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Latest Issue

No Free Lunch: Valuation Determines Return

March 15, 2019

Last week, I described the enormous challenges retirees face. One reason for that, aside from insufficient savings, is that markets haven’t delivered the returns many experts said we could plan on.

Back in the late 1990s, we were told that the long-term average return (~10%) was a reasonable long-term assumption—even if the market cooled down from the tech boom. Instead, the S&P 500 index gained about 3% annually since 1999 with total return just over half of the historical average. As a result, Baby Boomers are having to work longer and harder to retire, as well as save more of their income.

Nonetheless, hope still springs eternal for historically average returns. In this week’s letter, longtime friend Ed Easterling joins me as co-author to explore the reasons that so many analysts and product purveyors pitch such hopeful expectations. (Longtime readers will know Ed and I do this periodically.) We’ll show how the long-term average is a longshot bet in almost any market environment. Most of the time, returns over a decade or two are well-above or well-below average.

Most of all, it’s fairly predictable which side of average will occur. This has serious implications, yet there’s a lot that you can do to still achieve investment success. This is also something you will not hear from many in the investment business. “Predicting” less than historical average returns in the future is not exactly a great sales pitch. But as I think Ed and I will demonstrate, it is the most...

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