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When you start your career in the financial services industry you pretty quickly figure out that you must bow at the altar of the average return on investment in the stock market. Well, that and a couple of other things like…
- Compliance runs the show–resistance is futile.
- 8% is the return we assume people will earn on their investments because…
Finishing tenant #2 often involves reference to a vague statistic that's tricky to track down exactly. The 8% assumption on investments became so sacrosanct that I estimate many gave up on trying to prove its legitimacy and decided instead it must be true because everyone else uses it.
I've spent a good deal of time over the years trying to locate the source that validates this assumption (8% average return on investments).
Surely there is an air-tight academic paper somewhere that gives credence to this ubiquitous assumption?
After hours of research, on separate occasions, I'm NOT here to tell you that the supporting stats don't exist. I am, however, going to tell you that I have yet to find them.
So, I set out on my own number crunching endeavor to validate the 8% assumption and what I discovered is quite interesting. What you read below may cause you to re-think “reasonable assumptions.”
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