Predicting Future Returns

Getting tired of the roller coaster ride of the stock market? You’re not alone. With many investors unsure what to do and many of those not getting (or not listening to) proper advice, the past few years have seen several cycles of buying and selling on the equity and bond markets.

You many think that this will never end because “this time is different” – the Euro zone is a mess, the United States is printing money yet again and China’s growth is grinding to a halt. Some will have you believe that the world is ending and future stock market returns will never be as profitable as they have been in the past. The truth is that the market has in the past, is now and will in the future continue to produce healthy returns. What you really want to know is – What kind of returns can you expect?

All of this craziness has in fact happened many times before and I’m willing to bet it will happen again. When trying to predict future returns, let’s take a look at the S&P 500’s average returns* starting right before some of the previous worst economic disasters we’ve faced:

  • 1929 Market Crash – 1929-2010 = 8.92%/yr
  • End of World War II – 1946-2010 = 10.66%/yr
  • Black Monday (Oct 87) – 1987 – 2010 = 9.63%/yr

One of the best ways to safeguard your equity portfolio is to ensure that it holds good quality companies that are producing regular and increasing dividends. The US Stock Market experienced an average rate of return of 6.17% from 1900 to 2010. Of that 6.17%, 4.24 percentage points of the return came from dividends. Depending on the time frame that you study, dividends will account for anywhere from 40-75% of the total market’s returns. Now let’s also look at some more recent events and show what a difference dividends can make:

  • Dot Com Bubble – 2000-2011 = 0.5% total return
  • Same with Dividends Reinvested – 2000-2012 = 8.3% total return

I realize that the world economy is out of control and things are looking tough but my point with the statistics above is that the markets have always found a way to bounce back from adversity and there’s nothing to suggest that they won’t do it again. When you look at the above mentioned period of 1987-2010, remember that we had the massive crash in 1987, the recession at the start of the ‘90s, the tech bubble burst, 9-11, the subprime mortgage crisis and the credit mess in Europe. With all of these events that seemed like the end of the world in the stock market, the average return over this period was 9.63%!

A solid portfolio that includes balance and a healthy dose of dividend producing equity is key to riding out these ever-continuing obstacles. Predicting economic trends is hard but for those with the patience and nerve to stand firm in their investment plan, the rewards will continue to come.

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Mutual funds products are offered through Investia Financial Services Inc.

*Average returns calculated using the more conservative and accurate “compound annual growth rate” method which is usually 1-2% lower than the “simple average”.