Thoughts for Those Investing Over the Next 10 Years

By John Kageleiry

As we all know in life, the future is murky at best. This is especially true when it comes to the markets and investments. But sometimes there are ways of looking at things that give us some fairly credible information about what future stock returns may look like and how they can affect us.

Please be patient while I set the table on this one, the meal will be out shortly.

I recently came across some very interesting research, which was created by, a prominent and well-respected market research blog. In that research they demonstrated the close relationship between how much of the U.S. stock market is owned by U.S. citizens and businesses and how the stock market actually performed over the next 10 years. If we have a lot of our money in stocks, the returns over the following 10 years are below average. If we have only a modest amount in stocks, returns tend to be much higher than average. A current reading of this research projects a return of about 6% from stocks over the next 10 years. This is well below the 10% average over the very long term.

This isn’t the only research showing the odds of below-average returns over the next 10 years. It’s a pretty common view currently. With U.S. stocks now viewed as pricey by historical standards (as well as bonds) it presents some challenges for people who understand they need to own stocks to meet their long term goals. So let’s do a thought experiment. What if U.S. stocks do return well below the 10% average and we do end up with something like 6%? For anyone investing for retirement or any other goal over the next 10+ years, my thoughts are as follows.

Thoughts for Those Investing Over the Next 10 Years

  • You would be wise to lower your expectations. The odds of lower returns are higher than the odds of better returns.
  • If you’re planning to retire within the next 10-15 years you may need to save more now to close any shortfalls. If that isn’t practical, you may need to warm up to the idea of working longer. (For related reading, see: Is Working Longer a Viable Retirement Plan?)
  • If returns are lower, the impact of how much you pay in fees on your investments will be greater. And more painful. Anything you can do to control these costs will help you.
  • Make sure you have an adequate amount of investments outside the U.S. where stock ownership is lower and valuations are more attractive. This is a great way to spread your risk.
  • Broad investment mixes will return much less than they have historically. A hypothetical 60% stock and 40% bond portfolio will make between 3-5% versus a historical average of 8.7% in this situation.
  • Rebalancing would continue to be a big help if we do get lower stock returns. Picture the following five year hypothetical sequence of returns for stocks: +15%, -9%, +9%, +1%, +14%. Stocks achieved 6% average, and if you had rebalanced annually in a diversified portfolio you had great opportunities to sell high and buy low.
  • Newer types of investments may emerge that help build out better portfolios from a risk and return perspective. One of the asset classes that comes to mind is the peer-to-peer (P2P) lending market.
  • Having a good financial advisor working for you as a fiduciary will probably be a good idea and a good investment. They will help you to stay on track in a potentially disappointing and challenging period in the market. By helping you avoid one or two mistakes, a good advisor more than pays for themselves.

Review Your Financial Plan

If you have a written financial or retirement plan in place you may want to go back and see what returns it is assuming. Lowering those assumptions, as a stress test, would help you see if and how this may impact your future plans. If you don’t have a quantified financial plan, you need to get one. Like now. Without it you are basically flying blind, and that rarely ends well. Things of course could pan out differently and returns on stocks could be average or better. Or they could be worse than 6%. (For related reading, see: What Kind of Financial Plan Makes Sense for You?)

The crucial point is to be aware of what the possible impacts are to you and your future. Saving more now and having a stress-tested retirement plan may end up meaning you saved too much, missed out on enjoying that money before retirement and were gloomier than you might have been. But you have more money than you expected, and if it does come to pass, then you were prepared and realistic. And there is great value in preparation and realism. I encourage you to take advantage of anything that will help you reach your goals. (For more from this author, see: 9 Simple Steps to Meet Your Financial Goals.)

This article was originally published on Investopedia.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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