Vanguard: You'll make a lot less money in the stock market in the next 10 years—here's what you can do

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Some millennials have really upped their game when it comes to saving for retirement: socked away, and part of that growth is thanks to the booming market. But that may be about to change.

The economists at investing giant Vanguard predict that, over the next 10 years, annual U.S. stock market returns will likely average between 3 percent and 5 percent. When you factor in inflation — which, luckily, Vanguard predicts will be below 2 percent — the real rate of return is expected to be under 3 percent.

That's "a far cry from the returns investors may have become accustomed to over the last several years,” says Vanguard’s senior economist Andrew Patterson. The S&P 500, a benchmark of 500 public company stocks, had a rate of return of almost 22 percent last year.

You can blame part of the slowdown on strategies employed by the Federal Reserve following the 2008 financial crisis. The Fed pumped billions into the market, buying up bonds and mortgage-backed securities, which in turn, allowed investors to use that money to bid up stock prices. But over the past few years, the Fed has curtailed its spending and started to increase interest rates. Now, with the Fed continuing to draw back, Vanguard expects stock market growth to slow.

We do expect, for the foreseeable future, far more modest returns than we’ve seen in the past few years.
Jonathan Lemco
Vanguard senior investment strategist

"That period is now over and, in a way, we're now moving into a period of where we have to give that back," says Vanguard economist Peter Westaway. "The depressed returns going forward is very much a consequence of unwinding of those stimulative policies."

Also, investors have lately enjoyed “remarkable” returns, compared to historic rates, Jonathan Lemco, Vanguard’s senior investment strategist, tells CNBC Make It. “It would be unreasonable to expect these phenomenal rates going forward over a sustained period of time,” he says.

“We do expect, for the foreseeable future, far more modest returns than we’ve seen in the past few years — not terrible, probably not negative, but much more modest, positive returns,” Lemco says.

What you should do

1. Don’t panic

For millennials, time is on your side, Patrick Amey, a financial planner with Kansas-based KHC Wealth Management, tells CNBC Make It.

“Developing the right savings habits and being consistent in your saving and investment strategies is paramount right now,” Amey says. Don’t try to time the market. Instead, invest in a broadly diversified portfolio and then step back.

Remember that the markets are inherently volatile, Lemco adds. “There will always be ups and downs, but over a significant period of time, the likelihood is that they will do well. Don’t make yourself nuts over this.”

2. Keep saving

“With no control over returns, the focus needs to be on minimizing unnecessary expenses and taxes,” Harold Evensky, Texas-based financial planner, tells CNBC Make It. That means putting a little bit more toward your saving goals every month and making sure to take advantage of programs like employer 401(k) matches. “It’s basically free money, so do that,” Lemco says.

3. Pay down debt

This may also be a good time to focus on paying off what you owe on credit cards and student loans, Linda Rogers, a Tennessee-based advisor, tells CNBC. Kevin O’Leary and Mark Cuban, both investors on ABC's "Shark Tank," agree. They suggest you work towards becoming altogether debt-free.

"If you want to find financial freedom, you need to retire all debt — and yes, that includes your mortgage," O'Leary recently told CNBC Make It.

4. Make the most of your cash

If you're saving for a short-term goal like home ownership, the lower return estimates should not have any real effect, since any money earmarked for those purchases should be in a savings account or money market fund. “Four years or less on a goal, you should be in cash,” Douglas Boneparth, a New York advisor with Bone Fide Wealth, tells CNBC Make It.

And the good news is, with interest rates on the rise, you can actually earn a decent return on that money, Boneparth says. Right now, you can earn 1.90 percent interest on $5,000 in a Sallie Mae money market account or 1.80 percent in a savings account at Marcus by Goldman Sachs, according to Bankrate. And a five-year CD from Marcus currently pays 3 percent on a $5,000 deposit.

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