Investment Returns and Great Expectations

As the tech bubble of 2000 was about to burst, I read an article in Money Magazine which interviewed several readers about financial planning as the new century had begun. Most of the younger people who had done some financial planning were making some very lofty assumptions about stock market returns going forward from that point in time. One individual, who was 22 years of age and had just landed his first job out of college, was going to fund his 401k to the max and invest aggressively with 100% of his portfolio in stocks. At that age, an aggressive allocation is acceptable as you have decades to compound and time to make up for the inevitable bear markets that will strike. What I found particularly frightening was the expected return assumption the individual used for his stock funds in his 401k. We had just finished the two best decades in financial history with compounded returns in the high teens. The reader assumed these were normal returns and forecasted a multi-million dollar portfolio and early retirement. His assumption… 20% returns! I had a good chuckle and thought, “good luck with that!”

As we all know, that first decade of the new century gave us two substantial bear markets with declines greater than 40 percent. Clearly, 20% returns were not in the cards for that young gentleman anytime soon. His GREAT EXPECTATIONS will find him working a bit longer than the early retirement that he spoke so confidently of in the article (he boasted a retirement goal of 35 years of age).

So what can investors expect? What returns have the various asset classes delivered? What have the greatest investors in the world delivered to their clients/companies? Let’s examine. The famous Ibbotson data series known as Stocks, Bonds, Bills and Inflation takes a super long run approach—90 years! Problem is, that far exceeds the investing lifetime of just about anyone on the planet. However, it’s worth studying just so you can compare your great expectations with REALITY.

1926-2015 Returns of Stocks, Bonds, Bills and Inflation

Small Cap Stocks             12.0%

Large Cap Stocks             9.9%

Bonds                                5.6%

T-Bills                                3.4%

Inflation                            2.9%


A more realistic time frame and closer to the investment horizon of many individuals is 20 years. Blackrock recently did a study from 1996-2015. This is a good sample precisely because there were two severe bear markets in that time frame as mentioned earlier.

1996-2015 Asset Class Returns

Russell 2000                     8.8 %

S&P 500                            8.2 %

Bonds                               5.3%

T-Bills                                2.5%


Both studies show that stocks (small cap and large cap) have been the best performers over the long run and the very long run. Although small cap stocks are much riskier than their large cap counterparts—about 25% riskier, as measured by standard deviation. Bonds had respectable returns (and less risk as well).

As a further comparison, Warren Buffet’s Berkshire Hathaway has delivered returns in the 20% area for four decades. Some of the great hedge fund and money managers have been able to deliver 20-30% returns over a multi-decade time frame

So next time you are tempted with great expectations, I urge you to take pause. Unless you are the next Warren Buffett or James Simons, you will be sadly disappointed. We will update this study over time and overlay healthcare issues to see how they have performed relative to the market overall. But I will give you a spoiler alert now…. We would never have started this publication if we didn’t think healthcare stocks would outperform the S&P 500… in the past, or in the future.

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