This article describes and demonstrates the serious implications of forecast skew for long-term stock market returns. Spoiler alert: Most forecasts for stock market returns from Wall Street analysts average near 6% annually. However, there is almost no chance of a 7% annualized return for the next decade, but high chance that it’s between 0% and 6%. This outlook should be empowering, not concerning. There is a lot that can be done by and for investors to achieve success even when returns from the stock market are so far below average.
Insights include: (1) the stock market is random from year-to-year, yet highly predictable over decade-long periods, (2) EPS growth is slightly slower than GDP-N growth during almost every historical period for fundamental reasons, and (3) random diversification is good; intentionally-structured diversification is even better—for investment success, it’s important to understand the current stock market environment, the range of outlooks for the next decade, and the principles that drive stock market returns over investors’ horizons.