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Unrealistic expectations of stock market returns

Ask someone what they think the average annual stock market return is and at a minimum you’ll receive an answer like 8-12%.

People have extremely high, unrealistic expecations because the media and financial industry over hype the market during good times. They also tout long term averages, sighting durations that exceed life expectancy by 100 years. Or they start calculating after a major market decline like the Depression or Great Recession.

To make my point, I’ll start my calcuation at the beginning of the 21 Century- January 3, 2000. On that day, the S&P500 closed at 1455. Had you bought and held till today, the annualized nominal return would only be 2.7%. Accounting for dividends, perhaps that would take it to 4.5%. A far cry from people’s double digit expecations.

We’re experiencing a generational slowdown. Real GDP growth has only averaged 1.9% over the past 16 years.

The problem with slow growth is yet to materialize. Pension plans often base their actuarial calculations on at least a 7% return. This is one of the numerous reasons that pension plans are so underfunded. Many people are in for an unfortunate surprise.