Do you have realistic market expectations?

What kind of market returns do you expect in the coming decade? Will stocks bounce back to the high returns of the late 1990s, equal historical averages or slip below that? Will the returns you anticipate be enough for you to meet your personal financial goals? What will you do if returns come in below average?

Or are you uncertain as to what the market will do and not sure what to do next? Join the crowd.

One of the hot topics among investment experts today is not whether we'll see a return soon to the double-digit performance of the 1990s -- most concur we won't -- but just how much lower the market will perform in coming years.

Even a cursory review of the professional literature and overheard debates among investment advisers quickly reveals that the vast majority of experts anticipate yearly stock market returns in the single digits for at least the next decade, perhaps longer. Many Certified Financial Planner professionals cautioned investors during the heyday of the late 1990s about the inevitable market decline, and that has come true. The questions today are, how low will returns sink and how long will lower returns stay?

Many experts expect annual total market returns (before adjusted for inflation) of 7 to 9 percent. That's not only below the lofty returns of 1995-1999, but below the historical average of around 11 percent for large-cap stocks and 12 percent for small-cap stocks.

These same experts estimate a modest risk premium -- the extra return that stocks would earn above a risk-free investment, usually U.S. Treasury bonds -- in the range of 3 to 4 percent. This, too, is well below recent risk premiums of 6 to 7 percent or higher.

Some investment experts are even less optimistic, citing what they consider an overvalued market. One argued in a recent article in the "Journal of Financial Planning" that the future risk premium will be zero -- essentially saying that stocks won't do any better than bonds in the coming years.

These viewpoints of future equity returns differ sharply with the far more optimistic view of the investing public. Although a poll by the Vanguard Group toward the end of 2001 found investors anticipating returns averaging only 7 percent over the next year or two, these same investors were rosier about the long term.

They saw returns averaging 15 percent over the next two decades -- about the same as 1985-2000. One-fourth predicted stock prices to average 30 to 100 percent annually, which is virtually impossible to sustain for that long, say experts.

Assuming the experts are reasonably accurate in their predictions -- and one can never be sure when it comes to the stock market -- what should you do?

First, be realistic

If the historical average for stocks is around 11 percent, why assume that stocks will return 30 percent for the next 20 years? Many financial planners assume a modest overall portfolio return (usually a combination of stocks, bonds, cash and perhaps other investments) of around 7 to 9 percent.

Don't invest backwards

Many people start by assuming the stock market will return a certain rate (often high) and then save and plan accordingly. Instead, suggest many planners, start first by clarifying your personal goals -- retirement, a college fund, money to start a small business.

Next, determine how much money you will need to accumulate in order to achieve the goals, calculate a modest return on your investments, and then arrive at a figure of how much you need to invest each month.

This avoids the risk of undersaving or having to save longer than planned, which is what happens when you assume unrealistically high returns. And should the market exceed expectations, you won't have to borrow as much for college, can take more vacations during retirement or even retire earlier than planned.

Diversify more

Don't concentrate on bigger single bets. If stock returns slow down, other types of assets such as bonds or real estate may pick up some of the slack. Higher net worth investors may want to explore alternative investments, such as private equity, commodities and hedge funds. Remember, the object isn't to beat the market -- it's to reach your financial goals.

Save more

This is the most reliable way to compensate for lower returns.

Watch taxes and fees more closely

It was easy to overlook them during the bull market, but they take a bigger bite when investment returns are lower.

Wm. Gerry Keene III, CFP, RFC, is a Certified Financial Planner practitioner with Keene Financial Group in Cape Girardeau. He is a registered representative offering securities through FFP Securities Inc., member NASD/SIPC, and a registered Investment Advisory agent offering services through FFP Advisory Services Inc. (1-800-827-1929, 33KEENE 335-3363 or )