Tempered expectations

With the stock market hitting new highs, it’s a good time to assess what can be expected for market returns going forward. 

I think a reasonable range of annualized returns on the S&P 500 over the next 5 years is -7% to 12%, with a mid-point around 3%.

That isn’t the high returns that most expect, but that’s much more likely what they will get.

That assumes 4% to 8% underlying growth in earnings, 2% dividend yields growing at that same 4-8% growth rate, and price to earnings ratios of 12x to 25x.

If you think double-digit returns are to be expected, then it may be time to temper your expectations.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

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Tempered expectations

Over-confidence, social security, bonds–oh my!

Some this and that of interest this week:

Investors are once again over-confident about future returns. 10% returns are expected from those in North America and Europe, and 17% returns from those in South America and South Africa. Such returns are above historic averages, and present high valuations make those outcomes extremely doubtful. Not a good sign to a contrarian.

Academics believe the Social Security Administration has had a systematic bias over the last 15 years, over-stating the financial health of the social security program. In particular, the Social Security Administration has been under-estimating life expediencies. This probably means our benefits will be cut sooner and deeper than many suppose. The problem is unlikely to surface soon, but in 15-25 years will likely become a BIG problem. This will have a significant impact for those with a longer time horizon (younger) and for with plenty of their own savings (yes, we will get punished for being prudent).

Most casual observers of markets focus on the stock market. Not so for professionals, who know that bond markets are bigger and more important than stock markets. So, it may come as a surprise to many that bond markets have experienced a major rout over the last month. The downdraft did not hit junk or municipal bonds worst, but super-safe German and U.S. government bonds. Such big moves in super-secure bonds could potentially be the beginning of investors losing faith in government control of interest rates. There’s no reason to buy dried food and run to the fallout shelter, yet, but it bears watching.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Over-confidence, social security, bonds–oh my!

Be careful Mr. Hastings

Reed Hastings and Netflix might want to be careful what they wish for.

Reed Hastings is the fabulously successful founder and CEO of Netflix. Netflix has become a dominant force in streaming video sometimes consuming as much as 60% of all Internet traffic in the U.S. at peak times. They have built up a viewership of around 60 million paid subscribers.

I am a big fan and user of Netflix, and have nothing but good things to say about the company as a customer.

I do, however, have major problems with Mr. Hastings’ use of the government to force his competitors.

Mr. Hastings has used his bully pulpit as CEO of Netflix to oppose the mergers of Comcast (I and my clients own shares of Comcast) with Time Warner Cable, and now AT&T’s proposed merger with DirecTV.

He says that such mergers will harm customers when he is really just feathering his and Netflix’s bed. 

He doesn’t want his competitors charging him higher rates, so he is using the government to do what he can’t do in fair competition. This is kind of like asking a referee to change the rules of the game to benefit your team.

Although he has already succeeded in stopping the Comcast and Time Warner Cable merger, and may succeed with the AT&T and DirecTV merger, he may want to consider what will happen when his competitors enlist the government’s help to deal with his dominant position.

After all, his complaint against Comcast was that–if the merger went through–they’d have 60% market share in broadband to the home. Perhaps he should consider his own market share and how that may play out over time.

The problem with getting the government to intervene for you is that as your success grows, you too become a target. The same is true in paying protection money to the mafia–it doesn’t work in the long run.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Be careful Mr. Hastings

Hurray! We’re all living longer!

The good news: life expectancy in the U.S. increased by 50% during the 20th century. The bad news: we’ll all need a good deal more money during retirement.

The average 65 year old man can expect to live to age 84. The average 65 year old woman: 87. When you think of couple living off their retirement income, there is a 50% chance that one spouse will make it to 95. That means that most people should have 30 years of retirement planned (assuming they retire at age 65–not necessarily a valid assumption).

This makes a focus on long term returns more important than ever. Specifically, the conventional view of retiring with a conservative portfolio of bonds is probably not the way to go. We’ll all need the growth and inflation protection of stocks to keep from running out of money.

It also means the most conservative period of investing is probably right before and after retirement. A large setback in your portfolio right before or after retirement may be very difficult to recover from.

That is why many advisers are recommending high stock portfolios in your early years, low stock allocations close to and right after retirement, and than increasing that stock allocation as you get older. 

We simply need the growth and inflation protection that only stocks can offer to build wealth early and then sustain us into old age. But it also means you may want to reduce that stock allocation right before and after retirement.

Longer lives are great. But, to make it great, we’re going to have to plan for longer lives.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Hurray! We’re all living longer!