Approaching Retirement, Returns On Investments

As we all edge ever closer to retirement, assumptions are made about returns on our investments, or as Will Rogers once put it, return of our investments become more critical.

Siegel Study Shows Reversion to Mean

Per a recent Barron's report, Jeremy Siegel of the Wharton School has done exhaustive research that offers some hope to those who have grown discouraged over the dismal market returns of the past decade. Based upon market returns from 1871 to 2010, Siegel has found a tendency that periods of worse-than-average returns are followed by periods of better-than-average returns.

Weak Periods Set Stage for Market Rebound

Annual median returns have run an inflation-adjusted 6.84 percent over 20-year intervals and 6.29 percent over 30-year intervals. Since the returns of the past decade are almost flat, there is historical precedent for the coming decade to provide us a nice bounce-back. The 10-year holding periods following the worst 10-year holding periods show a median performance of 8.17 percent.

The rebound or reversion evidence is even stronger for 20- and 30-year holding periods. 

Study Based on Many Rolling Periods

Though this behavior is not based upon analysis of market fundamentals, this does not diminish its significance. Indeed, Siegel's study is exhaustive, covering 135 five-year periods, 130 ten-year periods, 120 twenty-year periods and 110 thirty-year periods. But one always has to allow for the occasional deviation from an historical pattern due to outlier events or conditions.

Treasury Bonds Underperform Stocks Across All Periods

As significant, the data also shows that over all holding periods, treasury bonds underperform stock by half, with the exception of the last 30- year period.

But according to Siegel, the last 30-year period sets up bond market underperformance in the next decade relative to stocks.

Bottom line: While stocks are not for everyone, they have consistently offered better relative return than bonds, and are likely to do so over the next 10 years.

As a caution, even though the average rebound is 8 percent over a decade, in a diversified portfolio, not all assets are stock, so most investors might want to project something lower, depending upon how they are allocated.

Growing Deficit, High Unemployment

Over the past several weeks, partisan debates have raged over how to address two legacy challenges from the Bush administration: a huge and growing deficit and high unemployment. 

As investors I caution against taking these oratorical broadsides at face value.                                                                                                                                                                                                                   

Economic Debate is Like Trench Warfare