Investor Expectations Down 25 Percent: Welcome to the New Normal

(MoneyWatch)  Vanguard's Center for Retirement Research recently checked in with 3,000+ regular folks (not economists or market diviners) to gauge our post-crash expectations. The median of our collective crystal-balling settled on 7.5 percent as the expected average annual return for the markets going forward.

That might sound downright giddy when viewed against the past decade's long slog to nowhere, but it is in fact well below the 10 percent average annualized gain for the S&P 500 going back to the mid 1920s. (For the record, Vanguard asked folks to crystal ball the Dow, not the S&P 500.) Just 36 percent of folks surveyed by Vanguard expect future average annual returns to be 10 percent or higher.

Perhaps that 7.5 percent median forecast is a triumph of Pimco's New Normal proselytizing, or maybe it is a function of our recency bias: the habit we have -- so say the behavioral finance guys -- of using our current experience to extrapolate our outlook. After the hit our 401(k)s took during the bear market, that bias is flashing caution. In its survey of retirement expectations (aptly titled "The Aftermath"), Vanguard reports that 49 percent of us agreed with the statement: "Today, the stock market is a more dangerous place to invest retirement savings than it was in the past."

It's not, really. Market risk always existed. Always will. We've just gotten more wise to it, through hard experience. The trick is how to use that newfound, um, appreciation of risk. The survey had some encouraging news on that front. Nearly nine out of 10 of us agree that we should keep at least part of our pre-retirement savings in stocks. That's the real new normal: stocks are risky, but you can't live without 'em.