It is true that one of the best ways to get your money to work for you long term is to invest it in stocks, whether that’s through individual stocks, or some sort of fund. However, many people have rather unrealistic views about the returns they can earn. According to Jason Zweig in The Wall Street Journal, most American investors expect that the stock market will offer an annual return of 13.7% in the next 10 years, and professional investors believe that average long term stock returns will be 11% a year.
Unfortunately, that’s not the case. Zweig reports that since 1926, annual returns have averaged at right around 9.8%. That’s a big deal. Subtract out inflation, expenses and taxes, and the real return is even less. That means that you need to realize that the market won’t suddenly bail you out at the end. You need to have a portfolio that reflects this reality, and start earlier, and invest more (in more than just stocks) than you might think.
Of course, if this is the sort of return you get on stocks, can you imagine the low return you will see on cash and bonds. In some cases, inflation and taxes can combine to result in negative returns as your buying power is eroded. Make sure to remember to factor inflation into your retirement portfolio, and be sure to remember that you problem won’t get the kind of returns your optimism tends to favor.
Image source: Kowloonese via Wikimedia Commons