What's a reasonable return?

Long-Term Investing

by Rick Kahler

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Fifty years ago, I scraped together $100 that I earned mowing lawns and invested in my first stocks. I had heard a person could make a lot of money owning stocks. The ones I bought were all very small regional companies that I selected with the help of a stock broker who said they had great promise. They all eventually went out of business.

The next time I had some money to invest, at age 19, I bought a house. My $1,000 down payment grew into $4,000 in a couple of years. I took that money and invested it into the futures market. Within days, it was gone.

It probably isn't a surprise that after these painful lessons, I put my investable dollars into buying real estate. It took me ten years to even consider investing money into the stock market.

While I did okay investing in real estate, my foray into more liquid investments could have been much less painful had I known then what I know now. Here's what I finally learned: buying individual stocks and trying to beat the market is a game very, very, very few people do well at.

Had I taken that first $100 and purchased an index fund that invested in the 500 largest companies in the US (the S&P 500), 50 years later, my $100 would have grown to $12,600, which is 10.2% a year. But, I didn't know that then.

My kids, however, are a little smarter. Six years ago, they invested around $100 each into the Vanguard Dividend Appreciation Fund that owns just over 100 large company stocks. Their $100 is now worth around $300, which is a little over 20% a year. If that return continues, at the 50-year anniversary of their original $100 investment, they will each have just over $920,000. While I will guarantee you that the 20% returns will not continue, they are well on their way to doing far better with their initial $100 investments than I did with mine.

This leads me to wonder if the growth of their stock investments is likely to equal the growth of the past 50 years. According to Jonathon Clements of HumbleDollar.com, in a July 1, 2017 blog post, repeating the returns of the past is probably unlikely.

First, he contends that because of "the aging of America and the accompanying slow growth in the workforce, the current century's real economic growth has been sluggish, averaging 1.9% a year over the past 17 calendar years. That's likely to continue."

If you take real economic growth of 2%, add inflation of 2%, and add the average 2% dividend yield of stocks, you are looking at a 6% long-term return. Based on Clements's math, that means $100 will grow to $1,840 in 50 years. That's a fraction of the $12,600 accumulation of the past 50 years.

calculator iconCalculator: How much income will my retirement savings provide?

Clements notes the focus here is on just US stocks, suggesting the outlook for international stocks is much brighter. Other asset classes that could also do well are real estate and commodities.

The bottom line is often the same. Placing your bets on one stock, one asset class, or one country carries with it a high amount of risk. Most long-term investors need to seriously consider diversifying their nest egg globally in several asset classes. While such investors will never hit a home run, they will also never have to forfeit the game.

After my early attempts at investing, it took me a long time to learn what I didn't know then. My hope is that writing about my mistakes can help others learn sooner what I do know now.

Rick Kahler

Rick Kahler, MSFP, ChFC, CFP, is a fee-only financial planner and author. Find more information at KahlerFinancial.com. Contact him at Rick@KahlerFinancial.com or 343-1400, ext. 111.

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