It used to be financial planning gospel: If you invested in stocks, you could count on an average return of around 10% annually over the long haul. But as many investors have discovered over the past decade, the long haul is sometimes longer than you can wait -- and if you don't plan for a potential shortfall on those returns, you can get left high and dry by an unexpected bear market.
So given how badly stocks have performed since the 2000 peak, is it time to give up on the chase for 10% annual returns? Is the "new normal" a world of lower returns, or is the recent underperformance merely a prelude to another period of outpaced gains in the future?
The law of averages
That's one topic that this month's brand new issue of Rule Your Retirement tackles. In the newsletter, which you can read today at 4 p.m. ET, Fool retirement expert and financial planner Robert Brokamp invited research analyst and SMU senior fellow Ed Easterling to talk to the service's subscribers about whether investors should count on history repeating.
In the interview, Easterling shares some data from his recent book, Probable Outcomes. One particularly interesting analysis looks at how returns over various 10-year periods throughout the 20th century compare to the average. As you'd expect, roughly half of those periods have returns of less than 10%, while the rest have returns of more than 10%.
What's surprising, though, is just how spread out those returns can be. Despite the 10% average, only 22% of the time did returns fall within 2 percentage points of that 10% figure. In contrast, you were much more likely to see either annual returns of more than 12% or less than 8% than to hit the middle of the target.
That may make planning seem like a hopeless cause. After all, the difference between an 8% return and a 12% return over 10 years amounts to almost 100% of what you initially invest by the end of the period.
Play the cards you're dealt
As hopeless as that may sound, Easterling points to some clues to help guide your planning. He observes that poor-returning periods typically start when stock market valuations are high, while stronger returns come with lower valuations. And with high P/Es and low dividend yields, he believes now is a period of high valuations, which suggests weak performance ahead.
Some would argue with Easterling's conclusion, however. Generalizing about the overall market obscures the fact that there are two distinct trends going on beneath the scenes. On one hand, high-flying stocks such as salesforce.com
At the same time, many large-cap bellwethers have much more reasonable valuations. Microsoft
Also, while dividend yields are historically low, companies aren't paying out as much of their earnings in dividends as they typically do. With huge earners Apple
Hope for the best, expect the worst
Of course, it's impossible to know for sure whether the next decade will bring a return to the domination of stocks or continue in the footsteps of the lost decade. What you can do, though, is to have a contingency plan for whatever the future may bring. That's where Rule Your Retirement can really help, not just with analysis in the current issue but also with seven years of valuable resources that will show you how to make the perfect financial plan for you. And full access to everything the subscription service has to offer is just a click away with a free 30-day trial.
Counting on 10% returns is a recipe for heartbreak if you run into a tough market. That doesn't mean that a comfortable retirement is a pipe dream. It just means you have to take steps to protect yourself from worst-case scenarios. If you do that, you'll find success in the long run.
Get started with a 30-day trial of Rule Your Retirement today -- it's free and there's no obligation to subscribe.
Fool contributor Dan Caplinger has plenty of pipe dreams, and they occasionally even come true. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services have recommended buying shares of AT&T, Microsoft, Apple, salesforce.com, and Google; creating a bull call spread position on Apple; creating a diagonal call position on Microsoft; and shorting salesforce.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy is anything but average.