Dear Millennials: Stock Market Returns of 16% a Year Are Definitely NOT Typical
People in their 20s and 30s — aka Millennials — recently became the largest segment of the US workforce and are developing a reputation for being more nimble and flexible both with their careers and their adventures. While it’s usually not fair to generalize about an entire generation, the clients under 40 that we work with seem to know what they want, and they seek out the professional advice and guidance they need to get them there.
That’s good because many Millennials are now approaching critical junctures in their lives that will require them to make major financial decisions: marriage/divorce, buying a house, having children, earning ownership positions in companies. In the Seattle area in particular, the tech industry continues to create a lot of new wealth for young people with the right skillset, and this momentum provides opportunities to create even more value for their employers, and in turn, expect more value for themselves. This is assuming they make financial choices that lead to that ideal combination of financial security and financial freedom, which is what we help our clients do.
Studies that shown that many Millennials want to retire younger, and they do not think Social Security will either be limited or not available when they hit their 60s. They are savers, and also tend to think of themselves as long-term investors, seemingly relying on high stock market returns to pad their nest eggs. That is understandable, considering that in their experience with the markets — which is the last 10 years — US stocks are up 16% annualized (through March 31, 2019).
What’s troubling is this: Most Millennials (some 70%) evidently expect stock market returns to continue averaging 16% annually between now and their retirement, according to a 2018 presentation by the Capital Group. The good thing is that most Millennials seem to value financial advice and planning. So with that in mind, I will explain why expecting 16% annualized returns indefinitely into the future is not a good assumption.
Stock market returns vary greatly, depending on the time frame. Take a look at the chart below. It presents 10-year rolling returns (returns for the previous 10 years), advanced month by month. As the chart below shows, timing is very important in gauging returns. For example: Had you invested $10,000 in the US stock market in Feb. 1999, 10 years later you have lost money to the tune of 3.4% a year! Granted, 10-year periods with negative returns have been few and far between. But they do happen. Also, the average annualized return for the past 20 years is much lower than 16% a year: it is 6% annualized.
Investors can’t control historical timing: We can’t control when we are born and therefore able to eventually invest, and there is some limit to our ability to control when we retire. Our job here at LNWM is to take advantage of all the available opportunities and put together a portfolio to attain each client’s goals — even if their timing isn’t great.
The LNWM Investment Team believes the next 10-year period could present relatively low stock market returns, due to a variety of factors including middling economic growth, high debt levels, aging demographics, and corporate profit margins that are now at or near historical highs.
With our younger clients (20s, 30s and 40s) – many of whom are in their peak earning years – we work to design a realistic and comprehensive plan that takes into account all assets (including stock options and other equity compensation) and opportunities. In-depth planning, with many “What If” scenarios, allows our clients the freedom to change their trajectory — personally and/or professionally — without becoming less secure financially.