What Investment Returns Can We Expect?

As we strive to amass enough for retirement, we need to make assumptions about our likely investment returns. The risk: Our return assumptions are too high--and we end up saving too little or betting heavily on the wrong investments. Want to avoid those mistakes? Here are a few pointers:

Don't extrapolate. We often get caught up in short-term returns. For instance, after the dazzling gains of the past decade, many investors think gold is the place to be and they're wondering when the rally will resume. Maybe gold will indeed get hot again. But it's worth bearing in mind that gold had atrocious performance through the 1980s and 1990s and that historically it has been valued mostly as a way to preserve purchasing power, rather than to earn outsized returns.

History isn't destiny. If short-term performance is a dubious guide to the future, what about longer-term returns? The historical record tells us that, over long periods, stocks have outperformed bonds, while bonds have outpaced Treasury bills and other cash investments. But that historical record hasn't done much for stock investors over the past dozen years. Today, the Standard & Poor's 500-stock index stands roughly 10% below where it stood in March 2000.

Risk gets rewarded--maybe. While stocks have lately been a miserable investment, they have the potential to generate superior performance over long holding periods. After all, stocks are riskier than bonds, while bonds are riskier than cash investments. If investors can't reasonably expect better returns from stocks, why would they take the risk of buying them?

Expect less. Whether you base your return assumptions on the long-term historical averages or on a thorough examination of today's investment fundamentals, here's a suggestion: Take your return assumptions and knock off a couple of percentage points.

To be sure, that will likely lead you to save even more each month as you strive to amass enough for your financial goals. But that isn't such a terrible thing--and it's certainly better than saving less, suffering disappointing returns and finding you can't afford to retire.

For more from Jonathan Clements, click here.

Sources: To read more about historical market performance, see "Stocks For the Long Run" (McGraw-Hill, Fourth Edition, 2007) by Jeremy Siegel.

Past performance is not a guarantee of future results

There is no guarantee that these strategies will succeed. This information is intended to illustrate products and services available through Citigroup Global Markets Inc. The strategies do not necessarily represent the experience of other clients, nor do they indicate future performance. Investment results may vary. The investment strategies presented are not appropriate for every investor. Individual clients should review with their Financial Advisors the terms and conditions and risks involved with specific products or services.

Bonds are affected by a number of risks, including fluctuations in interest rates, credit risk and prepayment risk. In general, as prevailing interest rates rise, fixed income securities prices will fall. Bonds face credit risk if a decline in an issuer's credit rating, or creditworthiness, causes a bond's price to decline. High yield bonds are subject to additional risks such as increased risk of default and greater volatility because of the lower credit quality of the issues. Finally, bonds can be subject to prepayment risk. When interest rates fall, an issuer may choose to borrow money at a lower interest rate, while paying off its previously issued bonds. As a consequence, underlying bonds will lose the interest payments from the investment and will be forced to reinvest in a market where prevailing interest rates are lower than when the initial investment was made.

S&P 500 Index is an unmanaged, market value-weighted index of 500 stocks generally representative of the broad stock market. An investment cannot be made directly in a market index.

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