What Rate of Return Should I Expect? (Is 8% Too Aggressive?)

September 12, 2023

The stock market hasn’t been around forever, and there’s no guarantee that average returns will remain the same in the future. How confident are we that the past performance of the stock market is an indicator of future results?


M has a question. He says, “We often use an assumed eight percent rate of return in projecting portfolio growth. We also say past performance does not indicate future results. With the stock market only being around 100 years old, how are we confident that this will be the case going forward?”

Yeah, here’s what I love. People think that, well, I don’t say people; that’s painting with a broad brush. Eleven or eight percent, that’s way too aggressive. What do you guys think and why are you using the number? What’s really interesting is sometimes when we use eight percent, it’s actually pretty conservative. If you look at what historically the S&P 500 has done over the last hundred years, over the last 60 years, whatever metric you want to look at, it’s somewhere between, like if you go back 50, it’s somewhere like 10 to 11 percent annualized per year. So, I think that eight percent is actually not crazy. It’s not outside the realm of possibility. But one of the ways that we try to ground this—you’ll notice a lot of the deliver variables that we have—if you go to moneyguy.com/resources and download them, we’ll use return assumptions like, “Okay, let’s start at ten percent for a 20-year-old, and then let’s decrease that return all the way till 65 so you get to some terminal rate of like five and a half, six percent.” Because when it comes to modeling, when it comes to thinking about your future, we would always argue that you would much rather be conservative and things turn out better than you thought than be aggressive and things not turn out so good. Nobody wants to get to retirement and say, “Oh man, I was planning on filet mignon, and now I’m gonna have cat food hamburger patties.” That’s not the place that you want to live. So, that’s why we always err on the side of conservative return assumptions.

The question for you, Brian, and I think I’m curious what you say about this, is how can we have confidence in the future? The stock market’s only 100 years old, or whatever the number is. How can we feel okay that we’re still gonna even make money in this thing? What makes me think that the next hundred will be as good as I think?

You have to take a step back and think about the human condition as a whole. Yes, you’re right, the stock market has not been around for that long, but that doesn’t mean we as humans haven’t been creating our own exchanges or bartering or looking at value. What I find interesting is if you look at humankind and you think about our journey, I think of spaceship earth down at Disney, the big globe that you get to ride up into. You see from when man came on the planet, there’s like thousands of years before we started figuring out how to write and communicate more effectively. The printing press was a big deal, and then you fast forward and think about combustible engines and other things, and then all of a sudden, it starts accelerating. The stock market is a direct dividend from this innovation, and the fact that now we are… Because I’m old enough—I was about to say “young enough,” but I was young—I was young when computers came on the planet. All of us Gen Xers are very unique in the fact that we had one foot back in the old days where everything was completely analog. I remember the days when I was the remote control because remote controls did not exist. You had kids, and you put them on a beanbag on the floor, and then they used their big toe to kind of turn the channels. Now TVs sit on the wall. Nobody even watches live TV anymore. We do everything through streaming now. We have the internet that came and changed the world. Now we have artificial intelligence. Every one of these innovations that are accelerating is happening faster. So, what’s going to happen over the next 10 years could have been what happened over 50 years if you look at how fast things are accelerating. And this is the thing where, as long as we don’t create the thing that kills us, we’re going to be able to make money off of this. Everything we do… Oh yeah, I mean, because we are headed in such a… It’s good for humanity. There’s going to be a way to make lots of money off of it. Yeah, and I hate to be that way, but it’s just the truth. I think that gets me excited about the future, on the way that the law of accelerating returns and the way human condition wants to innovate and grow. We’re actually picking up speed on that. There’ll be ways to profit off of it, and index funds will continue to do well through that. I think it gets me excited. So, I get excited about it, too. I think that we’re not going to run out of ways to make money in the future. And look, I always tell people, when you’re young, it’s okay to use the higher rates of returns like the S&P 500 because it can be motivating to see how much your money can grow. But as your life evolves and you get closer to retirement, it definitely benefits you to be more conservative because you’re going to be a diversified investor. And you also would rather be pleasantly surprised if you do all of your scenario planning at a much more conservative number, and that’s why we build that into our rate of returns and our assumptions that we use. Love it. For more information, check out our free resources.



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