Expect Sober Returns to Avoid Cost Traps

In the roaring ’80s and ’90s, stock returns averaged nearly 17% per year, and many investors assumed those days would last forever. But history shows that past returns—especially when driven by valuation changes—don’t predict the future. Today’s market sits at an 18× P/E, dividend yield near 2%, and modest real growth expectations of 2–3%. That points to total returns closer to 7% nominal, or about 4.5% real.

Assume your funds cost 2.5% annually. Suddenly that 7% target looks more like 4.5%, and after 2% inflation, you’re left with just 2.5% real return—barely keeping pace with living costs.

Monte Carlo simulations confirm that when net returns are low, high fees become even more destructive, consuming up to 60% of your real return. Behavioral research warns we often underestimate small drags on performance, but they compound mercilessly over decades.

The lesson? If you believe markets will deliver 7% before fees, focus ruthlessly on costs. Every quarter-percent you shave off your fund fees directly boosts your net return and expands your lifetime wealth.

Start by plugging today’s index valuation into a simple Excel model to project a 7% nominal return. Next, total up your fund costs—expense ratios, turnover, tax drag—and subtract. If your net forecast is under 5% real, rebalance now into ultra-low-cost index funds. This shift carves out every bit of wasted fee to cushion your future gains. Do it tonight.