17. January 2010 by Dan Walkow, CFA, CMT.

What are we smoking, and when will we stop?

A nationwide survey last year found that investors expect the U.S. stock market to return an annual average of 13.7% over the next 10 years.

Robert Veres, editor of the Inside Information financial-planning newsletter, recently asked his subscribers to estimate long-term future stock returns after inflation, expenses and taxes, what I call a “net-net-net” return. Several dozen leading financial advisers responded. Although some didn’t subtract taxes, the average answer was 6%. A few went as high as 9%.

We all should be so lucky. Historically, inflation has eaten away three percentage points of return a year. Investment expenses and taxes each have cut returns by roughly one to two percentage points a year. All told, those costs reduce annual returns by five to seven points.

So, in order to earn 6% for clients after inflation, fees and taxes, these financial planners will somehow have to pick investments that generate 11% or 13% a year before costs. Where will they find such huge gains? Since 1926, according to Ibbotson Associates, U.S. stocks have earned an annual average of 9.8%. Their long-term, net-net-net return is under 4%.

Read this excellent article at the Wall Street Journal Online. (subscription)

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17. January 2010 by Dan Walkow, CFA, CMT.

Gluskin Sheff & Associates’ chief economist David Rosenberg is well known for his sobering views on the economy and he makes some good points that up until now have fallen on deaf ears. The market has trumped his analysis so far, perhaps due to massive government monetary intervention into the economic system, but as central banks remove the economic stimulis perhaps its time to revisit what he has to say.

Read his thoughts at the Pragmatic Capitalist here.

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