When my grandma was alive, one of her favorite things to do was to marvel at the cost of everything in the grocery store. We’d scoot up and down the aisles, and she’d rattle off the cost of a loaf of bread, a sack of sugar, or a pound of butter from her Depression-era childhood. Though not nearly as consistent, either my mom or my dad will regale me with tales of CDs and savings accounts rates from their early adulthood once or twice a year. Anyone who has ever overheard those conversations knows they’re talking about the past. So why are we still talking about investment returns at 10%-12% mark in the present tense? It’s not that I don’t believe in investing; I just don’t believe in those rates. I especially don’t believe in those rates as a guideline for fledgling investors or people who are just trying to get their finances in order in 2016.
Take my buddy Dave Ramsey, for instance. On his website, he touts “The 7 Baby Steps” to get your financial affairs in order. Step four — a whole two steps ahead of paying off your mortgage — is the advice that people invest 15% of their income. Don’t get me wrong. Mr. P and I do this. In fact, between funding each of our pensions at 10% of our salaries and maxing out our Roth IRAs, we’re well over this percentage. My issue isn’t with the premise that investing is smart. It is. My issue is with this statement: “Even a couple hundred dollars a month invested now can make you a multi-millionaire.” I understand compound interest. I understand the fact that the market will recover. But I’m also not certain that this statement reflects the reality of now.
In fact, both on his website and in his books, he espouses the notion that investors earn 12% (or sometimes 8%**) on their money. It turns out, though, if you dig a little bit deeper, he also goes on to say, “From 1992–2011, the S&P’s average is 9.07%. From 1987–2011, it’s 10.05%. In 2009, the market’s annual return was 26.46%. In 2010, it was 8%. In 2011, it was -1.12%.” That’s right. We’ve moved from 12% to a negative number. I understand that the market fluctuates. I understand that investors are thinking long term. But I also think it is irresponsible at best and downright dangerous at worst to talk about these percentages as if they are reflective of the here and now for most beginning investors. Because they’re not. I’m not saying that he should be ignored* for putting the notion of investing in people’s minds. If and when we return to the reality of 12%, excellent. But I do think he should anchor his teachings in the reality of now.
I would never expect to go to the grocery store and pay five cents for a loaf of bread. I would never expect to put money in a CD and earn 10% or 15% on my money. But if I didn’t know better, I could read Ramsey’s advice and expect a much larger return on my investments than what I’m likely to see for quite some time. Instead, let’s teach people how to prepare for the future using the reality of today.
* He should be ignored for composing Tweets like a ransom note author. Stop with the random capitalization, Dave.
** “In fact, if you’d rather project your mutual funds to grow at 10% or 8%—that’s cool with us.” Thanks. I’m much more anchored in reality now.
So Tell Me…Do you still use 12% in your investment return scenarios? If so, why? If not, what do you use for a more reasonable outlook?