Could your 10-year market outlook be unrealistic?

Do you have an unrealistic outlook when looking forward to the next ten years in the markets? It’s interesting when I talk to people who are of retirement age, I don’t see a tremendous confidence in the next ten years.

Yet, a study that was released recently from Black Rock paints a very rosy picture of what investors expect for the next ten years.

The market has been on a tremendous run since March 9, 2009, which is now over eight years. Overwhelmingly two-thirds of defined contribution plan participants — that’s people putting money in their 401Ks, 403Bs and retirement accounts at work — believe that returns on their savings will continue to be in line with what they have experienced in the past, while 17 percent believe their returns will be higher. Keep in mind that over the last eight years the markets have seen tremendous growth of more than 19 percent per year.

It’s concerning that more than 78 percent of planned participants (again, people contributing to their retirement accounts at work), believe that bond returns will remain consistent or be higher than previous returns, which is mathematically impossible. It’s mathematically impossible for bonds to make in the next ten years what they’ve made in the last ten years. Remember, interest rates and bond values move in opposite directions, so interest rates can’t drop. For bonds to do well, interest rates must drop. Interest rates can’t drop enough for bonds to make in the next ten years what they made in the last ten years. To that end, we now have 78 percent of survey respondents believing in a market that is mathematically impossible to achieve.

When it comes to the stock market price-to-earnings ratios, in regard to how expensive stocks are, we’re at 28 to 1. There are different ways to define price-to-earnings ratio. There are different calculations. The one I like best is based on the last ten years of earnings and not based on what companies think is going to happen within the next year. It’s based on historical earnings, adjusted for inflation, and then compared to the current stock price. That is the best way to measure in terms of predicting future returns. There is no way to look at a number like that and make a case for a ten-year bull market run based on where we are currently. If a survey says markets are going to continue growing like they have for the last eight years, we’re basically saying the next ten years are going to be a boom. I understand the potential for optimism over the short-term because it could mean potentially lower taxes, less government regulation and many things in Washington that could spur economic growth and in turn support stock prices.

However, the bottom line is that with stocks priced where they are, there is no way I can make a case for a bull or a boom over the next ten-year period. If you are retirement age, close to retirement or already retired, the first ten years of retirement will more than likely determine 70 to 80 percent of your eventual long-term success in retirement. If markets are choppy and we have a bond market that can’t go anywhere, what does that mean for you? That means your market timing is not very good. The reality is that 44 percent of all our ten-year periods since 1900 (considering rolling ten year periods such as 1900-1910, 1901-1911, 1902-1912, etc.), 44 percent have returned less than six percent per year in those decades. It’s not unusual to have a decade of choppy performance.

Sequence of return risk tells us that over 30 year retirements, the stock market is probably going to average a good return. But, the reality is when the good years are and when the bad years are. That is a significant risk you take when you begin drawing income from your life savings. Do you have a plan in place to support that? If you don’t, make sure you are measuring that risk and don’t have unrealistic expectations. It shouldn’t surprise you the next time we have a bear market. We don’t know when bear markets and corrections are going to come. We build and plan for those markets before they happen. I have found if you’re very confident about markets for the next ten years and we have a bear market, it tends to lead to a lot of emotional decisions, short-term panic and we get in and out of markets at the wrong times, which can be very dangerous.

So, be sure you are looking at all angles and making sure you have realistic expectations as you build your plans around accomplishing your goals. Nobody knows how to make the most amount of money in the next ten years. It’s about positioning your money to achieve the outcome you want to achieve in the next ten years.