The cartoon hit the mark. Imagine an older man in a suit smoking a cigar. He's looking doubtfully at a smiling middle-aged money manager holding up a sheet of paper. The money manager exclaims, "We didn't underperform. You overexpected." Right now, that's Wall Street's favorite message, considering that the stock market has shown a less than 2% increase so far this year compared to a 28% average annual gain over the previous five years.

But the cartoon captures a far more serious question: What sort of long-term return should investors expect from the equities they're buying for their retirement years? The stock market has had a record run over the past two decades, and the gains have helped push household wealth to record levels. But the risk of disappointment is real. Take this striking example: The Dow Jones Industrial average at yearend 1964 stood at 874.12. Seventeen years later, at yearend 1981, the Dow was at 875.

Investors are right to worry about future returns. With the spread of retirement savings plans like 401(k)s, employees absorb all the investment risk from their pension plan. Whether workers end up living during their golden years in a condo by the ocean or in a trailer park off a highway partly depends on the stock market's long-run performance.

Of course, uncertainty is the essence of investing, and forecasting is a hazardous business. But the economic literature related to long-term returns seems to suggest that an inflation-adjusted range between a conservative 6% and an optimistic 9% is reasonable. Those returns are still superior to the main investment alternatives, like bonds or cash. Still, they are half or less than half of the heady double-digit gains of the past twenty years. Oh well, the stock market's unprecedented performance is a good story to tell the grandchildren.

 


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