« Looking at an Investment Strategy for Retirement | Main | Will You Get Hit by the AMT? »
9% Forever?
By JLP | January 5, 2006
The Fortune Investor’s Guide 2006 has an interesting profile of Roger Ibbotson. This quote is pretty amazing:
In May 1974, in the depths of the worst bear market since the 1930s, two young men at a University of Chicago conference made a brash prediction: The Dow Jones industrial average, floundering in the 800s at the time, would hit 9,218 at the end of 1998 and get to 10,000 by November 1999.
You probably have a good idea how things turned out: At the end of 1998, the Dow was at 9,181, just 37 points off the forecast. It hit 10,000 in March 1999, seven months early. Those two young men in Chicago in 1974 had made one of the most spectacular market calls in history.
The article then goes on to explain that Ibbotson believes the long-term return of the market will be 9.27% for the forseeable future, which is a downward adjustment from the 10.31% used in the past. To arrive at 9.27%, Ibbotson did the following:
He takes the 10.31% annual return on stocks from 1925 through the present and strips out the tripling of the market’s price/earnings ratio that’s occurred since then. “We think of that as a windfall that you shouldn’t get again,” he says. The drivers of stock returns that remain are dividends, earnings growth, and inflation. Make a forecast of future inflation using current bond yields, assume that dividend and earnings growth history will repeat themselves, and you get a long-run equity-return forecast of 9.27%.
One of Ibbotson’s biggest challengers has been Rob Arnott, a Pasadena money manager and editor of Financial Analysts Journal. He thinks that future equity returns could be as low as 6%. If that were to happen (I don’t think it will), people would have no incentive to own stocks.
This has major implications on future planning. Why? Well, say your retirement goal is to have $2,000,000 thirty years from now. Assuming a 9.27% average rate or return, you would need to save $12,767 per year for 30 years in order to reach your goal. However, using Arnott’s 6%, you would have to save $23,866 per year in order to reach your goal!
One thing those numbers don’t take into account is the power of dollar cost averaging, which you do when you make regular contributions through a 401(k) or IRA. Over the long run, that volatility should work to your advantage.
My advice: don’t worry too much about the numbers (things you can’t control) and instead worry about how much you can be socking away for your future. Get serious about that and the rest will fall into place.
Topics: Investing, Retirement Planning |
January 6th, 2006 at 8:51 am
Weekly Roundup - 01/06/06
Another busy week in the world of personal finance. Here are some of the most useful things that I ran across this week at my favorite sites…
February 27th, 2006 at 6:52 pm
Another way to save for your retirement is this great program that I found; http://www.bondrewards.com They reward you a percentage of your purchases back in US Savings Bonds. You shop at popular online stores like,apple.com, target.com. and when you add up to 50 they give you a US Savings Bond. I think is great because and spending and saving at the same time.
March 19th, 2006 at 12:24 am
Note that the above ‘bond rewards’ are most likely EE bonds, which are only worth half of face value initially (a $50 bond would only be worth $25)
March 26th, 2006 at 4:54 pm
I’m a member of Bondrewards have been for several years. they recently increased their rewards to higher than any other internet program. I’ve gotten over $600 in US Savings Bonds for shopping online and I love this program. I’ve told all my friends about it. Also they have all the stores you want over 500. As for the payouts, when you consider the Bonds will be cashed at retirement, I can earn over $50,000 face value for free bt the time at 67. That’s nothing to sneeze at, even if is EE bonds. Remember EE bonds will continue to increase in value for 30 years. So, even if face value is $50 it could be worth $100 in theory.