It appears that a healthy percentage of U.S. investors have chosen to learn from the tortoise, although some are still pulling for the hare. A survey released in January found that 401(k) investors expect 7 percent average annual stock market returns over the next few years, down from the less realistic 16 percent they expected three years ago.^1,2 Yet the survey also found that about one-fourth of investors expect stock prices to rise 30 percent to 100 percent per year over the next two decades.³

There’s nothing wrong with hoping for the best. But those who are overly optimistic risk not accumulating the funds they need to reach their goals for tomorrow.

Although past performance is never a guarantee of future results, one prudent approach to setting expectations is to look at historical averages. Over the past two decades, the S&P 500 Index increased in value an average of 15 percent per year. Since 1951, the S&P averaged about 12 percent per year.⁴ Neither is anywhere near the 30 percent some in the survey expect to earn over the next 20 years.

Setting reasonable expectations is an important part of investment planning. You won’t be disappointed if your portfolio earns more than you expected, and you’ll be prepared if it performs in line with historical averages.

1, 3) The Los Angeles Times, December 31, 2001
2) Business Week, July 20, 1998
4) Wiesenberger, 2001. Performance described is for the periods 1/31/1981 to 12/31/2001 and 12/31/1951 to 12/31/2001. Stocks are represented by the S&P 500 Composite Index total return, which is generally considered representative of the U.S. stock market. The performance of an index is not indicative of the performance of any particular investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results.