Study Projects Lower Rates of Return for Long-Term Investments
SAN FRANCISCO, July 26 /PRNewswire-FirstCall/ -- A study by the Schwab
Center for Investment Research (SCIR) indicates investors who are used to
the lofty returns of the past 35 years may be facing a harsh reality check.
The research, which closely examines the factors that affect long-term
returns, confirms that market returns over the next 20 years will likely be
significantly lower than some investors have come to expect. The report
suggests that investors should do their best to avoid unnecessary fees and
taxes in this era of lower-than-average returns, while at the same time
ensuring that long-term financial plans incorporate reasonable return
assumptions.
"For investors looking to their savings to meet specific educational,
lifestyle or retirement goals, accurate estimates are critical to ensure
that a financial plan has a solid foundation for success," said Jim
Peterson, vice president of the Schwab Center for Investment Research.
"Investors who assume they will earn high returns may be experiencing a
false sense of comfort, thinking they are saving enough for retirement,
when they aren't. The discrepancy between what investors think they will
have at retirement and what they will actually have can become magnified
when returns are compounded over a long-term investment horizon."
The SCIR study "Long-Term Market Return Estimates" helps investors by
providing reasonable long-term return expectations for stocks, bonds and
cash. Key findings of the study, available at
http://www.schwab.com/longtermreturns include updated estimates to help investors
fine-tune their financial plans:
* Large-cap stocks are estimated to return about 8.6 percent per year over
the long run(1), while mid/small-cap and international stocks are
estimated to return about 10.3 percent and 8.6 percent, respectively.
Bonds are estimated to return about 4.4 percent, while cash equivalents
are estimated to return around 2.9 percent.
* Compared to historical returns, cash-equivalent investments and bonds
exhibited the greatest percentage difference in projected returns,
estimated by Schwab to return just about half of their historical annual
compound return.
* Though cash equivalents show the biggest percentage difference between
historical averages and estimated annual returns, investors are
projected to see the biggest dollar difference in their large-cap stock
holdings. Using the historical average return of 11.1 percent, an
individual with a $10,000 initial investment would expect a return of
$82,088 at the end of 20 years. Using Schwab's revised long-term return
estimates, that same investor should project an end balance of only
$52,071, a difference of more than $30,000.
* While it's always a good idea to avoid unnecessary fees and taxes, it's
even more important to do so in an environment of single-digit returns
when such expenses can eat up an even greater percentage of potential
returns.
Calculating long-term estimates
Rather than looking exclusively at average returns, the Schwab study
uses a two-part formula to recreate historical averages and calculate
return estimates for large- and mid/small-capitalization stocks,
international stocks, bonds, and cash equivalents. The study starts with an
estimate of the current risk-free rate as measured by the yield on a
20-year U.S. Treasury Bond. From there, the research adds an asset class
premium representing the incremental return-higher or lower-demanded by
investors for investing in a given asset class, as opposed to a risk-free
bond. The result is a formula that determines projected returns for each
asset class based on a variety of factors (e.g. price-to-earnings ratio)
depending upon the class.
The study finds differences between historic average annual returns and
the new estimates ranging from 2.0 percent to 3.3 percent. For investors
planning and saving for long-term goals, these differences can have a
significant impact thanks to the power of compound returns. For access to
the full report, visit http://www.schwab.com/longtermreturnsstudy
About the Schwab Center for Investment Research
The Schwab Center for Investment Research, a division of Charles Schwab
& Co., Inc., provides individual investors with professional-quality
research and decision-making tools to help clients make better decisions
regarding the key stages of the investing process-financial planning,
portfolio strategy, and investment selection. Services include Schwab
Equity Ratings(TM) and the Schwab Mutual Fund Select List.(R)
About Charles Schwab
The Charles Schwab Corporation (Nasdaq: SCHW) is a leading provider of
financial services, with more than 330 offices and 6.8 million client
brokerage accounts, 521,000 corporate retirement plan participants, 178,000
banking accounts, and $1.3 trillion in client assets. Through its operating
subsidiaries, the company provides a full range of securities brokerage,
banking, money management and financial advisory services to individual
investors and independent investment advisors. Its broker-dealer
subsidiary, Charles Schwab & Co., Inc. (member SIPC, http://www.sipc.org),
offers a complete range of investment services and products including an
extensive selection of mutual funds; financial planning and investment
advice; retirement plan and equity compensation plan services; referrals to
independent fee-based investment advisors; and custodial, operational and
trading support for independent, fee-based investment advisors through its
Schwab Institutional division. The Charles Schwab Bank, N.A. (member FDIC)
provides banking and mortgage services and products. The company's other
operating subsidiaries include U.S. Trust Corporation (member FDIC) and
CyberTrader(R), Inc. (member SIPC, http://www.sipc.org). More information
is available at http://www.schwab.com. (0006-6723))
International investing may involve greater risk than U.S. investments
due to currency fluctuations, unforeseen political and economic events, and
legal and regulatory structure in foreign countries. Such circumstances can
potentially result in a loss of principal.
Small cap investing is subject to greater volatility than other asset
categories.
Bond fund prices are subject to negative price fluctuation during times
if increasing interest rates. Investment value will fluctuate, and shares,
when redeemed, may be worth more or less than original cost.
The information presented here and in the study is general in nature
and is for informational purposes only. It does not consider your
particular investment objectives or financial situation and does not make
personalized recommendations. This information should not be construed as
an offer to sell or a solicitation of an offer to buy any security. The
investment strategies and the securities shown may not be suitable for you.
Individuals should contact their own professional tax and investment
advisors or other professionals to help answer questions about specific
situations or needs prior to taking any action based upon this information.
We believe the information provided is reliable, but Charles Schwab & Co.,
Inc. and its affiliates do not guarantee its accuracy, timeliness, or
completeness. Any opinions expressed herein are subject to change without
notice.
(1) Actual returns may vary. For this research, a 20-year time horizon
was used for long-term return estimates. Returns over 15-year and 30-year
horizons were found to be similar. However, in any year the actual return
may vary considerably. Also, stocks come with more risk to principal
invested than other asset classes. For inflation, the study uses data from
January 2006 to determine a long-term inflation estimate of about 2.6
percent per year over the next 20 years.
SOURCE Charles Schwab
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Related links:
http://www.schwab.com/
CONTACT:
Sondra Harris, +1-415-636-3292, or
sondra.harris@schwab.com, or Lara Edge, +1-415-636-3386, or
lara.edge@schwab.com, both of Charles Schwab
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