What Returns Should We Expect?

They say that hindsight is 20/20, but in the financial industry, hindsight only gets you so far. And unfortunately, we do not know what the future will bring. Sure, back testing strategies, looking at historic trends, studying forecasting models and understanding leading economic indicators can help give us some guidance, but nothing and no one can tell us what will happen in the future with 100 percent certainty.
 
I wrote about this a few articles ago, but I want to state it again: not knowing something in the financial industry is dangerous, but assuming that you know something and being wrong can be catastrophic.
 
But according to a survey by BlackRock, the world’s largest money manager, a significant percentage of Americans are making assumptions about their financial health, and those assumptions are likely wrong. The survey of more than 1,000 people with money in their current employer-sponsored plans showed that more than half believe they can retire with the lifestyle that they want. A whopping 70 percent believe that they will meet their retirement goals.
 
That’s great, right? We want people to experience the retirement they have been dreaming of. In fact, that is a goal I have dedicated my career to. But here’s the problem—that confidence is based on assumptions of future performance, and we all know that assumptions are often based on emotions.
 
Now, you all know from reading this column that emotions have no place in a sound financial strategy. I strongly believe that to be true, even though consumer sentiment, how people feel about the economy as a whole, can impact market performance.
 
Look at some recent significant market movements. President Trump gave an extremely positive speech about the economy at the end of the February. Following that, the S&P 500 Index shot up 1.4 percent, to a record 2395.96, in its largest single-day advance since the election, because people “felt” good about the future. More recently, on May 16, the S&P 500 Index marked its 15th session with a move within 0.5 percent . . . the longest such streak in about 48 years, according to Dow Jones data. Then news of the Comey memo and subsequent investigations led to a 50 percent spike in equity volatility, because many “felt” scared.
 
Investor sentiment can affect the market; I don’t disagree with that. What I’m saying is that how you “feel” should not affect your investment strategy or overall retirement system. They should be built upon foundations that incorporate a rules-based process that maximizes your chance of financial success.
 
These optimistic pre-retirees who were surveyed are not just optimistic about their future, they are optimistic about the future of overall market performance. Two-thirds of those asked expect returns over the next 10 years to track past performance (17 percent expect even better returns than we have seen in the past).
 
Hmmm . . .
 
Here lies the problem. Nearly two-thirds (the same amount that base their confidence on the expectation of tracking past returns) were not aware of the fact that Wall Street believes there will be “notably lower” market returns moving forward.
 
According to consensus forecasts of 35 companies in the financial industry that were gathered by Horizon Actuarial, stock and bond returns might even be as low as half of what we have grown accustomed to over our lifetimes.
 
So why are these folks, saving in their company-sponsored plans, not being informed by those plan sponsors about the reality of our market future? Because those plan sponsors are making the same assumptions their workers are! More than two-thirds (70 percent) of the plan sponsors surveyed by BlackRock believe US stocks will mirror or beat past performance, and over three-quarters of them think bonds will as well. Apparently, they need to spend some time thinking about that little line we see on nearly every commercial, sales sheet, and prospectus we look at: Past performance does not guarantee future results.
 
Folks, we don’t know what the future will bring, and being optimistic about it will not change the outcome. Let me leave you this week with one thought. If you have not done so, now is the time to take responsibility for whatever investment strategy you follow. Whatever the future holds, managing downside risk exposure and minimizing losses are crucial to an effective investment strategy. Because every successful investor knows that if you manage the downside, well, the upside takes care of itself.
 
What is your strategy? What is your system? What are your rules?
 
Make sure your retirement goals and forecasts are based on facts, not emotion, and make sure your retirement system is designed to give you the highest level of protection by using those facts . . . not your emotions.
 
I remind you, as always, be vigilant and stay alert, and don’t assume, because you deserve more.
 
1. http://tinyurl.com/mhwrvjb; 2. http://tinyurl.com/mlck8jp