Tip Sheet Archive
High Dividend Yield
High Yield DJIA30
High Yield TSX60
Dividends at Risk
Dividend Risk DJIA30
Dividend Risk TSX60
Value Ratio Approach
Value Ratio DJIA30
Value Ratio TSX60
Low P/E DJIA
Low P/E TSX60
Low P/B DJIA
Low P/B TSX60
Low P/S DJIA
Stingy Investor Tip Sheet
|4 horsemen of apocalyptic returns|
Jason Zweig's article in last weekend's WSJ
chastised investors for their overly optimistic return expectations.
Problem is, it seems to me, that even Zweig's low expectations may
well be wildly optimistic.
But let's start with what got Jason all worked up. Evidently, "A
nationwide survey last year found that investors expect the U.S. stock
market to return an annual average of 13.7% over the next 10 years."
Those are some mighty high expectations. But you never know. There's
a small chance that a nice little bubble, or two, might get us there.
Anyway, Jason then tried to estimate "net net net" returns. (Not to
be confused with Benjamin Graham's "Net Net" stocks.) Jason's "net net net"
returns are returns after fees, taxes, and inflation.
Jason asked a few notable investors for their "net net net" return
estimates. William Bernstein was the optimist at 4%, Laurence Siegel
said 3%, John C. Bogle was keen on 2.5%, and Elroy Dimson was the
pessimist at 0.5%. But the makeup of the portfolios in question
wasn't clear. These estimates appear to be based on diversified stock
and bond portfolios.
Nonetheless, these estimates seem high to me even for all stock
portfolios. At least when it comes to the average investor. That's
because the experts have likely assumed that investors will minimize fees
and taxes (to the extent possible).
But instead of making projections, I like to look at historical
returns and then factor in the 4 horsemen of the return apocalypse.
I start with the annual returns for Canadian stocks
as represented by the S&P/TSX Composite. I then factor in poor
timing, fund fees, taxes, and inflation.
I assume that poor timing reduces returns by 3 percentage points a
year which may be on the conservative side. Fund fees come in at 2.5%
annually which is common for equity funds in Canada. I also assume
that capital gains taxes of 23% are levied annually.
It is very important to note that investors can work to reduce all of
these costs. (Inflation, the last horseman, is harder to deal with.)
How would an investor have fared when faced with such costs? The
results are shown in the graphs below. Just be warned, they ain't pretty.
(click for larger version)
(click for larger version)
The moral of the story is to try to reduce fees, taxes, and poor timing.
Btw, real bears, like Eric Falkenstein, would add in a few more depressing
Be careful, it's a risky world out there.
|01/20/2010 11:30 PM EST Permlink save & share||Markets|