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Old 10-31-2015, 05:36 PM   #21
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Originally Posted by Fermion View Post
Ok, I will play. Let us step back 10 years instead. It is 2005. Who saw Tesla becoming worth nearly half the market cap of Ford? Who thought Nokia would be a 2 bit rubber boot company and Apple would be nearing a trillion dollar market cap? Radio Shack bankrupt? (Ok, I give you that one...everyone saw that coming). Uber taking over taxi cab driving? Netflix being worth twice the value of CBS?

Yeah, if you can see 10 years ahead, you are much better than I am.
Actually you can see 10 years ahead. Or fun to try.

Will Tesla be able to build and deliver enough cars to make big profits and survive low oil prices? Will Uncle Sam continue to give money to Elon Musk? Tesla will probably be purchased?

Will we be buying the iPhone 16 in 10 years?

Uber drivers will be classified as employees and that fantasy hipster millennial business model will be exposed as the independent contractor scam it is. Just like FDX ground. After insurance and vehicle depreciation they will realize they are just employees.

Bogle is a smart guy. Its all about growth. Without wage growth and a strong middle-class you can only financial engineer the markets so much.

This latest stock rally is a great example of the disconnect between main street and Wall street.

People get mad and defensive when they hear the American Dream is dead.
Bogle knows it is. So do Buffet and Yellen.

So 4% is a safe bet Bogle return looking at main street.
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Old 10-31-2015, 05:40 PM   #22
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Nobody knows nothin.
Just like a Casino.
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Old 10-31-2015, 05:44 PM   #23
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It kind of is market timing if you are going to call people foolish for thinking they can get 7% returns (well below historical average for the stock market) over the next decade.

He is essentially saying you could feel comfortable writing one year out of the money covered calls on your index funds because the market is not going to moving up much at all over the next decade.
I am seriously thinking about doing that, starting with a portion of it.

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I agree that many, maybe most are talking about lower returns going forward. Seems to me that it might have now even become the "conventional wisdom."
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Well, Bogle has certainly made a compelling argument based on the "known unknowns" that can be guessed at but I'm pretty sure there will be "unknown unknowns" to completely upset the apple cart one way or another...
It is true that just because all experts agree, they cannot be all wrong.

That's my only hope.

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Originally Posted by Fermion View Post
Ok, I will play. Let us step back 10 years instead. It is 2005. Who saw Tesla becoming worth nearly half the market cap of Ford? Who thought Nokia would be a 2 bit rubber boot company and Apple would be nearing a trillion dollar market cap? Radio Shack bankrupt? (Ok, I give you that one...everyone saw that coming). Uber taking over taxi cab driving? Netflix being worth twice the value of CBS?

Yeah, if you can see 10 years ahead, you are much better than I am.
Some individual companies prosper and some go bankrupt. That's hard to predict. Good stock pickers can always do well. But the overall US economy and that of the world have more constraints and some boundaries can be expected.

The historical market performance is great because it includes the bull years of 1980-2000. We had an unprecedented P/E expansion. This P/E expansion cannot be repeated.

If the currently high P/E stays, the market performance is already going to be lower than the past, but still OK. I can live with that. Perhaps the P/E has reached a "permanently high plateau", to borrow from Irving Fisher.

In a past interview, Bogle talked of possible P/E contraction. Now that's going to hurt. Shiller also had the same apprehension when he talked of PE10 reversion to the mean. I surely hope that will not happen.
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Old 10-31-2015, 05:50 PM   #24
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I think in order to predict market returns going into the future one thing one must be able to predict is World events and the impact that will have on earnings and the World itself. It is just too hard to do IMO.
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Old 10-31-2015, 06:13 PM   #25
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I think there's a better way to phrase that.......

At least a 4% WR survives a 1% real return for 29 years before hitting zero all the time and for additional years most of the time.



not according to michael ,kitces work it doesn't. it takes a 2% real return average over the first 15 years of a 30 year time frame to support a 4% withdrawal rate inflation adjusted .

https://www.kitces.com/blog/What-Ret...LY-Based-Upon/
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Old 10-31-2015, 06:23 PM   #26
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His 6.5% annual return for 10 years for a 60/40 portfolio forecasted in 2006 is looking pretty good right now with a year to go.

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Old 10-31-2015, 07:25 PM   #27
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not according to michael ,kitces work it doesn't. it takes a 2% real return average over the first 15 years of a 30 year time frame to support a 4% withdrawal rate inflation adjusted .

https://www.kitces.com/blog/What-Ret...LY-Based-Upon/
Math gets it to 28 years inflation adjusted with 4% SWR and a 1% real return.

A 1.25% real return gets you a 30 year retirement.

What kind of funky math is he using that requires a 2% real return?

edit: I assumed a 2% inflation rate, which is about where we are today, even facing possible deflation.
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Old 10-31-2015, 07:34 PM   #28
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It is called sequence risk .
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Old 10-31-2015, 07:44 PM   #29
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It is called sequence risk .
edit: Tried to post an example, but sequence risk has nothing to do with the fact that you do not need a 2% average real return for the first 15 years.
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Old 11-01-2015, 02:56 AM   #30
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your example would only be true if you got a constant interest rate for 30 years with never a negative year . spending down in down years totally alters the equation . the exact same average return can end up having a difference as much as 15 years as to how long it will last depending on the order of those gain and losses .

which is why safe withdrawal rates are based on worst case scenario's
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Old 11-01-2015, 06:17 AM   #31
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Its all about growth. Without wage growth and a strong middle-class you can only financial engineer the markets so much.
People get mad and defensive when they hear the American Dream is dead.
Bogle knows it is. So do Buffet and Yellen.
If you look at the Japanese market, you can get a prediction of what could, or is, happening here. We have rampant global deflation. There is a global surplus of workers, and workers are a major commodity that factor into prices. That worker surplus is growing, not slowing.

When you look at upcoming demographic changes, the world is producing lower wage earners, and not higher wage earners. Changing what you pay a worker beyond what they can produce, does not mean you get a bunch of higher wage workers.

In the USA, there are less high-skill workers as work gets outsourced and workers gain productivity with new software and better hardware. The few (as a percentage) high wage earners left, will be required to pay additional taxes to support the rest of the lower paid workers. It becomes a death spiral as the incentive to not work replaces the incentive to work.

The USA is getting ready to retire the greatest generation that it has ever produced, the baby boomers. These people are the highest wage earners that the US, and possibly the world, has ever seen. The next generation will not have the same wages, and 3 people making $33K a year pay a lot less taxes than one person making $100K a year. That downward wage curve is going to start to go down exponentially after that generation retires.

As you look to company earnings reports, many companies are reporting stagnant top line revenue growth. Companies like Starbucks may beat revenue forecasts, but how does that help wages and job growth on a macro level? We get a bunch of people making $14 an hour, not $50+ an hour like the former union workers would be making.

Many of the lower skill workers will be replaced with robots, and other technologies. Even the person at the drive up window taking your order can be sourced in a different country, or by a self-service kiosk that you pay at. Taco Bell has been experimenting with robots to make their food. Bus and truck drivers (and trains?) are soon to become obsolete with driver-less vehicles. Even restaurant servers will have to forgo their $20+ an hour cash tips so that the cooks can make $2 an hour more. As a trade-off, the servers will get an additional $3 in taxable wages per hour. Overall, wages are headed down, not up.

To get any sort of price flexibility, companies can reduce the amount of proprietary widgets they make, and increase prices. That is not really natural inflation, it is an induced supply shortage. Only one company makes an I-phone, and the hurdle for getting into any business is getting steeper. Most other products are commodities, and can be produced by any company, anywhere. The lowest bidder will sell the most, other companies will lower their prices to compete.

Some self-motivated individuals may start smaller companies to survive. Many of these one-person companies will be a cash only business, with no taxes being paid or income being reported. They will be low revenue companies, but will produce enough revenue to support the families working in them. It will not increase wages to the mass public nor increase the tax base.

There will always be ways to grow the stock market. Stock buy-backs help demand for the company stock, and also increase earnings per share. That helps executives and stock holders, but does not increase demand for goods and services nor actual nominal profits. 50-year mortgages, or leases, will help housing ownership similar to the way 7-year car loans and leasing has helped the automotive industry.

If your early retirement plan is based on 9% average market yields, you better have a backup plan.
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Old 11-01-2015, 06:18 AM   #32
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A couple thoughts.

First Bogle is exactly saying he CAN'T predict the future which is why he thinks individual stock buying is dangerous. It's double dangerous because it also risks behavioral mistakes that you think you won't make, but statistically you will (caveat: I own individual stocks and also have made behavioral errors ).

The other thing he says many times is that he might be wrong and if you disagree you can easily change assumptions.

So... I think his MODEL is pretty good. If the 10 yr bonds yield 2% you can expect about 2% annual yield from government bond funds over the next 10 years. Might swing up and down a bunch... But that's a good expectation. If you add corporate bonds maybe you get to 3-5 without huge risk. But if you think Corp/gov't bonds will return 7-10%... Well... It's hard to understand how that would happen.

For stocks he breaks it into speculative and non-speculative. Dividend rates and reinvestment rates are "non-specuaktive" because over time the reflect the underlying growth of businesses. That makes sense. So... If you think underlying business will grow 7%/yr over next 10 years that's what you can expect. He expects it closer to 2-3%.

Then you have speculative return. He seems to think it'll contract from an elevated PE of 20 to a more "*historical normal" rate of 15." If you think it goes to 10... Then that will be negative. If you think it goes to 30... Party on.

What I like is that he also says... Not much you can do. Cash will get eaten by inflation.commodities are pure speculation. Individual stocks are risky.

So the message I get is... The market doesn't care how much you need. And he's guessing what he thinks it might return so investors can adjust expectations and avoid stupid mistakes trying to make the market give what they need .

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Old 11-01-2015, 08:15 AM   #33
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Everyone keeps mentioning cash will get eaten by inflation while they say wages are going to drop. Exactly how much inflation is going to happen if wages drop and everything becomes automated and produced cheaply? Maybe we are in for stocks only returning 3 or 4% and bonds 2%...but maybe inflation over the next ten years is only 1% per year.
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Old 11-01-2015, 08:31 AM   #34
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The real median wage is not declining, it is flat. The median nominal wage is growing with inflation. The labor force has suffered a large decline in the employment population ratio, and also age demographics, as boomers retire. Combined, they lead to declines in household income even while wages rise. This is our recent past.

Most of the employment population ratio decline is behind us, and it appears the boomer demographic impact is also tapering off. Going forward, the US labor force will once again begin to increase, albeit at a low rate. Still, this points to a period of renewed growth in internal aggregate demand and a positive outlook for the US economy. It should probably also lead to real increases in the median wage.
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Old 11-01-2015, 08:32 AM   #35
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Everyone keeps mentioning cash will get eaten by inflation while they say wages are going to drop. Exactly how much inflation is going to happen if wages drop and everything becomes automated and produced cheaply? Maybe we are in for stocks only returning 3 or 4% and bonds 2%...but maybe inflation over the next ten years is only 1% per year.
That's a good point. The inflation rate in Japan over the last 20 years has been very low with only one year at over 2% and 11/20 being negative Historic inflation Japan – historic CPI inflation Japan
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Old 11-01-2015, 08:57 AM   #36
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We just plan for 0% real and anything over that is party time. Our strategy for improving finances in retirement is to continually optimize expenses and increase hobby income, as we can control those. We can't control interest rates or the stock market, and there is no point in worrying over events we can't control.
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Old 11-01-2015, 10:13 AM   #37
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Nobody knows nothin.
Actually I think someone once told a young Jack Bogle that.
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Old 11-01-2015, 10:33 AM   #38
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This economy is changing fast. We now have a generation who are delaying marriage,delaying having kids, and they are not able to buy a home.
Not to mention the 7 year car loans.
Think about how this broke generation has and will change the Xmas shopping season for retailers.

The stock market really is like a casino. Its almost comical.
Sounds a lot like 1985 (or 1972), or....
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Old 11-01-2015, 10:46 AM   #39
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If you look at the Japanese market, you can get a prediction of what could, or is, happening here. We have rampant global deflation. There is a global surplus of workers, and workers are a major commodity that factor into prices. That worker surplus is growing, not slowing.

When you look at upcoming demographic changes, the world is producing lower wage earners, and not higher wage earners. Changing what you pay a worker beyond what they can produce, does not mean you get a bunch of higher wage workers.

In the USA, there are less high-skill workers as work gets outsourced and workers gain productivity with new software and better hardware. The few (as a percentage) high wage earners left, will be required to pay additional taxes to support the rest of the lower paid workers. It becomes a death spiral as the incentive to not work replaces the incentive to work.

The USA is getting ready to retire the greatest generation that it has ever produced, the baby boomers. These people are the highest wage earners that the US, and possibly the world, has ever seen. The next generation will not have the same wages, and 3 people making $33K a year pay a lot less taxes than one person making $100K a year. That downward wage curve is going to start to go down exponentially after that generation retires.

As you look to company earnings reports, many companies are reporting stagnant top line revenue growth. Companies like Starbucks may beat revenue forecasts, but how does that help wages and job growth on a macro level? We get a bunch of people making $14 an hour, not $50+ an hour like the former union workers would be making.

Many of the lower skill workers will be replaced with robots, and other technologies. Even the person at the drive up window taking your order can be sourced in a different country, or by a self-service kiosk that you pay at. Taco Bell has been experimenting with robots to make their food. Bus and truck drivers (and trains?) are soon to become obsolete with driver-less vehicles. Even restaurant servers will have to forgo their $20+ an hour cash tips so that the cooks can make $2 an hour more. As a trade-off, the servers will get an additional $3 in taxable wages per hour. Overall, wages are headed down, not up.

To get any sort of price flexibility, companies can reduce the amount of proprietary widgets they make, and increase prices. That is not really natural inflation, it is an induced supply shortage. Only one company makes an I-phone, and the hurdle for getting into any business is getting steeper. Most other products are commodities, and can be produced by any company, anywhere. The lowest bidder will sell the most, other companies will lower their prices to compete.

Some self-motivated individuals may start smaller companies to survive. Many of these one-person companies will be a cash only business, with no taxes being paid or income being reported. They will be low revenue companies, but will produce enough revenue to support the families working in them. It will not increase wages to the mass public nor increase the tax base.

There will always be ways to grow the stock market. Stock buy-backs help demand for the company stock, and also increase earnings per share. That helps executives and stock holders, but does not increase demand for goods and services nor actual nominal profits. 50-year mortgages, or leases, will help housing ownership similar to the way 7-year car loans and leasing has helped the automotive industry.

If your early retirement plan is based on 9% average market yields, you better have a backup plan.
In other words everything is going to hell in a handbag except the stock market.....OK
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Old 11-01-2015, 10:46 AM   #40
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I think Bogle and Buffet and Yellen are all seeing the same picture. Expect the worst and hope for the best.
After reading this depressing thread, I think I'm going to make some margaritas and just chill.
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