Ask anyone the best way to double your money today and you’ll get one answer.

    Fold it in two. Put it back in your wallet.

    Given the beating stock investors have received in the last three years the response is understandable. According to the 2003 edition of “Stocks, Bonds, Bills, and Inflation”--- the Ibbotson Associates compendium of investment returns---the last three years were the third worst period since 1926. Only the first years of the Great Depression, when investors lost 61 percent of their money in comparable three-year periods, were worse.
Our experience, 2000-2002, is a 38 percent loss of money invested in stocks.  This is a good deal worse than the 25 percent loss investors experienced in crash of 1972-1974 that followed the first OPEC embargo.

    It’s not supposed to be this way.
Historically, stocks return 10 or 11 percent a year. At that rate the famous ‘Rule of 72’ (the doubling time for money is the number 72 divided by rate of return) tells us money doubles in about 7 years. Today, few believe history. Worse, an ominous chorus of new research says future returns will be lower. Some of the arguments turn on esoteric items like the “equity risk premium. ” Others simply observe that historic returns included a 4.5 percent dividend yield. Since stocks now yield 1.5 percent, future stock returns are likely to be about 3 percent lower, or 7 to 8 percent a year.
Still darker views can be found--- but I think they reflect trauma, much like the Business Week cover that declared stocks were dead only months before the start of the longest bull market in history.

Query: Does the prospect of lower stock returns change how we invest our money?

Answer: No, we should continue to invest at least half of our savings in equities. A 7 to 8 percent annual return is still better than the return on bonds or cash.
What changes is the doubling time of our nest egg. A return of 7 to 8 percent a year means a doubling time of 9 or 10 years, not 7. We can experience the difference in two ways. Either we retire with a less income or we retire later.

Is there a way to keep our personal plans on schedule?

Yes. Since we save money year by year we have two levers on the doubling time of our nest egg. One is the investment return on our savings. The other is the amount we save each year.
Suppose the new money added to your nest egg each year is about 3 percent of its value and you expected a 10 percent investment return. Your nest egg was growing at 13 percent a year, a doubling time of almost 6 years.

You can restore the doubling time by increasing your savings rate to offset lower equity returns. In this example, you’d need to increase your savings to 5 or 6 percent of your nest egg. If half your savings had been going to bonds, the increase will be proportionately smaller.
Painless? No. We’d rather grow with more investment return, less new savings. We don’t always get our first choice. But we do have a choice.