What returns should you expect?

Today Yahoo Finance published the results of a survey holding that Millennials expect a 10.2% return, and the general public even higher at 11%.  The two commentators and the host seemed to think this was absurd.  See article and video.

Later in the day Marketplace ran a segment on how pension and endowment funds are demanding similar profits from hedge funds, because our retirements are based on greater performance than they have obtained in the market since 2000.  During the early 2000s market commentators urged on this sort of expectation.  It is poor form to pretend now that it is unrealistic.  In fact, it was quite realistic from the 1930s until 2000, with returns averaging 7% in capital gains and 3% or so in dividends.

I suspect a flaw in the survey. The respondents probably were answering what the return for a particular investment should be if it is successful, not the portfolio average. It turns out that about 11% is the answer required to generate an average return in the 3% to 5% range since traditional growth ceased in about 2000. This is only a point better than corporate bonds for a much riskier proposition.

If you look at returns of people on the Fortune top 10 list, they range from slightly negative to +30%, with a preponderance at the high end. In the cases where this return has continued for many years, and some it has, then it is a reasonable expectation a professional money manager, subject of course to additional constraints, should be able to attain at least a third of it.

What’s really going on is that the market is over-invested with spurious gimmicky companies being founded to flounder. Successful high flyers can evaporate in a day (e.g. Valeant). Companies base their businesses on eliminating jobs rather than finding ways employees can create value, and this impacts the customer base. That “growth” would dry up in the era of productivity is inevitable. If you look at returns from WWII to 2000, including dividends, in fact they did average around 10-11%. They would still with sound policy.

Millennials have more of their life experience in the post-growth era, so logically their expectations are a little lower.  The commentators did not actually comment on life experience vs. expectations, probably because that undermines their point that the public is unrealistic.  Instead they wanted to blame investment marketing hype.  Frankly I have no use for hype either, but that is not what is causing these expectations.  If you look into the other writings of these commentators, they are a bit on the liberal side, as typical for media wonks outside of a few right wing sites, and it is simply the liberal agenda that investors should expect to be fleeced, either by their corporate officers or by the government.  What happens then is a spiral into deflation caused by poor expectations, a spiral which the planet has been rotating on the brink of since 2008, barely buoyed by negative interest rates and the like.

The problem is self-correcting.  But you may not like the cure.  Conflicts and unstable governments will arise which will destroy production capacity.  For example, the Syrian economy is basically offline, Iraq constantly teeters, and Nigeria’s solution to vanishing income from oil sales is to destroy and shut down their oil industry – not by consensus but by conflict.

Once production is low, and productivity is low, then if and when recovery begins, it will begin will full employment, wage inflation, and rising expectations.

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