Time for a change?

Keep saving. Stay the course. Don’t panic. You’ve heard it all before (especially from us). We still believe it, but…are you sure you’ve picked the right strategy to begin with? Here are a few reasons you might consider for making a change to your investments:

1. A Change in your Life Situation
A change in your family status (marriage, child, or divorce) can alter your projected savings needs or the amount you need to save to get there. Furthermore, if you are returning to work after a period of not saving in a 401(k) plan, you may need to bump up your contribution a little to make up for lost time.

Not So Great Expectations...
Why We All Need to Save More

Do your dreams of an early retirement seem more like a “pipe” dream these days? If stock market losses over the last 18 months have left you feeling a little hopeless about your chances to stick to your original game plan to cut bait at age 60, you are not alone. It is especially important for those of us with retirement looming (or who just want to retire early) to realize that current market conditions require us to rethink our expectations for future growth of our 401(k) accounts.

The 90s...Up, Up, and Away
The period of 1991-2000 provided stock investors with roughly double average long term stock market returns. As Historical Stock Market Returns illustrates below, the last 20 years gave us unprecendented returns from stocks, giving investors the false confidence that we could actually expect to achieve 15% returns or more on our equity accounts.

So what caused these high returns? In the simplest terms, the willingness of investors to pay more for stocks.

What determines how much you pay for a stock?
Corporate earnings. Historically, the appreciation in stock prices has closely paralleled the rising trend of corporate earnings and the growth of the economy. In fact, the returns over the last 20 years have been largely due to rising earnings. Traditionally, stocks trade for around 20 times earnings per share. A bull market can see stocks priced as high as 35 times earnings and a bear market as low as 12 times earnings.

Current price levels forlarge US stocks are in the 24-29 times earnings range. What this tells us is that the big stocks are not selling at a discount (unlike every other bear market since the 1950s). We also know that the higher the price we pay for an investment, the lower our future return will be. And, as we just mentioned, historically, appreciation in stock prices has been tied closely to the growth of the economy.

What can you expect now?
Given current economic growth expectations and the absence of corporate earnings growth, many experts believe we will see stock market returns of 7-8% annualized over the next 5 years, with bond returns in the 4-5% range.

The Bottom Line
Provided these predictions are true, 401(k) investors have no choice but to save more. With the double digit returns of the 1990s behind us, at least for the foreseeable future, we must modify our strategy to expect less and save more. Our futures depend on it.

Visit the Planning Calculators at www.deschutes401k.com to help you project the impact of lower returns on your own retirement next egg.