Free Money Finance Policy Announcement -- And a Question from Our Studio Audience

I hesitated even posting this for fear that I would be deluged with questions, so let me state this up front: I do not respond to individual questions. If you have a specific personal finance question that pertains to an individual situation, there are plenty of smart personal finance bloggers who will answer it. I'm just not one of them. As such, I have a new policy -- I will not respond to any email sent to me asking for personal finance advice. There, that gets that out of the way. Before, I would have been rude not to respond. Now, whoever sends me an email has been informed of the policy, so I can't be perceived as rude, huh? ;-)

It really gets down to two things: time and expertise. I don't have the time to address individual concerns. Instead, I try to post on topics that most people will enjoy/get something from. In addition, I'm not qualified to address anyone's specific needs. I don't know (and can't possibly learn via email) all the specifics of someone's financial life -- a task that's often required to give good advice. Instead, I share what I do (which is something I am qualified to talk about) in hopes that it will help a lot of people.

Ok, now that I've rattled on like a politician at a county fair, let me say that I did recently receive an email question and did respond personally to it (this was prior to my policy announced above, of course). I wanted to share the question and my response because it gets to the heart of my investment philosophy. First, the question:

I was wondering if you have ever read The Four Pillars of Investing by William Bernstein?  He says that we should expect something along the lines of 3-4% real returns in the future.  However on your site and others like the fool.com, I always see figures like "X amount of money invested at 10% over Y years gives you a final amount of Z."  What are your feelings about the long term performance of the market from here on out?  This is important to me as I am in my mid 20s.

Here's how I responded:

I haven't read that specific book, and the question you ask is a big one (no one can predict the future), but here are my thoughts:

1. The numbers that others and I quote are the average returns seen over decades and decades. So while past performance is no indication of future results, this is a pretty long trend and I feel comfortable with it.

2. I have faith in the U.S. stock market and the country in general over the long term. As such, I use index funds and will follow the market in my rate of return.

3. If the U.S. economy only returns 3-4%, there are going to be a lot worse people off than I am -- especially since I'm saving like a squirrel preparing for winter. I think if I keep at it, I'll be fine.

I've had this question (or a similar comment) before, so I thought I should state my position on it. In the end, I spend much less than I earn, invest what I save (mostly in index funds), and have been doing so for a long time (and will continue to do so for many more years). As such, no matter what the future holds, I'll be better off than the vast majority of people. And I keep re-stating these principles over and over again because I'd like all of you to join me in this secure (as secure as it can be) financial future.

Comments

[Blaine Moore (Run to Win)]

I thought that you kept from answering personal financial questions by making it so that nobody could email you at the address you publish on here? Heheh.

[Dale G.]

As one of your regular readers, I'll be happy to comment on your policy. I agree completely. In addition to not necessarily having the expertise to answer specific personal finance questions, you are unlikely to have all of the information you would need to answer them.

That isn't to say that you should answer questions. But the sort you absolutely should answer are exactly the sort that you should answer publically, along the lines of: "I've heard about the new Roth 401(k)'s. Where can I get more information?" or "Have you read this book or article and do you have a comment or review?" One of the great things about blogs is that the readers themselves often provide links to additional information. I can't take credit for doing that here.

As for the question about the future real rate of return for various assets, I think it is worth remembering that all sorts of rates of return are stated by various people as benchmarks, estimates and forecasts. Some of them are real and some are nominal. The nominal rate of return is, of course, a raw number. On bonds and interest bearing accounts, it is the stated interest rate. The real rate of return is adjusted downward by the inflation rate. I prefer to do all of my calculations in terms of real rate of return.

Historically in the US, stocks have had a real annualized return of about 7-8%. It is highly variable, year to year. Taken over longer periods, it gets much more predictable. Some people will even quote a number of 7.81%. I'm not buying. My annualized return over the next 20 years on the stocks I hold will not be 7.81%. I'm hoping for better, but I would be shocked to hit that number dead on.

When I'm doing my planning, I try to plan pessimistically. I assume that my return will be on the low side. I assume that I will have lean years in which I won't be able to save as much. Every year that turns out better than my forecast provides an additional cushion when things go wrong. My forecasts aren't based on a 3-4% real return, but I do consider whether I can reach my goals if I average 6% annually over the next 20 years because I have several years that are below par.

[beloml]

I just want to let you know how beneficial your blog has been to me personally, and, I'm sure, to your other readers. The level of security I will have in my retirement (in 20 or so years) will reflect in large part what I've learned from you. Thanks for this valuable service.

[FMF]

Thank you, Beloml. That was very kind of you to say.

That's why I do what I do here at FMF -- to help all of us manage our finances better. I appreciate the fact that you let me know it's working. :-)

[dave]

this was touched on by another commentor, but that was 3-4% *real* returns, adjusted for inflation and fees. The 8%-10% range would be before adjusting for these factors.