Is your portfolio producing what it ought to?

The traditional finacial advice that has been repeated for decades is clear: “invest at least 10% of your monthly income in the stock market, in a healthy balanced ratio of 60:40 – primarily in mutual funds and bonds.” Investors who do so are told that they can expect an annual growth of about 8% – a little more than enough to keep up with inflation.

The main reason that this strategy is pushed so heavily is something analysts call “historical data”. Even taking into account the Great Depression and the recession of the 1970s, they still say that the traditional advice works.

Well, you already know my thoughts on the matter. Now why not listen to what the Wall Street Journal says?

Money managers point to historical data going back to the 1920s to show that in the past stocks have produced total returns of about 10% a year over the long term and bonds, about 5%—meaning a standard “balanced” portfolio of 60% stocks and 40% bonds would earn just over 8% a year. (Naturally, their legal departments quickly add that the past is no guide to the future.)

Are these forecasts realistic? Are they sensible? Are they even based on actual logic or a correct reading of the past data?

A close look at the data reveals a number of disturbing errors and logical flaws. There is a serious danger that investors are deluding themselves and that returns from here on may prove far more disappointing than many hope or believe.

The article goes on to describe how stock market performance and inflation affected the actual buyer power of investors, and the numbers are scary. So why not print out a copy of this article for your financial advisor and see what he says?

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