Get used to idea of stock returns in single digits

Pension managers, other experts slash bullish predictions

Dollars & Sense

March 16, 2003|By THE BOSTON GLOBE

If Fidelity Investments, the world's biggest mutual fund firm, is cutting back expectations for its own employee pension plan, what does that say about the financial future for the rest of us?

Fidelity recently lowered to 7 percent its annual return target for its in-house pension, shifting an already conservative forecast of 7.75 percent to among the most modest levels in corporate America.

The move comes as pension executives around the country are slashing their bullish assumptions of the 1990s and investment managers charged with caring for workers' retirement funds are bracing themselves for what they say could be the worst decade for stocks since the 1930s.

Many individual investors have either thrown in the towel when it comes to the stock market or have resigned themselves to a more sober reality.

"You're certainly not going to have the kind of runaway years we had in 1997 and 1998," said Merritt Maxim, a 35-year-old technology consultant from Carlisle, Mass. Just a few years ago he and his wife had hoped to retire early. Now they expect to have to work into their late 60s to make enough money to retire.

Single-digit returns could become a way of life for the foreseeable future, according to many market strategists.

They predict stocks are poised to produce annual gains of just 6.5 percent to 8.5 percent over the next 10 years, down from the 10.2 percent average gain of the past 77 years.

Even when the war watch ends and the economy shakes off its blues, the strategists say, stocks may post the most tepid growth of any period since the Great Depression.

"We've got to think in terms of single-digit numbers, instead of double-digit numbers," said Christopher N. Orndorff, chief of equity strategy at Payden & Rygel, a Los Angeles firm that oversees $45 billion. "People have to adjust their expectations for retirement. Or they have to start saving more money."

Across the investment landscape, firms that manage mutual funds and retirement accounts for millions of Americans are sending a similarly subdued message.

Investment chief Alan Brown at State Street Global Advisors, a Boston firm with $763 billion under its watch, is fretting about a possible double-dip recession that would damage stocks further.

Roger Ibbotson, a Chicago market strategist who predicted correctly in 1976 that the Dow Jones industrial average would hit 10,000 by 2001, now expects stocks to rise at no more than 8.5 percent annually over the next 20 years.

Economists at Wall Street's Goldman, Sachs & Co. are more bearish, predicting returns of 6.5 percent.

The grim outlook is hard for most investors to fathom. The majority of investors got their first taste of stocks during the heady 1990s and now are living through a bear market that's devoured 30 percent to 50 percent of the typical portfolio.

A future with returns of 7 percent or 8 percent - while reasonable to the likes of investment veteran Warren Buffett - has never figured into the nest egg calculations of the average 401(k) holder.

Even conservative investors like the Maxims must adjust their outlook. While Maxim said he never bet the farm on high-flying Nasdaq stocks, he has become more conservative over the past year, moving a portion of his money into cash and bonds for the first time ever. He fears the market could fall even deeper into negative territory for another year or two, before giving rise to any double-digit rally.

"We still have 25 to 30 years until retirement, and I just hope over the long term, the market will even out in my favor," he said.

The seismic shift in the state of the market is already changing the way investors behave and will influence their confidence and planning for years to come, analysts say.

Individual investors were still pulling money out of stock funds, as the Standard & Poor's 500 index has dropped another 8 percent so far this year.

"The expectations really have to be pretty sober going forward," said Garrett Nagle, an investment adviser to wealthy clients in Boston.

While he predicts the market will bounce up once the worst of the Iraqi war fears are over, returns nonetheless will remain in single digits for the foreseeable future.

That's partly because corporate earnings aren't expected to shine soon, and because many investors have simply lost the stomach for a volatile market.

"The excitement over stocks is not going to be there," Nagle said. "The general tone of people is, `Been there, done that, and not very happy about it.' "

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