Friday, July 17, 2009

The challenge of setting future return expectations

Periodically our firm will revisit what we believe different asset classes will return over the long-term future. This is important as future return levels are a key assumption in preparing wealth plans that will assist clients in determining when to retire, how much to spend in retirement, and other key issues. We (as have others of our profession) have typically looked at historical return information and historical relationships between different types of investment assets and from this information have set our future return expectations.

After the events of the past year or so, things have changed. A very good discussion of how things have changed can be found in an article titled "Beware of the 'Business as Usual' Mindset" authored by Mohamed El-Erian, co-CEO of PIMCO. You can find the article at In the article El-Erian sets out 4 key questions:
1. How far will the balance shift away from markets and toward governments?
2. How will governments finance their growing involvement in the economy?
3. To what extent will this alter the role of the U.S. in the global economy?
4. How far will governments go in de-risking the financial system?

You can read how Mr. El-Erian answers each of the questions in the linked article. Our firm concludes that these issues raise the risks for all of us in terms of trying to have the funding to accomplish our key goals. We believe the answer is to have more of a safety cushion in a wealth plan. That may require working longer, spending less, being more flexible on goals or any number of other strategies. Key is to have a wealth plan and in that plan to properly measure what the goals are and what the cushion is to assist in protecting those goals. As the world changes in so many ways, including market changes, such a wealth plan must be updated each year to have continued relevance.