SoCo Magazine - May 2008 - (Page 62) yourmoney The 21st Century – What Can We Expect From U.S. Stocks Dear Bob & Tim, With the turmoil and uncertainty in the U.S. stock market, I wonder, during the next 10 years, will we see the same significant appreciation as we’ve experienced over the last 10 or 20 years? Also, I’ve followed Warren Buffett’s trading behavior for a few years now, and it seems he has the Midas touch. What are your thoughts? Can he maintain his astounding record? Sue Douglas Middleboro, MA Warren Buffett’s investment record during the latter half of the 20th century and into the early years of the 21st century has been nothing short of spectacular. His Berkshire Hathaway stock has experienced compounded growth in excess of 21 percent per year, trouncing the average for the U.S. stock market, which grew at a rate of just more than 10 percent per year, including dividends. Every year, Buffett provides Berkshire Hathaway shareholders with a newsletter concerning the prior calendar year’s successes and failures. His February 2008 letter contained some very interesting facts and conclusions for astute investors to consider: The Dow Jones Industrial Average started at 66 in 1900, and ended the 20th century at 11,497. At first glance, this appears to be astounding growth; however, if you convert this data into an annual compounded growth rate, it’s only 5.3 percent per year. This figure captures price-appreciation only. If dividends of 5 percent per year on average during the 1900s are added in, the total return is just a little more than 10 percent per year. So what should investors expect for U.S. stock returns in the 21st century? The bad news is that dividends may average only 2 percent per year, which is about where they are now but well below the 5 percent average of last century. If we assume that price appreciation remains the same at 5.3 percent per year, total return for this century is likely to be just a little more than 62 | s o comagazi ne . i nfo | M ay 2 0 0 8 7 percent per year. This is three percentage points less per year than during the 20th century. But what if stocks appreciate less than 5.3 percent per annum? Then it wouldn’t surprise Buffett to see total returns for this century as low as 5 percent per year, roughly half the average for the prior century. Investors may think that these projections are overly pessimistic. But Buffett points out that “for investors to merely match that 5.3 percent market-value gain [of the 20th century], the Dow, which was recently below 13,000, would need to close at about 2,000,000 on December 31, 2099. I should mention that people who expect to earn 10 percent annually from equities during this century – envisioning that 2 percent of that will come from dividends and 8 percent from price appreciation – are implicitly forecasting a level of about 24,000,000 on the Dow by 2100.” Assuming the accuracy of the above scenario, what’s an investor to do? We believe that in addition to U.S. common stocks, one must consider investing in international stocks, emerging market stocks, commodities, U.S. and international bonds, and real estate. By doing so, an investor increases his or her chances of experiencing faster growth elsewhere. O Tim Geremia, CFA, CFP, is the chief investment officer of Coastline Trust Company and Bob Gaumont, EVP, is the chief fiduciary officer of Coastline Trust Company. http://socomagazine.info
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