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This question stems after listening to Robert Kiyosaki's Rich Dad CD audio collection.
He stresses in his CD that he finds it "risky" that the majority of middle class U.S. workers have retirements that are completely dependent on mutual funds (or various other equities) and thus are dependent on the performance of the stock market by the time they retire.
This may be a basic question, but it made me wonder about what is the underlying idea behind why we would expect the market to provide positive, and by positive I suppose I mean beyond the 5% you could get risk free in a savings account/cd/etc, returns for us in the "long-run" by the time most of us would retire? (probably 10-40 years for the people in this forum)
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It simply is because the stock market has provided positive long term yields across its entire history.
http://www.finfacts.ie/stockperf.htm
11% average annual return for nearly 80 years.
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I am aware of this, but I wasn't satisfied with it. Probably because that
common idea that past results do not guarantee future performance line that we've all come to know.
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OK, but here's the deal. Let's say you made that statement in 1927. Or 1940. Or 1965. Or 1970, or 1985, or 1995, or 2000. Everytime you'd say 'just because the stock market has done well in the past doesn't mean it will in the future!' But every time, the stock market has proved that wrong.
The fact remains it has passed through numerous and immense technological, economic, financial, social, and global changes for 8 decades and has continued to be profitable. [
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correct.
the stock market is profitable and is expected to be profitable into the future because otherwise, people would put their money in tbills.
the thing is, stocks (and all other asset classes-again except commodities) pay a risk premium for their profitability. their return is defined by the risk as all those asset classes' sharpe ratios are between .2-.3
that is both historically and in expectation (except commodities again blah blah blah). by using leverage and diversification you can construct a portfolio that generates a sharpe ratio of between .4-.6...far better than just an equity allocation, or predominately equity allocation and one in which you don't need to shift towards bonds as you age.
you can just reduce the risk target.
your portfolio efficiency is still the key. maintaining it is crucial.
Barron