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Cascade Investment Group

Specializing in financial and tax planning, risk and portfolio management.

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Scott Rethi / April 1, 2016

Wealth Notes: Where Do You Think The Market Is Headed?

What are the odds that the US stock market, the S&P 500, will make money next year? How about over the next three, five, 10 or 15 years? Do you think that each year you have a better than 50% chance to make money by investing in US stocks? Or is the market like a casino and Wall Street has the odds stacked against the average investor like the casino does in all of its games?

Our friends at Oppenheimer took Morningstar research and compared the odds of making money in the stock market to the different games in the casino. Guess what, your odds in the casino are lousy. The best games – baccarat, craps and blackjack, give you 48% to 49% chances of winning. The stock market, on the other hand, has been positive 75% of the time over rolling one year periods of time. The market has been up 94% of the time over ten year periods and 99.7% of the time over 15 year periods.

We take the stock market every time as a way to have money earn compound interest and gain over time. It is why accounts targeted for future income – like retirement accounts – need to have a sizable commitment to stocks. It is why we stay in stocks through difficult periods like the beginning of this year.

What are your expectations for the next year, three, five or 10? Can you live with those expectations as your money is invested in a portfolio of different investment asset classes? Have you even thought about it much?

We think about investment returns every day and how likely those investment returns are to be as we go in to the future. Our investment and financial planning work depends on how likely returns are to be in the future and if they will reflect the past or become something very different. Financial plans require us to make certain decisions about the future of each dollar invested.

Financial plans start with basic assumptions. When do you plan to retire? How much income do you need to support your lifestyle? What tax rates will be used? At the beginning of the planning work we ask questions that have not been answered in detail before. The ideas we have for our life in the future float around in our heads but it looks very different when those ideas are written down with targeted ranges in place for spending, life goals and retirement.

Once the plan is sketched out, another set of assumptions must be used – the returns to use for each asset class and inflation. We have to make decisions about which investments will work best to achieve the goals in the plan. These assumptions require knowledge of past returns and a review of what could happen in the future. The past is simple – we have great data for US stocks, international stocks, oil and gas, gold, government bonds, high yield bonds and every standard asset class. We know what the variability of these returns has been as well.

Expected future returns – well, that’s what keeps us up at night. Will stocks perform as they have in the past? Will inflation remain low or return to its historical average? Will interest rates ever go up to help savers and if so when?

Each year, I review different asset class return projections. Some research groups put out their one year number – what they think each asset class will return next year. Others put out seven or ten year estimates. There are some with estimates that are very different but most fall close in line with each other. For the most part, the longer term estimates look reasonable and have track records to match.

We do expect the next decade to have more volatility than the prior decade. Inflation looks like it will be lower. Certain asset classes, like long-term US government bonds, are expected to have a tough time making money after inflation is factored in to the equation.

Our goal for clients is to take the least risk possible to help you achieve your goals. For most of us, this means having money in a variety of assets. Certain assets, like stocks in the US and abroad, can be expected to grow significantly as returns compound. Others, like bonds, are there to provide some steady income and portfolio balance.

We are passionate about helping you achieve your life goals and to retire comfortably. Talking about return expectations may not be as exciting as talking about your next vacation or sending children off to college and yet it is a crucial component of your ability to live a fulfilling and rewarding life.  Next time we review your financial plan let’s also review our expected return assumptions built into the plan to help you understand our outlook. We hope, as fans of The Hunger Games will remember, that the odds will forever be in your favor.

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444 East Pikes Peak Avenue
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Colorado Springs, CO 80903
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Cascade Investment Group, Inc. is a dully registered broker-dealer and registered investment adviser. Advisory services are only offered to clients or prospective clients where Cascade Investment Group, Inc. and its representatives are properly licensed or exempt from licensure. This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Cascade Investment Group, Inc. unless a client service agreement is in place.

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