One of the biggest questions facing retired investors right now is what to expect from stocks in the coming decade.
Equity returns matter most if you're at or near retirement, since that volatility will affect your ability to finance a reasonable life after work. After decades of double-digit returns from the stock market, some market observers — among them Vanguard Group Founder John Bogle — warn that stocks could fall short of expectations.
Bogle puts the number at 4%, an annual return many investors once associated with bonds, not stocks. He predicted lower returns in an interview published by CNBC. By Bogle's reckoning, dividend yield and earnings growth added together get you a 6% return, but that stock valuations compared to earnings growth suggests that number is off by 2%. "You're talking about a 4% nominal return on stocks. And that's low, lower than history. History is around 6 and a half," Bogle said.
The problem is that over long periods there really isn't anything better than stocks and a balanced portfolio. Reinvested dividends and compounding are what cause portfolios to grow, year in and year out. The alternative is stock picking, an endeavor at which even the most experienced investment managers fail on a horrifyingly routine basis.
So what should a long-term investor, whether years from retirement, or years into retirement, do? Stay invested, according to Bogle. "It doesn't mean you should stop investing, but it means you should be investing in accordance with the expectation of lower returns in the future," Bogle said. "And if you're wrong and if I'm wrong and the returns are higher, well, you're just going to have a terrible problem: Your nest egg is going to be larger than you would have ever expected."
Bogle is doing some basic math here to make a prediction about the future of the stock market. With all due respect, he himself would warn anyone against trying to predict anything about stocks.
Here are three proven ways to ensure your retirement stays on track, whatever the stock market does:
Princeton professor Burt Malkiel, once calculated that merely rebalancing was enough to increase return while lowering risk. As he put it, "We all wish that we had a little genie who could reliably tell us to 'buy low and sell high.' Systemic rebalancing is the closest analogue we have."
Lower your cost:
It's a fact. The more you pay for investment advice the less you keep in your account. The less money you have, the less it grows from compounding. Paying 1% or more for investment management is just giving money away.
Finally, and this is a major point, never chase returns. If Bogle's vision of lower stock gains comes true, a lot of voices in the marketplace will try to sell you on leaving stocks for something less diversified and higher risk. Broad diversification is the key to reliable returns. Trying to grab quick gains by concentrating your bets or through exotic traded alternatives inevitably ends in tears.
Is this sexy advice? Exciting investing? Absolutely not. But you need to ask yourself, in all seriousness, do you want your investments to be exciting? If your goal is to retire with a healthy nest-egg and low stress, then the answer would most certainly be no.