Friday, December 19, 2008

Recalibrating Expected Annual Stock Market Gains

For many years, the stock market seemed to be sure way to retirement riches. With 10% average returns (prior to the most recent decade), the stock market would turn savings into riches through the process of compound interest. Indeed, I have written about 10 to 12% annual stock market returns in Retirement Saving Challenge - The Power Of Compounding and Why Most People Get Returns Less Than The Market

Now, it seems a long term bull market may have caused some to (mis)take average annual returns for guaranteed annual returns. As a result, there may have been over allocation of savings in the stock market, due to the belief that future returns would match the historical 10%. Unfortunately, 2008 has proven there are expecting average annual returns from the stock market each year can be devastating, as many diversified portfolios are down 40 to 50%, with little hope for recovering losses soon.

At this point, we have reduced our expected stock market gains to 7% annualized returns, with possible +/- 30% variation. In recognition of the high yearly volatility, we will only invest money in the stock market which is not needed for at least five years. Money needed for the short term will be kept in CDs, bonds, and money market funds. That way, significant declines in the stock market , such as in 2008, won't affect the funds needed for expenses in the current year.

For more on Reaping the Rewards, check back every Friday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC

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