Future U.S. Equity Returns

Philosophical Economics has this to say about the best-case upper limit for U.S. equity returns in the future:

In what follows, I”™m going to explain why I believe long-term future U.S. equity returns are almost guaranteed to fall substantially short of the 7.5% pension fund target. Unlike other naysayers, however, I”™m going to be careful not to overstate my case. I”™m going to acknowledge the uncertainty inherent in equity return forecasting, and manage that uncertainty by being maximally conservative in my premises, granting every optimistic assumption that a bullish investor could reasonably request. Even if every such assumption is granted, an expected 7.5% return will still be out of reach.

25% of my investment portfolio is in U.S. Equities. And they have done really well for me. Since 2008, the S&P 500 benchmark has delivered a 13.04% rate of return. My overall portfolio for the same duration? 12.34%. I am very happy with the performance even though I forecast much lower rates in my spreadsheets. Probably a good idea to remain conservative in my planning assumptions.

This extended bull run in the markets, since 2008, can create a sense of complacency in terms of future returns. After all, if a benchmark is delivering such an impressive rate of return, why pursue any particular investment style? Buy and hold the S&P 500 index.

My expectation in retirement is that the stocks I hold will produce sufficient dividend income and I won’t be focused on share price appreciation. In other words, I don’t need capital gain in retirement. It’s nice to see the total number grow but it is the passive income that is far more important to me.

Philosophical Economics. Always insightful even if the posts are too infrequent.

2 replies
  1. Mark
    Mark says:

    In my opinion, most pension funds are destined to fail. There are too many variables and it only takes one rouge variable to torpedo the whole kit and kaboodle. More of a fan of Bogle’s philosophy and index funds as an investment vehicle. Unfortunately, too many folks are relying on other folks math for their future financial health and that just seems too risky for me.

    • Richard Cleaver
      Richard Cleaver says:

      Agreed. I have an investment policy statement that provides a clear set of principles and guidelines for my portfolio. Having been an investor for over 30 years now, I’ve learned to put a lot of the talk about future returns into perspective 🙂


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