Are your employees facing a looming 401k crisis ahead? With stock market valuations near all-time highs in the present low-interest rate environment and rate hikes being telegraphed by central banks, there is a strong likelihood that stock market returns on 401(k) plans will under-perform in the decades ahead. No doubt, participants will be questioning their investment choices.
Traditionally, as interest rates rise, borrowing costs go up for corporations (and stock prices fall). If capital is harder to come by in the way of higher financing costs, companies will find it harder to expand, build new products and grow. This will affect corporate earnings and stock prices will start to recede. Since the 1920’s average rates of return (over a 40-year period) have been about 11%.
According to Paul Merriman, Founder of Merriman Wealth Management:
From 1928 through 2014, the S&P 500’s compound rate of return was 9.8%, enough to transform a $100 investment at the start of 1928 into $346,261 over 87 years.
Given enough time, such a return would almost certainly be sufficient to fund a comfortable retirement.
Looking through the eyes of a young investor with 40 or more years ahead, I studied every 40-year period during that time (there were 48 of them). The worst performing period yielded a compound return of 8.9%. The best was a compound return of 12.5%.
Merriman is an optimist and his research shows historically that the markets do perform well over time, but may require patience and faith to endure the bad years. Buying and selling can be very costly and it is virtually impossible to time the good years versus the bad years.
So despite some rough time possibly ahead for stock markets, Merriman suggests staying the course and/or making slight allocation adjustments into other asset classes. Clearly a “glass half-full” approach. But when available, it is a safe strategy to engage the assistance of a financial advisor.
