Don't Sell Yourself Short on Investment Return Expectations

Several personal finance bloggers have challenged me recently on my expected rates of return for long-term investing.  I always use 10 or 12 percent when I do my future investment value calculations for my own retirement accounts.  I’ve written several posts where I make up a hypothetical situation and pit one persons choices against another persons investment strategy.  I usually use 10 or 12 percent when I forecast future investment values for these hypothetical examples.  More than once, commenter’s have scoffed at my assumptions.  More recently, my assumptions have been shot down on somebody else’s blog post that I commented on.  The writer of that blog told me, “Matt, lower your 8-10% assumptions for your portfolio. I really think it's giving you a false sense of security and progress. Make it a little more painful!”


Make it a little more painful?  To me, painful would be getting to retirement age and realizing that my investments did not earn at least 8% averaged annually.  If that were to be the case, I don’t think it would have been worth it to take the risk of investing in the stock market at all.

I am not a financial guru, professional stock trader, investment advisor or even a rich guy.  I am just a guy with a blog.  But, I do educate myself by listening to and reading materials produced and provided by all of the types of people I just mentioned.  The most famous and influential of these is a guy named Dave Ramsey.  Maybe you’ve heard of him.  He has a nationally syndicated radio talk show that is broadcast on hundreds of radio stations across America.  He has also written several New York Times best-selling books on the subject of personal finance, money and business.  Dave also uses 12 percent as an average annual return for virtually all of his investment examples.  This 12 percent is not just a number pulled out of a hat.  This is based on data for actual past performance of real stock market figures.  I often link to this post on Dave Ramsey’s site to affirm my 12 percent investment return assumption.

Okay, so it is all well and good to assume a rate of return for the future.  We all know where assumptions will get us though, so I wanted to take a look at some actual numbers.  I created a table that shows all of the mutual funds that I actually have money currently invested in.  

My Mutual Funds Actual Average Annual Returns

Mutual Fund (Class) - Fund Family	Inception Yr	5-year	10-year	Lifetime
Capital World Growth & Income(A) - American	1993	5.0	8.4	11.6
Fundamental Investors(A) - American	1978	3.9	5.6	12.5
Washington Mutual Investors(A) - American	1952	0.2	4.2	11.7
The Growth Fund of America(A) - American	1973	1.3	2.2	13.5
The Income Fund of America(A) - American	1973	3.1	5.6	11.2
Capital Income Builder Fund(A) - American	1987	3.1	6.3	9.6
New Perspective Fund(A) - American	1973	4.8	5.4	12.5
New World Fund(529-A) - American	2002	9.8	N/A	13.7
Europacific Growth Fund(A) - American	1984	4.3	6.1	11.9
Global Allocation Fund(A) - BlackRock	1994	3.6	8.1	9.5
Global Discovery Fund(A) - Franklin Mutual	1996	1.2	7.8	9.2
Mid Cap Core Equity Fund(A) - Invesco	1987	1.8	5.3	10.4
Developing Markets Fund(A) - Oppenheimer	1996	5.6	17.5	14.4
Averages	1984	3.7	6.9	11.7

Average annual returns are percentages based on numbers published most recently in the respective prospectus’s for each individual fund. (Chart developed Jan 2012)

A quick analysis of the numbers gives away my secret for picking mutual funds to invest in.  I always choose funds that have been open for a long time and have a proven track record of annual returns around 10 percent or higher.  Among all 13 of the funds I am currently invested in, they have been open for an average of 28 years.  The five and ten year returns are somewhat dismal which can be explained by the bear markets and their declines in 2002 and 2008.  Still, over the lifetime of all of my mutual funds combined, the average annual return is 11.7 percent.

There it is folks.  Numbers do not lie.  This is why I always use 10 to 12 percent as an assumption when calculating future investment values.  I am certain readers will have arguments and I am eager to see them in the comments section.

Here are some of my guesses as to why people think 10 to 12 percent returns are unreasonable:

• They only look at more recent data, such as the 5 or 10 year returns.  My response: I am investing for 40+ years.  I’m going with the lifetime data.
• Their actual investments are under-performing, as compared to mine.  My response: Choose better investments!  Perhaps use my chart as a reference.
• Their advisor tells them to plan on 8% maximum returns.  My response: This could be because their advisor has them invested in conservative funds that are more stable and have lesser upside.  That is fine for the cautious investor, but I’m sticking with the more volatile funds with higher upside.
• They watch the network news too much and as a result, have a pessimistic outlook for the future of the economy.  This, in turn, would mean speculation of lower stock market returns.  My response: The only real indicator we have of how a mutual fund is going to perform in the future is how it has performed in the past.  In the past, each 10 year period of low stock market returns has been followed by a 10 year period of excellent returns.  I choose optimism over pessimism and am expecting the next 10 years to be stellar!

Those are just a few of the arguments I’ve heard in the past and expect to hear again in the future. The important thing to remember is to only invest in things because you understand them.  I can understand a simple chart or graph that shows me past performance of a mutual fund.  I am optimistic and believe that each fund will perform in the future as well as it has in the past.  You shouldn’t invest in funds just because somebody tells you to.  More importantly, you shouldn’t let the opinions of others sway your investment decisions.  Everybody has opinions.  To the people who say that my 10 to 12 percent expectations are unreasonable, I say: Well, that is just your opinion.  Thank you, but I am making my investment decisions based on my understanding of the facts.  I am investing in all of the funds listed above in my chart, and I fully expect to gain an average of 10 to 12 percent yearly over the long term.

What are your expectations for your investment returns?  Do you think that I am out of touch with my 10 to 12 percent expectations?