As in most distributions, there are a few outliers, so advisors and academics tend to use an AS that reflects the long-term historical results recorded in the Ibbotson data. Total equity return expectations cluster around 11% and bonds, 5%. For those working with real returns, the related AS would be 8% for stocks and 2% for bonds.

As a profession, we are so confident about our assumptions that it is an axiom, repeated by all advisors (large and small, fee and commission, independent and captive), that "stocks are safe in the long run." The almost universally held belief is that, given a 20-year or longer investment horizon, the probability is effectively 100% that an investment in stock will outperform an investment in bonds.

Since the inception of financial planning as a profession, this assumption has served our clients well. We also religiously repeat, even if we don't believe it and without recognizing the inherent conflict, the mantra "past performance is no guarantee of future performance." It's time we reconsider what we tell clients, or we may not continue to service them well in the future.

Not What It Used To Be

"The future ain't what it used to be" is one of my favorite expressions. It's a catchy way to get the attention of those too comfortable with the status quo. It's also handy as a reminder that every professional who eschews ouji boards and follows rigorous econometric procedures can still be woefully off target when looking into the future. The Ibbotson/Sinquefield data is so important to our profession because it serves as the basis for our fundamental assumptions. So it's instructive to see, in retrospect, how successful Ibbotson/Sinquefield has been in predicting the future. Below, I've reproduced a table prepared by Professor Jeremy Siegel of Wharton in the Fall 1999 Journal of Portfolio Management. First, however, it's important to preface Professor Siegel's table with the caveat he included in his paper.

"My purpose here is not to highlight errors in Ibbotson's and Sinque-field's past forecasts. Their analysis was state-of the-art, and their data have rightly formed the benchmark for the risk and return estimates used by both professional and academic economists. I bring these forecasts to light to show that even the 50-year history of financial returns available to economists at that time was insufficient to estimate future real fixed-income returns."

If even Ibbotson and Sinquefield have trouble predicting the future from historical data, I believe Exhibit 1 is an effective wake-up call for practitioners who still believe in the sanctity of their interpretation of Ibbotson/Sinquefield data.

No Change

Before moving on to a discussion regarding how the future may look very different from the past, it's worth taking a few paragraphs to consider how we might be misadvising our clients, even if future returns are not too different from the past.

Professors Jones and Wilson in their article in the Spring 2000 issue of The Journal of Private Portfolio Management, "Stock Returns in the 1990s: Implication for the Future," provided a series of empirical probabilities of achieving specified returns for various holding periods, based on data from 1920-1998. Contrary to popular belief, they demonstrate that at 20 years, the probability of an investor earning a compounded rate of at least 7% based on the historical record was only four chances out of five. Even at 40 years, the probability of an investor earning a compounded return of 8% or better was only slightly better than four out of five.

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