In a recent post I spoke about various products that purport to ‘guarantee’ your returns in the stock market … in the current environment, it’s totally understandable that investors would be looking for such guarantees. But, you pay for them …
… instead, I suggested:
You can provide yourself a similar – or better – result at far less cost: buy a low-cost Index Fund and wait 30 years to cash it out; I can virtually ‘guarantee‘ an 8.5% minimum return
Rufus, though, took me to task, citing the Japanese stock market:
Here’s a prediction for you….In about 5 years the NIKKEI index will show you to be completely full of it even at your 30 year timeframe. If you had picked up the NIKKEI 225 in 1990 you’d now be down 75% just on your principal. Fun! If you had picked it up in 1985, you’d be about even today, which is still an absolutely massive loss against inflation. Your entire premise has a market survivor bias built into it to which you are blind. There simply are no guarantees.
Firstly, Rufus is right … there are NO GUARANTEES in life .. especially when it comes to the stock market.
BUT, what I offered was a ‘virtual guarantee’:
It is simply based upon the fact that the past 75 years of the Dow Jones have seen NO 30 year periods (including buying in the day before the biggest stock market crash in history) of returns less than 8.5%.
I’m not sure whether Japan could claim anything remotely approaching the same track record, nor are/were its fundamentals the same as the USA.
From a practical standpoint, I can only tell you this:
1. I invest using history as a guide to setting my benchmarks, but I always buy on value: i.e. do the stocks, RE, businesses look cheap at the moment, and
2. I invest in markets where, if things turn drastically sour, then everybody else is likely to be in the same boat … and, by everybody, that means the whole world.
If I’m going to be peeling potatoes, then so is everybody else … hence my major stock market investments are always in the USA.
Rufus, of course, ONE DAY, there will be a 30 year period where this does not hold true for the USA either, but by then I’ll be learning to speak Mandarin Chinese 
Points 1 and 2 are pretty critical. Having the patience to stand aside when things get overheated and to resist the lure of the latest hot fad is a must if you want to avoid under performing.
A couple of points about the “average return”:
(i) an average return of 8.5% pa is not the same as an annual compound return of 8.5% pa. A lot of sales literature for investment products confuses the two (whether deliberately or out of ignorance is a matter of debate);
(ii) for retires who rely on draw down of principal to fund their living expenses it has to be remembered that even if the projected average return is acheived over the balance of your expected retirement, an average is made up of a series of returns some of which will be greater than the average and some of which will be less. If you get stuck with the below average returns in the early years, then the retirement plan is likely to fail because the withdrawl of principal means that higher later returns on a smaller amount of principal are needed (and become progressively more unlikely as time goes by).
traineeinvestor – very good point on the average vs compounded rate. Even if the stock market did average 8.5% over a 30 year period, VERY few investors would actually see those returns between buying and selling when they were supposed to hold, management expenses, taxes, fees, and the trick playing the mutual fund companies do with publishing what investors earned, etc… If you look at the Dalbar study, even though the market had averaged 12.98% from 1984 – 2004 (when the report was published), the average investor earned only 3.51%. Imagaine what those numbers would look like if the report ran to 2009!!!
The other argument to this is that for MOST people, it is very hard to just let money sit for 30 years without touching it (ie. something else comes up, ‘life’ happens, another opportunity arises, etc…).
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