WHAT investment return do you expect?

In 1999, the S&P returned 21 percent; in 1998, 25.6 percent; and in 1997, 33.4 percent.

If somebody had asked you at the end of 1999 for your prediction on what the S&P 500 would return during the next 10 years, how would you have answered? Would you have predicted a positive return? Double digits? Single digits? Or would you have predicted negative returns?

Jeremy Grantham is co-founder and chairman of GMO. His company did a 10-year forecast of various asset classes from Dec. 31, 1999, to Dec. 31, 2009. They ranked the best to worst asset classes and their expected compounded real returns. On the chart to the right are the results.

Pretty impressive.

GMO also did a seven-year forecast as of Dec. 31, 2009. Any guesses? The worst performing asset class in the fixed-income category was short-term U.S. Treasurys (30 days to 2 years) at -0.6 percent. Emerging markets were the highest ranked fixed-income investment at 2.1 percent.

For stocks, the worst performing asset class was U.S. Small Cap Equities at 0.5 percent. The best performing asset class was U.S. High Quality Stocks at 6.8 percent. The second best investment was Managed Timber at 6.0 percent. U.S. Equities (Large Cap) was 1.3 percent, and International Equities (Large Cap) was 4.7 percent. These forecasts are forward-looking statements and are not a guarantee of future performance. The actual results may differ materially from the forecast.

Recently, I read a very good article in the Wall Street Journal written by Jason Zweig. He had interviewed David Salem, president of the Investment Fund for Foundations, which manages $8 billion for more than 700 non-profits. Salem periodically asks trustees and investment officers of these charities to imagine they can swap all their assets in exchange for a contract that guarantees them a risk-free return for the next 50 years, while also satisfying their current spending needs. Then he asks them what minimal rate of return, after inflation and all fees, they would accept in such a swap. In the latest survey, the average response was 7.4 percent. One-sixth of the participants refused to swap for any return less than 10 percent.

Zweig cited a nationwide survey that was done in 2009. It found that investors expect the U.S. stock market to return an annual average of 13.7 percent over the next 10 years. “The faith in financially high returns isn’t just a harmless fairy tale. It leads people to save too little in hopes that the markets will bail them out. It leaves others to chase high performance that can’t last,” says Zweig.

One thing is clear: Investors need to pay attention to costs. High expenses will eat into your returns. Recently, someone showed me his portfolio of mutual funds, and he was paying between 2.5 percent and 3 percent in internal fees. This is a no-win situation for the investor. Continued...

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Many investors like to compare their performance against a particular index (ie. the Dow or S&P 500). If you have a well diversified portfolio with several asset classes, how can you make this comparison?

I believe investors are best served when the primary performance benchmark is the long-term real return their portfolio must earn to achieve their long-term financial goals.

What investment return do you need?

Alan P. Weiss is the president of Regent Wealth Management Group in Woodbridge. He also is a certified financial planner and a certified public accountant. Readers are reminded that certain investments and investment strategies may not be appropriate for them and that all investments involve risks and uncertainties. Consult an expert of your choosing if you have questions about investments. More information is available at www.regentwealth.com.

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