Ready To Retire: Part 4

More questions from readers....(please keep them coming).

"Scott, given the current economic circumstances, how can anyone expect to see an average annual return of 7% again in our lifetime? You keep reminding us that we are in a low return environment!"

Indeed, an excellent question.

Of course, the real key to this discussion is: over what time period?

As I have said many times in the past and expect to say many times into the future: everything economic is cyclical, always has been, always will be. No matter what the central bank monetary policy and / or government fiscal policy does, they can only try to smooth out the length or depth of the cycle.

We have seen 8 recessions (cycle periods) in the US since the 1960's. We have not seen one since 2008-2009, so there is one coming, likely sooner than later (the longest period without one was 10 years, through the 90's).

The MSCI All Country World Index has returned (total return = dividends re-invested) almost 7% annually since 1995:

The Canadian Bond Index total return has been approximately 5.7% over the same time period. Blended into a balanced 60% (ACWI) 40% (XBB) mix, this would give a total return the vicinity of 6.5%.

We are going to have periods where growth assets stall and even turn negative: 2007-2009 the total return for ACWI was -24% (ouch!). 

Back then I fielded a great many similar questions about how we might ever see 7% returns again. It is human nature (behavioral finance 101) to project forward the bias of what has happened to us most recently: The Recency Effect. In other words, after a year of low or even negative returns, we make expect that we will not likely see positive returns again. Many investors refused to participate in equity markets after the 2008-2009 recession (and were also frightened by the 2011 debt crisis), but the ACWI returned an annual average 13 plus % from 2009 until now.

The real story is that over time: 10, 15, 20 years or more, the averages smooth themselves out. In the short-term you can get higher levels of volatility and swings in markets from cycle to cycle, but over longer periods, over multiple cycles, returns become significantly more consistent and stable.

We may be in a "low return environment" at the moment, but as the cycle evolves (and as future cycles evolve), we will likely be able to get back to higher returns and over the longer term, back to the average annual returns at or near 7%.

Of course, prudent portfolio management, planning and strategy (re-balancing) should be able to add value (so you get the benefit of the fees that you pay).

So, if you have 30 or 40 years (or more) of life left, you are going to see another 4 0r 5 cycles (at the very least). Make a plan, stick to it and get good (and resonably priced) advice.

And as I am sure that you all are aware (and to make sure that you all know in no uncertain terms):

Investing has risks, although we do our best to control that risk. Past returns are not in any way a guarantee of future returns and although we work our tails off to try to be better than the benchmarks,  there is always the possibility that circumstances out of our control will , at times, interfere with the year to year returns. Over longer terms, the historical average returns are certainly possible, but in no way are they certain.

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