda that is being pushed very hard to destroy public pensions. Please pay attention to what is being done. Organizations like the Buckeye Institute and State Policy Network aka SPN (both are Koch backed right wing propaganda organizations) put out regular press releases and other propaganda tools to state that the 8% return on investment, that is used by most public pensions to estimate what their expected income from investment will be, is invalid. This is so they can scream that the pensions are underfunded and, of course, need to be done away with completely for all public employees.

It is a very clever propaganda campaign to destroy pensions, in particular, public pensions. The investment firms made out like bandits when the private pensions were raided starting in the Reagan years. How the theft of people's pensions was legal is way beyond me. Now that they have hoovered up all the private pension funds and forced everyone into private investing that gets higher fees and charges for the fund managers, their next target is to raid public employee pension funds. It has worked like a charm in Michigan where the thieving GOP have working on stealing the public pensions up there.

Return on investment is an interesting topic, but the 8% number is a key to knowing why the number is being put out there. These right wing thieves are very smart and very consistent about propaganda. If you know what the key phrases are, you can spot their work in a lot of places even here at DU!

Thanks so much for posting this information. Can you post a link to the newsletter? I would like to pass it on to our retired employees watchdog organization.