Someone finally said it out loud: The stock market’s annual returns won’t be as rewarding as they have been historically.
Pension funds, institutional investors, and even ordinary folks like us put money in the stock market with the expectation that, over the long term, we can earn roughly 7 percent to 8 percent a year, maybe more. In the bull-market era between 1982-2000, stock returns soared into the double digits.
But this is a bear market. So John P. Hussman, of Hussman Funds, has lowered his expectations.
“We estimate the likely 10-year prospective total nominal return for the S&P 500 to be only 4.8 percent annually,” he wrote in his latest missive to investors (www.hussmanfunds.com).
His opinion aligns with what veteran Dow Theory analyst Richard Russell observed a few months ago: “I’m fairly convinced that this is a legitimate primary bear market. And it will end the way all major bear markets end – with good stocks being tossed into the market for whatever price they may bring.
“The good stocks will be sold last because there will, at least, be a market for them. They will sell below known value.”
Russell put the downside in a fairly wide range that works out to between 28 percent and 56 percent lower on the Standard & Poor’s 500 index, a market benchmark that trades around 1,350.
That means the 10-year projected return for the S&P 500 would be anywhere from 9 percent to 14.7 percent annually, still well below the projected returns that were available between 1973-1984 and the period between 1940-1954.
So what’s an investor to do? We checked in with Ed Lambert of the financial advisory firm Wiley Group, which runs $200 million for clients from offices in West Conshohocken. He advises against socking away cash under the mattress.
Currently, advisers such as Lambert are doing battle against what he calls “the silent killer” – the invisible tax on savers who stick their cash in the bank at 0.3 percent but lose 2 percent every year from inflation.
“If inflation is at 2 percent a year, a basket of goods that costs $100 today will cost $122 in 10 years,” he explains, assuming that rates don’t change. “But you’ll only have $103 to buy that $122 basket” if you leave your money in the bank. “It’s financial repression. The U.S. government is manipulating interest rates, keeping them low to keep the $16 trillion in debt-service costs down. Meanwhile, savers earn less than inflation.”
Wiley Group is putting client money in dividend-earning equity index funds such as WisdomTree LargeCap Dividend Fund (Symbol: DLN), and Schwab U.S. Dividend Equity ETF (symbol: SCHD) an exchange-traded fund seeking to track the performance of the Dow Jones Dividend 100 Index. On the fixed income side, they use iShares Barclays Aggregate Bond Fund (symbol: AGG), iShares iBoxx Investment Grade Corporate Bond Fund (symbol: LQD) and iShares Barclays 1-3 Year Credit Bond Fund (symbol: CSJ). Finally, he recommends a small percentage of a client’s portfolio be in alternatives such as real estate investment trusts and precious metals, such as SPUR Gold Trust (symbol: GLD). A sample breakdown allocation equals roughly 48 percent in equities (large-cap and domestic), 26 percent in fixed income, 16 percent in alternatives and about 8 percent in cash and money markets.
What’s the thinking behind presidential candidate Mitt Romney’s much-discussed offshore trusts? Jim Duggan, of Duggan Bertsch L.L.C. in Chicago, explains that they are a popular tool for wealthy clients.
“The headlines presume there is some nefarious intent behind Mitt Romney’s trusts, and have speculated that there is no valid reason behind such planning,” Duggan said. However, asset-protection trusts, like those used by likely Republican nominee Romney, “are a prudent part of a well-conceived wealth-preservation plan.”
Duggan explains that the accounts Romney set up are known as Offshore Asset Protection Trusts (OAPTs). “While these accounts have gotten a bad rap, they are perfectly legal,” said Duggan. Asset-protection trusts started out not as a way to reduce or eliminate tax, but about keeping what the client has from civil verdicts. These trusts often have something called a “spendthrift clause,” which says the assets of the trust can’t be used to pay out the claims of beneficiaries’ creditors or lawsuits.