Using unrealistically high returns

Recent past returns are not a guide to potential future returns

Returns such as 15% p.a. may be quoted by some financial planners when projecting future returns for the Australian sharemarket.

However the sharemarket returns since 1980 have been unusually high compared to a longer perspective. During the 1960s – 1970s, average returns were much lower than 10% pa.

The Australian sharemarket average return of the last 25 years is much higher than the average over the last 100 years.

So future projections using the returns of last 25 years are very questionable and/or naïve. It demonstrates a lack of in-depth research.

(Note this discussion is not saying the Australian sharemarket is heavily over-valued at present – rather that recent past returns are not necessarily a guide to future returns. Haven’t we all heard that before, but how many people really do appreciate the significance of the statement?)