Counting Our Chickens Before They Hatch

I tell you, the economy is bad.
How bad is it?
The economy is so bad, that I bought a toaster oven and my free gift with the purchase was a bank.

I am looking at a gloomy series of charts. From the end of 1999 to the end of 2009, the S&P suffered a 23% loss measured in American dollars. During those ten years, the tech bust dropped the value of the S&P by 50%. Then the housing bubble and the financial crisis dropped the S&P by 56% from its peak value in October 2007. If you measure the drop in the S&P during the past decade in Euros, the loss is 47%, measured in gold, 80%. Every year the dollar is losing value to other currencies and commodities even as the markets gyrate.

The retirement calculators often suggest 8% as an average annual return on investment and 3% as an average rate of inflation. The actual return on investment over the last 10 years would average -2.7%. It is harder to get an accurate measure of inflation because our government economists keep changing the definition of their indices in order to make the political party in power appear more successful. However, looking at a ten year moving average of the Consumer Price Index over the course of the last decade, 3% does look like a pretty good number. Our national debt seems to be approaching a mathematical singularity, an infinite increase over a finite period of time. Do you want to bet that the value of the American dollar will continue to drop at a modest 3% per year?

In a recent edition of the Wall Street Journal, Jason Zweig observes that, “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.”

His commentary on this little factoid, “What are we smoking and when will we stop.”

The article goes on to observe that over the years tax increase and inflation subtract 5% to 7% from our returns. That means the American investor would need a 20% average annual return on their investments in order to meet their expectations.

In the words of the eccentric wide receiver, Chad Ochocinco, “Child, please!”

The author also asked some respected experts what guaranteed rate of return after taxes and inflation would be realistically acceptable. John C. Bogle, founder of the Vanguard Group of mutual funds replied, 2.5%. Elroy Dimson of London Business School, an expert on the history of market returns: 0.5%.

That brings us back to the retirement calculators that tell me I have to work another 3 years. That is assuming I can beat taxes and inflation by 2% or 3% every year for the rest of my life. This is quite an assumption given our rising national debt, a terribly sick housing market, and the death of the notion that our economy can be driven forever by consumption without the creation of any wealth.

http://finance.yahoo.com/retirement/article/108608/why-many-investors-keep-fooling-themselves?mod=retire-planning

http://finance.yahoo.com/news/Lets-Hope-These-4-Things-Dont-usnews-2604707770.html?x=0