Advertising

The Seattle Times Company

NWjobs | NWautos | NWhomes | NWsource | Free Classifieds | seattletimes.com

The Seattle Times

Business / Technology


Our network sites seattletimes.com | Advanced

Originally published July 8, 2007 at 12:00 AM | Page modified July 8, 2007 at 2:03 AM

E-mail article     Print view

Your Funds

What you expect to happen may not

Everything you know about your financial future could be wrong. That's not a statement on listening to predictions of a dire market crash...

Syndicated columnist

Everything you know about your financial future could be wrong.

That's not a statement on listening to predictions of a dire market crash or following some new theory of the "best" way to invest. It's about what you think you know about stock-market returns and how you have planned for them in the future.

Paul McCulley, managing director at Pimco and author of the new book, "Your Financial Edge," said that investors need to reshape their portfolios to reflect the returns they should realistically expect from the stock market for the next 25 years.

It's not the first time someone has suggested market gains will be lower over the long haul. It's just rare that someone with so much influence in the industry and such a long track record of being correct as an economist has called for such a dramatic shift.

Most investors and advisers have come to believe stocks will deliver an annualized average return of about 10 percent, with small-company stocks doing slightly better.

They believe this mostly because of the widespread acceptance of research by Roger Ibbotson of Ibbotson Associates.

A few years back, however, Ibbotson started suggesting the first 75 years worth of research would not be a good indicator of the next 25 years.

Instead of 10 percent on large-cap stocks, Ibbotson said the next 25 years would see the market deliver in the 8-9 percent range, on average, most likely in the high end of the range.

McCulley, however, is saying that the past 25 years — a period he described as "a long journey of disinflation" and "irrelevant" to the next quarter-century — will have no bearing on the future.

He went well past Ibbotson, forecasting a growth rate of 6 to 8 percent annually and said investors should "remember that it could be at the bottom of that range."

Rest assured that plenty of investment advisers and pros will suggest McCulley is way off base. They'll say it because to do anything else blows a huge hole in their financial planning.

While it certainly is possible McCulley is wrong, consider what happens if he is right.

advertising

Say your expectation has been set at 10 percent returns, on average per year. Using a rough compounding formula, that means your current nest egg — without any further contributions — would double three times and be halfway to a fourth over the next quarter century.

A nest egg of $100,000 at that rate of growth, would be just under $1.2 million in 25 years.

Now cut those returns down to McCulley's predicted range. At 8 percent, the money doubles three times; at 6 percent, it doubles just twice.

That same $100,000 in savings would be worth somewhere in the $400,000 to $800,000 range.

And living on that retirement nest egg would be one heck of a lot harder.

Chuck Jaffe is senior columnist at MarketWatch. He can be reached at jaffe@marketwatch.com or Box 70, Cohasset, MA 02025-0070.

Copyright 2007, MarketWatch

An 802.11n upgrade could make a big difference

Retailers opening doors on Thanksgiving Day

Google makes concessions on digital book deal

Critics want to block Comcast-NBC deal

Google submits revised book settlement

Advertising

Video

Opening day at Crystal Mountain
Skiers crowded the slopes at Crystal Mountain for one of the resort's earliest openings.

Video shows violent arrest by SPD
Fort Lewis Memorial
Highlights: Ken Auletta talks about "Googled"
Seattle International Cabaret Festival
Ken Auletta talks about "Googled"
Medal of Honor
Pelosi answers questions at Swedish Medical Center
Pelosi speaks at Swedish Medical Center
"Pistol" Pete Ryan

Marketplace

nwautos

2009's most fuel-efficient sedansnew
Choosing a new sedan? Weigh the impact of your choice on your wallet and on the planet.
Post a comment

Open Houses

Find this weekend's open house listings.
Or search by location:

 
Most read
Most commented
Most e-mailed
 
 
Advertising