Bogle's 10-Year Forecast

[retiredinnyc]

This is why when I run firecalc , I use the 100% chance of surving

I was ready retired when I found this site, in my under informed calculations I figured I could withdraw 5% for life and still adjust for inflation. Well I have come to find out that with a 80/20 portfolio which is what I have, it's more like 3%. When I retired a 5 % withdrawal was way more than I needed. That's a good thing because it very well might have bankrupted me, so based on his numbers I think 3% withdrawal will be just fine for the next decade. Personally I haven't taken out a dime since I retired my pension is way more than my living expenses I detailed that in another-post . This is why in my opinion early retirement is for those that certainly have the means to weather the storms.
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[hnzw_rui]

I was ready retired when I found this site, in my under informed calculations I figured I could withdraw 5% for life and still adjust for inflation. Well I have come to find out that with a 80/20 portfolio which is what I have, it's more like 3%. When I retired a 5 % withdrawal was way more than I needed. That's a good thing because it very well might have bankrupted me, so based on his numbers I think 3% withdrawal will be just fine for the next decade. Personally I haven't taken out a dime since I retired my pension is way more than my living expenses I detailed that in another-post . This is why in my opinion early retirement is for those that certainly have the means to weather the storms.
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Totally depends on when you retired. The 3% figure is more like worst case so far. Granted, right now, we're probably in one of the relatively bad cases. That said, I agree, those undertaking super early retirement (particularly in their 30s and 40s) should probably have a large cushion in their withdrawal rate or their budget, or be flexible about going back to work.

Safe Savings Rates: A New Approach to Retirement Planning over the Life Cycle

 

[retiredinnyc]

Yup, worse case scenario I don't want to find out my withdrawal rate was good 95 % of the time and I'm in the 5% that went bust, then what

 

[Fermion]

?

My issue was him calling other people dumb just because they have a different opinion on where the market/world is heading over the next decade. Nobody really knows, so the person calling others dumb should maybe think twice.

 

[retiredinnyc]

Seems to me you called him dumb, and insinuated he is getting dementia or Alzheimer's , did you think twice?

 

[rodi]

Please folks... Hot topic has been enabled. That means you are reminded to stay within the community rules with every post. Refrain from calling each other names or getting in tiffs.

Thank you.

 

[REWahoo]

Please folks... Hot topic has been enabled. That means you are reminded to stay within the community rules with every post. Refrain from calling each other names or getting in tiffs.

Thank you.

Translation: Take it outside!

 

[Mulligan]

Translation: Take it outside!

Ok, dinosaur..... That was a successful strategy back in the day. Now it will just get you a lawsuit for suggesting it. I actually was mad enough my last year working to suggest it. The offer wasnt accepted, but now 5 years later he was one of the few workers still there I routinely converse with.


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[DEC-1982]

PE could also come down with tax law changes

I have a great deal of respect for Mr Bogle, as well as Mr Shiller, but it seems to me that high PE could become lower in the future with tax law changes. And nobody can really forecast tax law changes.

PE ratios don't HAVE to come down only due to lower prices.

Dividends and capital gains are treated differently. Dividends have higher taxes, so that is one reason dividends have come down from a historical 4% to a current 2%. With that money not going out as dividends, the money is (well maybe is) instead used for stock buy backs resulting in higher prices and higher PE ratios.

So it is entirely possible for tax laws to change treating dividends just like capital gains, resulting in higher dividends being paid out, lesser stock buybacks occurring and the end result being a gradual lowering of PE ratios.

 

[NW-Bound]

One of the reasons cited for the P/E expansion in the period of 1983-2000 was that interest rate was dropping. As bond yields dropped, stocks could have a higher P/E as they competed for investors' money. Another reason that has been suggested is that the risk premium for stocks dropped due to more investors getting comfortable with the volatility and willing to pay more for equities.

With the interest rate rising, both bonds and stocks will face pressure. The P/E ratio may contract. Bogle and Shiller agree on this risk, and the remaining question is how much it will contract. We will have to wait to see. It of course depends on how much the interest rate will rise, and that is something nobody knows for sure.

 

[daylatedollarshort]

Here is another article today from Marketwatch on the same subject, with a summary version of Bogle's recent comments mixed in with some other financial talking heads' forecasts:

John Bogle says you won't make much money from stocks - MarketWatch

"Academic studies have shown that the Shiller PE has greater statistical validity than a conventional PE at forecasting future returns. One year’s worth of earnings can be misleading. Nevertheless, Bogle and the value mavens are now in agreement about likely future returns."

 

[NW-Bound]

John Bogle says you won't make much money from stocks - MarketWatch

And I also agree with Bogle that it is likely that "a balanced portfolio (roughly half in stocks and half in bonds) should return around 3.5% for the next decade. Adjusted for inflation or in “real” terms, Bogle thinks a balanced portfolio will return 1.5%, barely increasing purchasing power."

The above return is not that great, and barely above the I-bonds that I have. But I am not a buy-and-holder, and have been looking to squeeze a bit more out of stocks by trading or writing covered calls.

 

[Markola]

Re: international.
I think the point he makes (and others) is that the country of origin of a company is no longer a good indicator of international exposure and many of the biggest US companies derive much if their growth and revenue from those growth markets.

Yes, that is exactly the point that Mr. Bogel and a lot of others make, to the extent that it seems accepted wisdom. However, there are counterarguments. Burt Malkiel in A Random Walk said there is no evidence this was true. More recently, and ironically enough, a Vanguard analyst on the Vanguard podcast explained how major US companies hedge their own exchange rate risks in the currency markets for their international earnings. Individual investors buying international stocks are subject to exchange rate risk, however, so one is not the same as the other. The world is constantly changing in unpredictable ways so I still like the international index exposure in the VG Life Strategy funds.

 

[eta2020]

So if I live of off dividend yield which is more then 2% then according to Bogle I will have less (real) money at the end of the decade then I have now. (100% in equities)

I have a hard time to believe that. I think he is too negative. Even in 2000-2010 that was not case if you had a mix of small, mid. large cap plus international exposure.

Humbug

 

[samclem]

So if I live of off dividend yield which is more then 2% then according to Bogle I will have less (real) money at the end of the decade then I have now. (100% in equities) . . . Humbug

Dividends are a significant portion of the historic total return of equities. If they aren't reinvested, then the only way for a stock portfolio to be worth more at the end of 10 years is for their share prices to have grown by more than inflation. That's failed to happen over plenty of 10 year periods, and is more likely when starting with high valuations...like we have right now. Not so much humbug.

 

[eta2020]

Dividends are a significant portion of the historic total return of equities. If they aren't reinvested, then the only way for a stock portfolio to be worth more at the end of 10 years is for their share prices to have grown by more than inflation. That's failed to happen over plenty of 10 year periods, and is more likely when starting with high valuations...like we have right now. Not so much humbug.

S&P 500 Return Calculator - Don't Quit Your Day Job...

I see it happening way LESS often then coming up positive.

Now this is only S&P 500. Create mix adding Small/Mid Cap plus international and likelihood drops even more.

But you are 100% correct stating that dividends are significant portion.....

Historically world economies grow way faster then inflation. You think USA in 1900 was worth USA in 2000? We are with 1000's of times more now

 

[NW-Bound]

The period of 2000-2009 was particularly bad, because it was a peak-to-trough interval for the market. The S&P returned -0.99% anualized in nominal terms, and -3.42% annualized after inflation (inflation was 2.43%). In the same period, Vanguard Total Bond VBMFX returns 6.06% nominal annualized, or 3.63% in real terms. A 50/50 porfolio would be flat after inflation!

Let's look at the period of 2000-2015, which is better because it is nearly peak-to-peak for the market. VFINX returned 4.15%/yr nominal, or 1.86%/yr in real terms (inflation was 2.29%). VBMFX returned 5.45%/yr nominal, or 3.16%/yr real. A 50/50 portfolio would grow 2.51%. If you draw 2%, your stash will barely beat inflation, if we ignore the sequence of returns.

So, the last 15-year period was not that great, except for accumulators who got a chance to buy low. But a retiree has no money to buy, other than some chances to do rebalancing. When you have no other income, everything changes.

And then, looking ahead, interest rate is rising although we hope it will not be much. Still, it would apply pressure to bonds and stocks both. That's why Bogle has repeatedly warned that the future is gloomy, and pension fund managers are sticking their head in sand when they plan on having 7.5% nominal.

Looking back at what Bogle said in the link provided by DLDS, he said future stock return may be 4% nominal, and bonds only 3% nominal, with inflation of 2%. This gives a 50/50 portfolio a return of only 3.5% nominal, and 1.5% real. And note that he now thinks P/E reversion is more likely. Has Shiller recently convinced him?

Anyway, why doesn't one then go 100% stock to get 4% nominal, and after a WR of 2% can still match inflation of 2%? Personally, I don't do that because I like to be able to rebalance to buy low/sell high. We should embrace market volatility then, because if the market stays placid with lousy returns we are toast.

 

[hnzw_rui]

That's why Bogle has repeatedly warned that the future is gloomy, and pension fund managers are sticking their head in sand when they plan on having 7.5% nominal.

In fairness, the 7.5% nominal assumption is usually based on a 20 to 25 year span, not just one decade.

 

[cyber888]

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.

It's hard to predict the unwritten future. Bogle is no Nostradamus. In 10 years, an advance race of aliens could land on earth and make slaves of all of us or they could wipe out poverty and bring enlightenment to everyone. Who knows. And maybe in 10 years, oil could still be cheap, and Tesla will run out of business. I guess we should just stop worrying and be happy.

 

[daylatedollarshort]

In fairness, the 7.5% nominal assumption is usually based on a 20 to 25 year span, not just one decade.

Looking across history as well as 16 countries, The Triumph of the Optimists authors research found that stocks for the long run has been a correct assumption, but that long run may be 40+ years. And, statistically, I'm not likely to live that long. This is not to say stocks aren't a good bet, it it just that financial writers like Bodie and Bernstein say not to bet the money you need for retirement essentials like food and health care on them. Only bet what you can afford to lose.

 

[daylatedollarshort]

Looking back at what Bogle said in the link provided by DLDS, he said future stock return may be 4% nominal, and bonds only 3% nominal, with inflation of 2%. This gives a 50/50 portfolio a return of only 3.5% nominal, and 1.5% real. And note that he now thinks P/E reversion is more likely. Has Shiller recently convinced him?

Shiller does seem to get the bubble idea, and many think the Fed policies are never going to drive up consumer inflation, just asset (housing, stock and bond) inflation and when the bubble pops it is going to be a big pop:

"The Fed now leads a culture of central bankers who see their job as reducing unemployment and stabilizing prices for consumer goods only, come what may in the markets. This needs to change. In a world in which high trade and money flows tend to restrain consumer prices but magnify asset prices, central banks need to take responsibility for both. After all, asset price inflation is as dangerous as consumer price inflation. "

The Federal Reserve Asset Bubble Machine - WSJ

 

[audreyh1]

The period of 2000-2009 was particularly bad, because it was a peak-to-trough interval for the market. The S&P returned -0.99% anualized in nominal terms, and -3.42% annualized after inflation (inflation was 2.43%). In the same period, Vanguard Total Bond VBMFX returns 6.06% nominal annualized, or 3.63% in real terms. A 50/50 porfolio would be flat after inflation!

Let's look at the period of 2000-2015, which is better because it is nearly peak-to-peak for the market. VFINX returned 4.15%/yr nominal, or 1.86%/yr in real terms (inflation was 2.29%). VBMFX returned 5.45%/yr nominal, or 3.16%/yr real. A 50/50 portfolio would grow 2.51%. If you draw 2%, your stash will barely beat inflation, if we ignore the sequence of returns.

So, the last 15-year period was not that great, except for accumulators who got a chance to buy low. But a retiree has no money to buy, other than some chances to do rebalancing. When you have no other income, everything changes.

And then, looking ahead, interest rate is rising although we hope it will not be much. Still, it would apply pressure to bonds and stocks both. That's why Bogle has repeatedly warned that the future is gloomy, and pension fund managers are sticking their head in sand when they plan on having 7.5% nominal.

Looking back at what Bogle said in the link provided by DLDS, he said future stock return may be 4% nominal, and bonds only 3% nominal, with inflation of 2%. This gives a 50/50 portfolio a return of only 3.5% nominal, and 1.5% real. And note that he now thinks P/E reversion is more likely. Has Shiller recently convinced him?

Anyway, why doesn't one then go 100% stock to get 4% nominal, and after a WR of 2% can still match inflation of 2%? Personally, I don't do that because I like to be able to rebalance to buy low/sell high. We should embrace market volatility then, because if the market stays placid with lousy returns we are toast.

So we've been through one lousy 15 year period, and then we get another 10 years of lousy returns?

 

[samclem]

S&P 500 Return Calculator - Don't Quit Your Day Job...

I see it happening way LESS often then coming up positive.

Now this is only S&P 500. Create mix adding Small/Mid Cap plus international and likelihood drops even more.

But you are 100% correct stating that dividends are significant portion.....

Historically world economies grow way faster then inflation. You think USA in 1900 was worth USA in 2000? We are with 1000's of times more now

Well, you said that you thought the idea that stocks would be at lower real prices in 10 years was "humbug", and I think the possibility is far from remote. I don't have a graphic that shows 10 year rolling real returns without dividends reinvested. But, as a rough start, the graph below shows 10 year rolling total returns for big US stocks. Now, subtract out dividends (historic US average : 4.3% per year ) and inflation (say 3% per year ) and we can see that we need about 7+% average annual price growth to end the decade in positive territory. A glance at the graph shows there are many decades where stocks didn't do that well. I'd bet the situation is worse for decades starting at today's stock valuations (which is probably Bogle's point).

 

[hnzw_rui]

Looking across history as well as 16 countries, The Triumph of the Optimists authors research found that stocks for the long run has been a correct assumption, but that long run may be 40+ years. And, statistically, I'm not likely to live that long. This is not to say stocks aren't a good bet, it it just that financial writers like Bodie and Bernstein say not to bet the money you need for retirement essentials like food and health care on them. Only bet what you can afford to lose.

Personally, I'm still early in the accumulation phase and I'm using 3% real returns (25+ years) for my own projections. Alas, with practically non-existent returns on safe investments, I don't think I have much of a choice but to bet on stocks this early in the game.

The 7.5% nominal assumption is for pension fund managers and actuaries. They have a different time span than me, though, and unlike my retirement savings, they have both inflows (employer+employee contributions) and outflows (retiree pensions).

 

[NW-Bound]

So we've been through one lousy 15 year period, and then we get another 10 years of lousy returns?

That's what Bogle said.

Life is unfair. Then we die.