Thanks Hendrick.
As I say in the article I linked to, “My annual investment return assumption is 6% above inflation. Historically, equities returned more than 6.9% annualized from 1927 to 2019 after adjusting for inflation.”
I agree that the next few years (possibly more than a decade) will likely see more muted annualized returns than we saw over the past century. According to Morningstar’s forward-looking analysis, they expect about 1% lower returns on average.
I also assume that investors go close to 100% equities because in the long run, nothing else has a chance of getting you to financial independence unless you plan to work for more than a century ;).
Here’s my analysis as to why equities are a lot less risky than people believe, and in fact less risky than cash if you look over periods of 20+ years:
Even if you believe markets are more risky now than ever in the past (something that’s hard to dismiss), the risk of not taking enough risk is even higher.
In addition, if you believe that 6% above inflation is too aggressive an assumption, you must understand that this makes a 10% savings rate even less acceptable. The only thing we can control in our retirement planning (at least to some extent) is how much we invest and what we invest it in.
After that, we have to hope the market gods smile on our investments, but come up with plans on how to mitigate the risks in case they don’t. Here are some of my thoughts on that:
