Rebecca Katz: What is a realistic rate of return for the financial markets over the next decade?
Joe Davis: Our expectations for the next 5 years are roughly 4% to 4.5%. That’s the average. Who knows what the pattern will be along that. That’s not what we do and how we model it, but that’s how the math works out. On the equity side, it’s below historical averages. It’s below what the trailing 5-year returns are generally speaking for most, certainly for U.S. investments.
Rebecca Katz: It’s interesting, though, because if cash is yielding 2%, cash is a good.
Joe Davis: That is. It’s a lower expected return environment. Ironically, the only thing that will lead us to markedly higher expected returns is actually a bear market because the market will sell off, but it will start to discount a future rate now.
Rebecca Katz: We’ll take slower growth.
Joe Davis: So my parents may be watching tonight, and they may be trying to generate 10% from their portfolio over time. Mom and Dad, I mean, there’s no Magic 8 Ball. You either can take more risk, if one is willing to do it, to eke out a higher return. It’s more equity volatility, unfortunately. Or it is spend less, or save more. I mean they’re the 3 variables that one can choose to pull in some combination. I wish I had better news, it was going to be more of a patient environment and one that was going to be a little bit frustrating because we’re not going to have the returns that we have had over the past 10 years.
Rebecca Katz: Right, so control the things in your control.
Joe Davis: It’s getting a little bit better for fixed income. Because we’ve been consistently downgrading our forecast because stock valuations and the performance in the market’s been too strong, and they’ve been ahead of the fundamentals over the past 4 or 5 years, that’s why we got more guarded and more guarded. We see unpredictability ahead and volatility picking up, we are getting more alarmist and bearish in our long-term forecast.