Return on Stocks – 5% The New Normal?

Traditionally stocks have returned about 10% per year.  During the period since WWII, which included both the post-war boom and the Reagan years (and also left out the Great Depression), the return was about 15%.  During the last decade the return has been 0%, as stocks just recovered from the dot-com bust just about the time the housing bust started.

The talk now is that the new normal return will be about 5%.  Don’t expect the 10-15% returns of the past.  As stated before, the return on stocks is indexed somewhat to the return on bonds, savings accounts, and treasuries.  If those vehicles are paying high returns, people will sell stocks until the price is low enough (and the expected return high enough) to justify the added risk.  Likewise, if the rates drop, people will bid up the price of stocks, such that the projected return will be lower, because they are willing to accept the lower return since they can’t make as much in safer vehicles.  Given that savings accounts are paying nothing now (and banks may start to charge a fee to look after your money for you), it would seem that the return on stocks would be lower also.  If we see a bit of deflation, this will keep rates low for a long time.

But then again, everytime that I hear that the “normal has changed,” something seems to happen that changes things back again.  I heard in the late 90’s that the new normal was for a company to have no profits.  They would just borrow a ton of money and grow – profits were optional.  They just needed to get big fast before their competitors took away the market.  This all ended with the dot-com bust.

Then came the housing rise, where the new norm was for houses to rise 20% per year.  Sure, the price rise might slow down a bit was the reason, but prices would never fall much.  Somehow the old stability would remain but the accelerated price growth was the new normal.  It also was no longer normal to take out an 80/20 loan.  ARMs and Option-ARMs were the new normal.  We all know what happened there.

So, “they” may be right and we may see the return on stocks be less than in the past.  As Will Rogers quipped, people may be more concerned of the return of their money, rather than the return on their money.  But I’ve found the “new normal” doesn’t last all that long.

Keep investing regularly and buying on the dips.  If the rate of return is lower, that just means you’ll need to save harder since the amount of compound interest generated will be less.  If the new normal is here, one will still do better in stocks than in 0% savings accounts.  One will also do better with a pile of cash (and stocks) than with a pile of debt.  If the old normal returns, you’ll also be in a great place to see it.  If not, at least you’ll be making 5%.

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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing

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