The following pages provide important updates of information in the book.

              (1) Updates of capital market forecasts found in Chapter 10 (Updates page 1)

              (2) 2009 update of Figures 2-1, 2-2, and 2-3 in Chapter 2 (Updates page 2)

              (3) 2009 update of Figure 2-4 in Chapter 2 (Updates page 3)

              (4) 2009 update of Figure 2-5 in Chapter 2 (Updates page 4)

      3/31/09

The long-term expected return for bonds is the current interest rate on long-term US government bonds, which is 5% in the book (page 146). Over the last year, the yield for long-term US government bonds has gone down from 5% to a normal level of, perhaps, 4% since the book was written. Actual current yields are significantly lower than this, but that is because there has been panic buying of US government securities recently. These securities are considered “safe”.

This buying artificially raises prices and depresses yields (prices and yields move in opposite directions). This is the so-called “flight-to-quality” to which commentators refer.

The long-term expected return for stocks is equal to the current dividend yield plus expected real economic growth plus expected inflation (page 147). In the book, these components are 2%+3%+3%, respectively, for a total of 8%.

Because of the decline in the stock market over the last year, the dividend yield has moved up from 2% to 3%. This means that the expected total return on stocks has gone up by that same amount to 9% (3%+3%+3%).

What all this means is that total returns will be slightly higher than those estimated in the book in the years before retirement, because this is by definition a period of relatively high stock exposure, and slightly lower in the years after retirement, a period which is characterized by relatively high bond exposure.

However, the changes in forecast returns as a result of what has happened in the markets recently do not change the basic structure of the analysis presented in the book or the essential conclusions.

It is interesting to note that for the subsequent year, the year ended 3/31/10, the return for stocks was 49.7%, and the return for bonds was -14.4%.

6/30/09

The significant rally in the stock market in the second quarter was quite typical of the recovery from a market low which anticipates an improved economy. The stock market declined about 50% from the peak in the fall of 2007 to the low in March. The rally in the second quarter was about 30%, which means that the stock market is still down about 35%. This sharp rally demonstrates how important it is to stick a well-conceived long-term program, rather than throwing in the towel at the market

bottom, because the pain is to great. You never know in advance where the bottom is, but it is clear that you need to be there when it comes. 

The yield on long term government bonds stands at about 4.3%. This means that the total return from bonds over the long-term will be 4.3%, which is somewhat lower than the 5% used in the book.

The rally in the stock market reduced the yield to about 2.7%. This means that the long-term return forecast for stocks, using the methodology outlined above, has fallen somewhat from the end of March. However, the total return of 8.5-9% is still higher than that used in the book.

The bottom line is that, as suggested at the end of March, returns from an appropriate portfolio of stocks and bonds will be somewhat higher in the early career years and somewhat lower in the later years. However, the differences are not significant enough to change any of the conclusions about the use of Target Date Funds and the returns to be expected from them.

11/20/09

The stock market has increased more than 50% since the lows in March. Of course, that leaves it still down 25% from its high. The arithmetic is intimidating. If you start with $100, and you lose 50%, which was the decline in the the stock market at the low in March, you end up with $50. If the stock market then goes up by 50%, as it has, you end up with $75. The stock market has to increase by 100% from its low in March to get back to its high.

It is obvious that there is a lot of confusion and uncertainty about the outlook at this point, and this is reflected in the fact that investors as a whole have been putting all their money into bonds and other fixed income alternatives and almost nothing into equities. Investor sentiment is a very powerful force, and major buying opportunities are created (in this case, for stocks) when sentiment toward a particular asset class is as negative as it is now. 

Nevertheless, the best way to make long-term forecasts for the returns for bonds and stocks is to use the approach described in Chapter 10. The expected return for bonds is the current yield, and the expected return for stocks is equal to the current dividend yield plus the forecast for inflation and the forecast for real economic growth.

The current yield for bonds is still depressed by special considerations, including government activities. That is why it currently is about 4.4%. This is slightly lower than the 5% assumed in the book.

The yield for the stock market at this point is about 2.4%. I continue to believe that inflation will be about 3% over the long term and that economic growth will be 3%, as I assumed in the book. Thus, the expected long-term return for stocks is about 8.5%, which is slightly higher than the 8% assumed in the book.

It is interesting to note that, despite all the tumult and volatility of the last two years, forecast returns for bonds have stayed in the 4-5% range, and the forecast returns for stocks have stayed in the 8-9% range. This, of course, supports the view expressed by Jack Bogle in the quotation at the beginning of Chapter 11 - "Don't do something. Just stand there". In short, you will maximize your potential returns by having a well-conceived investment management which is on autopilot.

This is the opposite of the usual advice you receive from brokers and friends, which is "Don't just stand there. Do something". Whatever you may have tried in an effort to follow the second maxim in the recent period, or any other similar period, would not have worked and would have been extremely costly.

As is usually the case, the stock market has risen sharply off the bottom in March. Some of the best gains in market history occur at such times, and so what has happened is nothing unusual. In fact, if you are not invested in the stock market for these kinds of gains, your long-term returns are significantly reduced.

However, this advance has taken place without even a 10% correction. This type of correction is fairly common in advances like the current one, and it would not be surprising to have a correction, or decline, in the stock market at any time of this amount. When and if there is such a correction, rather than panicking at losing some money again, you should have confidence that the appropriate action is the same as indicated above - "stay the course".

The conclusion about the outlook remains the same as it was at the end of June. The returns from an appropriate portfolio of stocks and bonds will be somewhat higher in the early career years and somewhat lower in the later years. However, the differences are not significant enough to change any of the conclusions about the use of Target Date Funds and the returns to be expected from them.  

3/31/10

During the first quarter of 2010, stocks returned 5.4%, and bonds had a negative return of -0.1%. This was the best first quarter for stocks since 1999, and the stock market has now gone up for four consecutive quarters. This was despite a correction in February which amounted to about 8%. As indicated above, it is unusual to have an enormous increase in the stock market from the lows in March, like the one we have experienced without a 10% correction.

As a result, it would not be surprising if there is a correction of that amount at some point. However, on the other side, it is important to point out that this enormous increase has taken place without almost any support from individual investors. It appears that they are still so shell-shocked from the 50% decline in the stock market which they experienced that they are unwilling to step up and buy stocks.

This is typical behavior for individual investors who come into market rallies only after there has been a significant move and who in the process help make the next peak. It is therefore unlikely that there would be such a peak without participation by individual investors. As these investors gradually come into the stock market, it should continue to overcome any correction and move higher.

The yield on the stock market at this point has declined to about 2% from the 3% level of a year ago, because of the sharp gain in the market. It is still likely that inflation will be 3% over the long term and that real growth, which consists of growth in the work force combined with the growth in productivity, will be about 3%.

Therefore, using the methodology outlined in Chapter 10 and referenced above, the long-term forecast for the return from the stock market should be 8%, down from 9% a year ago. The yield on the 30-year treasury bond which was used in the book to estimate the future return for fixed income is about 4.75%.

These numbers are not materially different than those used in the book, and so the long-term investment strategies recommended in the book are likely to generate the same returns and the same results used in the book.

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