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Dear Liz: Why do you keep saying retirement accounts will earn an average annual return of 8%? We haven’t seen returns like that in years, and there’s no chance we will in the future.

Answer: No one knows what the future will bring. But we’ve been through tumultuous times in the stock market many times in the past. Between the mid-1960s and early 1980s, for example, the Dow Jones industrial average benchmark of stock prices pretty much went nowhere, pinging back and forth between about 600 and 1,000. (Just do a Web search for “Dow Jones history” and you’ll turn up charts that show this.) People were pretty disgusted with stock market returns, and many were pessimistic about the future of our economy. Through the rest of the 1980s and ’90s, though, stock market returns exploded.

In every 30-year period since 1928, stocks have had an average annual return of at least 8%. Those who hung on through bad times were eventually rewarded for ignoring the doom-and-gloomers.

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Categories : Investing, Q&A

2 Comments

1

If you “pay attention” to a few stocks (pick a category-i.e. propane, electric, phone, etc.) and you watch the 52 wk low/highs you can find some that do pay a good dividend and just be patient. I bought APU (Amerigas) when it was $29/share–now it’s about $45 but I’m not selling because the divident pays me $2.96/share which avg’s out to 10% for my $$. I’ve been watching FGP (Ferrelgas) and when it went below $20/share I snagged that one. Dividend is $2.00/ share another 10%. Pay attention and be patient.

2

This article raised several questions:

Why begin the analysis with 1928?

What are the results of including earlier periods?

Is an 83-year statistical baseline, with a few major fluctuations, sufficient for us to be confident in predicting future market behavior?

How do we know when any given 30-year period will begin and end?

This advice might be more complete if it included the following caveat about stocks:

In an economic downturn some companies go bankrupt, causing the loss of most of all of the funds invested there. The larger the downturn, the larger the likely loss. As a result, even if markets eventually recover, there will be a smaller total remaining upon which the recovery will act. In some instances, the investor will never get back to even.

Thank you. Charles D. Bates