In a remarkable recovery from a massive decline in March, the U.S. stock market reached new highs this past week. Investors may not understand how the stock market can be doing so well when the U.S. economy continues to struggle with the COVID-19 pandemic. We addressed this disconnect in our last article. Today we would like to offer a bit of warning about investment returns as we look at the road ahead.
Investment professionals often refer to the "equity risk premium" to project future returns. The idea is that investors must be compensated for accepting risk. The base scenario for investors is taking no risk and investing US government securities. A good proxy for the risk-free investment is the U.S. 90-day Treasury Bill which is currently yielding about 0.10%. Investors willing take some risk in the bond market would earn more than this. Today, they might earn 2-3%. Investors willing to take even more risk by entering the stock market would receive a premium of 4-6%.
So, a portfolio of 50% in bonds and 50% in stocks can be expected to earn approximately 3.0-4.5% (50% of 2-3% + 50% of 4-6%). This is far less than most investors have earned historically.
Springwater Wealth Management
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