Realistic Strategy Needed as Returns Drop

Going forward, your investment returns may be lower than what you’d expect. Way lower. In the past, the stock market has averaged around 9-10% over the last century, and bonds have averaged 5-6% each year. There were even years when both types of investments grew more than double their averages.

And that’s the problem. Averages are just that, an average. There have been good decades for stocks and dreadful ones—same for bonds. If you listen to some very successful, very wise, very experienced, and very influential investors today, you’ll hear that the averages will hold. But there are equally successful, wise, experienced, influential investors who predict returns one-third to one-half of what the averages predict.

You savers out there can look at your bank statement and see just how low interest rates are now. Those of you trying to live on fixed income investments are painfully aware that as your older holdings mature, the replacements can’t come close to the returns you had before.

So what do you do if bond rates continue to stay low or if stocks fail to produce a meaningful bull market in the next decade or two?

Well, what you don’t do is reach for returns that are outside your comfort zone.  If you are the type who never felt comfortable putting money in anything other than CDs, then pulling your money out and buying high-yield corporate bonds, foreign bond funds, or dividend paying stocks is likely a bad idea. Now don’t get me wrong, I use those types of investments in most of my retiree portfolios, but that’s because I know that those clients can handle the ups and especially the downs that come with them.

Likewise, if you have always used a limited amount of conservative stock funds in your portfolio, now is probably not the time to put half your money into the China stock market, a hot tip, or gold. Not that these are bad places to put money, it’s just bad to gamble too much in such volatile investments particularly if you have always been a conservative investor.

Most of the times when I see people dramatically shift their investment style it is because they are starting to panic. They see how much (or in this case, how little) their investments have been growing and they jump at every promise of riches that comes their way. The risks are revealed somewhere in the prospectus or fine print, but those paragraphs are overlooked in favor of some historical return that may never be duplicated.

Yes, some changes to a portfolio may be necessary, but not as a knee-jerk reaction. Instead they should be undertaken with deliberation, study, and guidance. However that may only get you so far. You have to look at the whole picture and be realistic about how much standard of living can be bought through your investments. The tried and true advice, to spend less and save and work more, is not as exciting as “sure-fire” ways to beat the market, but it’s the best way to stay steady when your returns have turned lukewarm.

This article was published under the title "As returns fall, keep strategies realistic" in the Wichita Falls Times Record News on June 30, 2013.