Investors can earn higher rates of return from their bonds and stocks

Most people think that investing for the long haul is the best course of action. The benefits of compound growth and the tax benefits of tax-deferred accounts for retirement top most people’s list of…

Investors can earn higher rates of return from their bonds and stocks

Most people think that investing for the long haul is the best course of action. The benefits of compound growth and the tax benefits of tax-deferred accounts for retirement top most people’s list of reasons to hang on for the long haul. But the problem is that investors typically overestimate the returns they can expect from their time horizon. If your expected rate of return is around 7 percent, you may want to look at other strategies.

Savvy investors can earn an after-tax rate of return of about 3.8 percent — and often more — from marketable bonds. With a total return investment approach, you can earn an after-tax rate of return of 6.3 percent — and often more — from marketable stocks.

Stock Investors

Let’s say you’re planning to retire at 65. If you want to maximize your tax benefits, you’ll be relying on your capital to pay for your retirement and living expenses. As such, your anticipated rates of return should be based on your estimated annual Social Security benefits and other factors such as inflation.

To figure out how much your portfolio will be worth 10 years from now, multiply your anticipated inflation rate by the rate you expect your portfolio to earn. If your expected rate of return is 7 percent, multiply that number by 1/365. Then multiply that figure by the rate you expect your portfolio to earn each year. The result is your lifetime rate of return. If the total return is 3.8 percent, we’d say that you should expect your portfolio to earn a compounded rate of return of 5.8 percent per year. This is in sharp contrast to what the market’s realized rate of return has been over the past 60 years: a compound annual return of about 7 percent.

Frequent Stock Buyers

One advantage of owning a long-term portfolio with a moderate rate of return is that you’ll never see the kind of steep drawdowns and possible market volatility that you’ll encounter when you engage in investment-based behaviors that drive returns higher. For example, if you buy stocks at a 20 percent return and cut them back to a 10 percent return, you’ll end up with an overall return of about 7 percent a year. But if you buy the same stocks at an 8 percent return and cut them back to a 7 percent return, you’ll end up with an annualized return of 8.8 percent. However, this is still nearly double the 3.8 percent rate of return you’d earn under a traditional strategy of buying stocks at a 20 percent return and cutting them back to a 10 percent return.

Regular investors, as measured by the Spectrem Main Retirement Index, have an average rate of return of about 4.5 percent. This exceeds the 3.8 percent that a moderate rate of return yields for those people who have full time earnings. With a passive approach, they can earn more than double the market’s rate of return.

Investing for Growth for Retirement

The preservation and preservation of capital is a cornerstone of the bond strategy because it protects your assets from inflation. Many factors including credit, duration and interest rate effects will affect bond prices, but they don’t affect the interest or income payments they’ll make to you. Fixed-income portfolios yield similar rates of return across a range of markets and scenarios. If the market experience is a function of low interest rates, it will produce a higher after-tax return in the long run.

Bonds and Active Real Estate

Under a passive portfolio approach, the market can typically be expected to maintain its current level of after-tax returns. Bonds are in the safe-haven portion of the investment portfolio, and are generally more liquid than stocks and cash. As a result, they tend to stay invested through market cycles.

Active real estate has the potential to produce higher after-tax returns if the market is underperforming, which would put the price of real estate relative to its underlying economic fundamentals on a positive course. Investors can expect to see a combination of increased rents and increased investment returns from an active real estate strategy.

But as the market experienced during the Great Recession, the market provides little protection against severe economic downturns. Therefore, a potential risk of an active real estate strategy is that it might not match a passive portfolio approach because real estate prices have historically gone up faster than stocks.

Buying Stocks for Growth for Retirement

A surefire way to earn high rates of return is to have a fast-growing portfolio. But this assumes you can invest in stocks with low volatility and that your portfolio will grow in tandem with the economy. Sounds like a prescription for regret.

With a disciplined investment approach, investors can dramatically reduce

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