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Thinking About Saving More

September 05, 2018

There is a school of thought that you can investment money and let the market returns make up for shortfalls in your savings. More often than not, it is a false premise.

While many will use historical returns to predict their returns going forward, we favor looking at more recent history and what the environment is today. Let’s break that down further.

If you look at returns since 1900, stocks returned 6.5% after inflation (real return) and Treasury bonds returned 2% after inflation. If you assume 2.5% inflation, then nominal returns (inflation plus return) is 9% and 4.5% respectively. If you have a 60-40 equity-bond portfolio, the return is 7.2% including inflation (no fees subtracted).

History and averages smooth out the peaks and valleys. Also, none of us has a 118-year time horizon. In addition, our current environment is low interest rates and high valuations. The past two cycles beginning in the late 1990s, a 60-40 portfolio returned below 5%.

Return predictions going forward range from negative stock return for seven or ten years to 5.5% real return for the next 10-15 years.

Whatever the answer turns out to be, the issue remains save what you need for the future but don’t expect the markets to make up any significant shortfall.


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