If you want to retire comfortably, you have to have a strategy for how you're going to invest. To make sure you'll reach your goals, you also need to set expectations about how your investments will perform over the long haul.
But when the financial markets are as unpredictable and volatile as they have been lately, trying to guess where they'll zig and zag next seems hopeless. After a lost decade of essentially flat stock returns, how can you now define a "reasonable" return? And how can you protect yourself in case your best guesses go wrong?
Figuring out the big picture
The question of how to estimate long-term investing returns in the current market environment lies at the core of the Motley Fool's efforts to help people get smarter about planning for their retirement. In the latest installment of the Fool's Rule Your Retirement newsletter, which hits the digital presses this afternoon at 4 p.m. ET, the Fool's retirement expert, financial planner Robert Brokamp, looks at a number of prognostications from various market experts. Like kids sorting through their Halloween hauls on Nov. 1 in search of their favorite treats, Brokamp has a knack for finding true insight amid a cacophony of market predictions.
One of the predictions that caught my eye came from Jeremy Grantham . Market experts often make broad predictions about where various asset classes will go, sometimes picking a stock or two that they think will do better than average. But Grantham, who is famous for having predicted the bear market of 2000 to 2002 -- albeit early -- does more than that, breaking out an entire subclass of stocks that he believes will provide much better returns for investors than the market overall.
The key to market-crushing stocks
Lately, it seems like the stocks with the best returns have been speculative plays. High-debt companies such as airline US Airways (NYSE: LCC) and casino operators Las Vegas Sands (NYSE: LVS) and MGM Resorts (NYSE: MGM) have posted amazing returns lately, as hopes for a recovery and the resulting cyclical boost make investors more confident about their near future.
But as Grantham sees it, if you're going to invest in stocks, those are exactly the wrong ones to buy right now. Instead, you need to stick with what he calls "high-quality" names. To Grantham, that means companies with three things: strong, stable returns; low debt levels; and businesses that stand the test of time and maintain a dominant position over the long haul. Grantham himself has listed Microsoft (Nasdaq: MSFT) and Coca-Cola (NYSE: KO) as examples of high-quality stocks, while other members of his GMO management team pointed to Johnson & Johnson (NYSE: JNJ) and Pfizer (NYSE: PFE) as prospects.
Just how dominant will high-quality stocks be? Grantham thinks they'll beat U.S. stocks overall by more than 4.4 percentage points over the next seven years. And even though he believes international stocks will offer somewhat better returns than domestic stocks, those high-quality names will still beat the international broad market by a significant margin.
Stock investors came to expect real returns of 7% or more during the fast and furious bull markets of the 1990s. But thanks to low valuations and a general disdain of blue-chip stocks, valuations are a lot more attractive than they were 10 years ago. That could provide a springboard for better returns ahead for retirement investors, allowing you to once again start entertaining dreams of a happy retirement.
Get the whole story
Grantham is just one of the people that Brokamp looks to for guidance in this month's newsletter. In addition, he consults with ETF expert and money manager Rick Ferri, as well as Vanguard founder John Bogle, to get a consensus view of what's to come.
To find out where the experts agree and disagree, take a look at the new issue of Rule Your Retirement. A free 30-day trial to the subscription service gives you full access to the new issue as well as a host of other resources designed to help make retiring rich a whole lot easier.
If you want to retire comfortably, having the right investments makes it a whole lot easier. Fortunately, rumors of the death of the stock market are greatly exaggerated, and smart investors will be rewarded for their confidence.
Will this decade be better for stocks than the last? Matt Koppenheffer takes a look at whether the 2010s will tank your portfolio.
