Avoiding 5 Common Mistakes in Overestimating Future Equity Returns

Brown, Robert A.
May 2002
Journal of Financial Planning;May2002, Vol. 15 Issue 5, p86
Academic Journal
This article develops an approach for the financial planner to follow for the development of realistic long-term return expectations by focusing on five common mistaken assumptions for use within their financial planning. Financial plans generally specify certain critical investment decisions. These decisions may include the asset allocation or asset mix, the annual contribution to the client's investment accounts during the accumulation years and the level of annual withdrawals that can be prudently supported during the distribution years. Such decisions depend critically on the planner's assumed rate for equity returns. If the planner misestimates these future returns, the planner could substantially jeopardize the client's ability to realize what otherwise might be quite reasonable financial goals. This article is not mean to forecast near-term equity market returns. That is an entirely different exercise. Readers are encouraged to adopt those portions of this methodology that they deem applicable to their own circumstances. However, the author believes the most useful equity return assumptions for long-range financial planning exercises involve conclusions such as 3.39 percent for the next ten years followed by 6.71 percent thereafter.


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