Chapter 11 Realistic Market Expectations. Effectively managing your retirement account requires you to have realistic expectations of future stock and bond market returns. Having reasonable expectations requires knowledge of the past market performance and, more importantly, an understanding of why those returns materialized. | Chapter 1T Realistic Market Expectations In the short run the market is a voting machine. In the long run it s a weighing machine. Benjamin Graham E ffectively managing your retirement account requires you to have realistic expectations of future stock and bond market returns. Having reasonable expectations requires knowledge of the past market performance and more importantly an understanding of why those returns materialized. This chapter will help you develop an appropriate portfolio that meets your needs. The past 25 years have been unusually generous to investors despite the recent bear market in stocks. As a matter of record it was one of the most profitable periods in the economic history of the United States. There is little chance the high returns of the 80s and 90s will repeat over the next 25 years. In fact based on current interest rates and low inflation it is all but impossible for the markets to repeat the performance. Before we begin a detailed look at risks and returns of various markets there are a couple of issues you need to know about. Copyirght 2003 by The McGraw-Hill Companies Inc. Click Here for Terms of Use. 169 Protecting Your Wealth in Good Times and Bad First it is nearly impossible to accurately forecast stock and bond returns over the short term. There are too many unpredictable events and uncontrollable factors that can affect the near-term outcome. However over the long term the performance of the stock and bond market is fairly predictable because it follows the growth of the . economy. Therefore to the extent that we can predict long-term economic growth which is somewhat controlled by the Federal Reserve Board we can predict long-term returns in financial markets. The second issue surrounds the market-forecasting methodology used in this book. There are several methods used to make a market forecast all requiring a certain amount of trust in the viability of American capitalism. Nevertheless some people trust more than others
