WSJ’s Zweig: Don’t Get Overexcited by Recent Investment Returns

Monday, 07 Jan 2013 02:31 PM

By Dan Weil

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A lot of financial markets enjoyed sharp gains last week, but Wall Street Journal columnist Jason Zweig urges investors to temper their expectations for the future.

The Standard & Poor’s 500 Index rose 2.5 percent Wednesday alone after Congress approved the fiscal cliff deal. Meanwhile, the Russell 2000 index of small stocks hit a record high Friday.

And the Barclays U.S. Corporate High Yield Index broke below the 6-percent barrier for the first time.

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

“Starved for good news after a dozen years of bear markets and wrenching volatility, investors need to keep their expectations in check and to avoid taking unacceptable risks in the pursuit of yield,” Zweig writes.

Keep in mind, for example, that if the S&P 500 gained 2.5 percent every day of the year, as it did Wednesday, you’d be looking at a 50,000 percent increase.

Also remember that given the laws of compounding, an extra percentage point of yield means a lot less for your returns when interest rates are near record lows, like now, than when they are higher, Zweig says.

Rob Arnott, CEO of investment strategy firm Research Affiliates, predicts stocks will return only 4 percent, before inflation, over the next 10 to 20 years.

That’s because of high budget deficits and debt and the aging population, he tells The Motley Fool. “We call it the ‘3D Hurricane’ — the interconnected influence of deficit, debt and demography.”

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

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