This question is especially important if you are considering retiring soon or if you have been offered an early retirement package.
If you’re like me, when you try to imagine what lies ahead, you think about your most recent experiences and extrapolate going forward.
Investors do this more than anyone – at least as far as I’ve seen. While I can see why folks do this, it’s really not a very good exercise and I’ll show you why.
If you think back over the last 10 years, you’ll agree that it hasn’t been a picnic for investors. Depending on when you calculate the 10-year average, you could get a slightly negative return or a slightly positive return for that period. But either way, it’s a lousy return.
Based on that, investors might forecast a crumby 10-year return going forward.
Even though we’ve heard that old expression that the past is no guarantee of the future when it comes to investing, what else do we have to base our decisions on other than the past?
Well…I do want you to consider the past when you think about the future. Just think about it a little differently.
Let’s look at an example to help explain this idea.
If you review the chart below, you can see that the 10-year trailing return in 1974 was an ugly -3.8%. That means had you invested in 1965 and held on to your investments through the end of 1974, your annualized return was -3.8%.[TABLE=2] [TABLE=3]
But what happened over the next 10-year period? The market had an annualized 6.9% return. In fact, after each of the last 5 decade-long market meltdowns, the market did pretty well.
Is that a guarantee that the next 10 years will be years of wine and roses for all? Not by a long-shot. But it does indicate that history is on our side. It shows the importance of not falling into the trap of thinking our most recent experience is going to be repeated in the future.
Exactly one year ago, did you predict that the market would do so well by the end of the year? I sure didn’t.
While we face real challenges ahead as a nation and as investors, it would fly in the face of all the facts to become pessimistic right now.
What do you think we’re in store for over the next 10 years?