It’s not often you get to read such a sensible analysis of statistics as this! The implications for people trying to manage their pensions on the basis that on average they’ll get a 7.5% return on their pot are frightening, as good an argument for collective pensions as I’ve read this year!
Ask a random stock market ‘guru’ at the beginning of the year what he or she expects what equities will do that year and you will probably get an answer like this: ‘Well,… somewhere between the 5 and 10%.’ And this year is no exception. The average Wall Street forecast for the return on US equities is +7.5%. More importantly, this average includes very little outliers (see for example here and here). Plus or minus 20%, or even more extreme, is (almost) never the answer. And while that may sound logical, it is, in fact, not!
Sticking with the average
Please take a look at the graph below. It shows the calendar year returns on the Dow Jones Industrial Average Index since 1900, ranked from lowest (left) to highest (right). During this period, the return on the Dow Jones has averaged 7.4%. From this perspective, a return forecast of…
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