If you think the stock market is the road to a comfortable early retirement, you're wrong. You may have thought about cashing in on the long-term average annual returns of 7% (post-inflation) you heard you could get from investing in stocks, but I'm here to tell you to think again.
That long-term average likely won't happen year in and year out. In fact you will have long periods of over- or underperformance. For example, in the past decade, the SPDR S&P 500 ETF, an exchange-traded fund (ETF) designed to track the broad U.S. stock market, returned an amazing 1.5% per year. That includes income from dividends. That's a long way from 7%.
It's a small, small world
Going global helped a bit. The iShares MSCI EAFE Index Fund, a proxy for the world's non-U.S. developed markets, has provided a total annual return of 5% since it was started just more than nine years ago.
But for the tantalizing returns generally associated with stock markets, investors had to rely on emerging markets, which provided annual returns of 12.8% over the past 10 years.
It could be worse
However, according to Jeremy Grantham, co-founder of the asset management firm GMO, even this limited outperformance is coming to an end. He and his team of analysts are expecting emerging-market stocks to return just 4.7% per year after factoring in inflation over the next seven years. U.S. large-cap stocks are expected to return a measly 0.3% after inflation, and U.S. small-cap stocks are expected to lose almost 2% per year over that period.
Now this is only one man's (and his associates') view, but when Grantham speaks, people in the financial world listen because over the years he has proven incredibly prescient when it comes to long-term investment returns, pretty accurately calling the annual rates of return on 11 asset classes between 2000 and 2010.
Change is in the wind
If Grantham is right, we could be in for what many commentators are calling the new normal, meaning that the broad-based market joy we experienced 1983 to 2000 will be reserved for history books. Instead, we could be in for several years of volatile markets that generally move sideways.
In this type of market, index funds and ETFs won't do your portfolios any favors. Buy-and-hold just won't do it. Investors will need to be much more discerning and proactive if they expect to see the types of returns that will lead to an early retirement.
Investors who know how to pick the stars from the wannabes will be able to take advantage of the volatility that is characteristic of this new type of market.
That means finding high-quality companies with secure dividends, companies like Southern Company
Megacap blue chips like these are well-followed by both Wall Street and Main Street, so we wouldn't normally expect them to blow the doors off the market, but things aren't normal. Times of market volatility provide opportunities to snatch up these stalwarts at discount prices, and the safe dividend provides a source of income while you weather uncertain times.
Looking in the dumps
And while we may not see markets move up much over the next several years, there will be movement within markets by stocks that are currently being shunned for whatever reason.
Investors the world over are rightfully concerned about the fiscal situation in Europe where countries like Ireland and Greece, whose financial houses are absolute messes, have had to turn to their fellow European Union members for help. While this help may provide short-term solutions, it isn't fixing the fundamental issues, and these small countries just might pull down the whole continent.
While economic pain in Europe may prove to be impossible to avoid, there are plenty of high-quality companies that get most of their business from outside the Old World. One of these, Banco Santander
Both of these companies have the global operating footprint to survive a financial upheaval in Europe, and the collateral damage that their stocks suffer as investors are fleeing all things European provides patient investors the opportunity to pick 'em when they're down.
Don't go it alone
That's what Jeff Fisher and the Motley Fool Pro team do -- troll the depths of market sentiment to find investments that perform even in a volatile market. They even take it one step further, using tools like options to pick up investments at bargain prices or produce income even as stock price stagnates.
If you're interested in preventing your investment portfolio from languishing for another decade, enter your email address in the box below to learn more about how Motley Fool Pro can help. You'll even get a free report with five strategies for growing your portfolio in a volatile, range-bound market.
This article was originally published June 16, 2010. It has been updated.
We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
Nate Weisshaar doesn't own any of the stocks or ETFs mentioned above. Intel and Paychex are Motley Fool Inside Value picks. Unilever is a Motley Fool Global Gains recommendation. Southern and Unilever are Motley Fool Income Investor picks. The Fool owns shares of and has bought calls on Intel. Motley Fool Options has recommended buying calls on Intel. Motley Fool Options has recommended a write covered straddle position on Paychex. The Motley Fool has a disclosure policy.
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