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Expected Returns
Old 03-10-2015, 06:10 PM   #1
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Expected Returns

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Above is a link to Research Affiliates (Rob Arnott) outlook for asset class returns for the next decade, and it ain't pretty. Excep for EM stuff, looking at pretty close to 0% real returns.

You could dismiss this as discredited market timing, but that's not what they're doing. Like Gross' New Normal, GMOs Asset Class expected returns, all of these look at where we are now - Now being ultra low interest rates and high equity valuations.

For example, historical bond returns have been around 5%. But you can correlate historical ten year bond returns with what the 10 year rate was at the inception of the 10 year period. Today 10 year TNote is what, about 1.5%?

While historical things like Monte Carlo or Firecalc are meant to stress test our situation, none really use today's valuations as a starting point. US markets really don't have much history that's helpful. Maybe Japan of the last 25 years would be a better comparison.

Hopefully they are really not after me, I'm just paranoid.
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Old 03-10-2015, 06:35 PM   #2
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I don't know about other asset classes. But, I'm pretty sure I can calculate the yield to maturity (based on current market prices) on the bonds I already own. And, I'll agree that isn't pretty.
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Old 03-10-2015, 06:48 PM   #3
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It's pretty much in line with my general expectation for low returns. As long as real returns remain positive, be it only slightly, my plan should work. But US small caps look really ugly on that graph.
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Old 03-10-2015, 06:55 PM   #4
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Just as a gut check on these 10 year predictions, I'd like to see the 10 year historical on all of those indexes.

The average across all of the asset class predictions (except cash) is 2.22%.

I wonder what the historical 10 year would look like in comparison to the 2.22%.

I figure the money has to go somewhere, and if those 16 cover the world, then one would expect the average of them all to stay around the same over time. The "right" way to do the calculation would be to do a weighted average based on "market capitalization" of each class. So if US Large holds twice as much value as emerging markets, then the weighting would reflect that. But the average might be interesting anyway.
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Old 03-10-2015, 07:52 PM   #5
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We just use 0 - 1% real return in a spreadsheet for retirement planning. If we can do better, cool. If not we won't have to move to a shopping cart under the freeway overpass.

We focus on liability matching strategies:
Matching strategy - Bogleheads

We're really into trying to find ways to cut recurring expenses and increase passive income because we can control those but we cannot control the stock market or the direction of interest rates. Every $1K we save off of retirement expenses not impacting our quality of life is another $50K in potential total retirement costs we won't need to fund.
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Old 03-10-2015, 10:11 PM   #6
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Are they including dividends?
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Old 03-10-2015, 10:23 PM   #7
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Expected Returns

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Originally Posted by gcgang View Post
Asset Allocation Website

Above is a link to Research Affiliates (Rob Arnott) outlook for asset class returns for the next decade, and it ain't pretty. Excep for EM stuff, looking at pretty close to 0% real returns.

You could dismiss this as discredited market timing, but that's not what they're doing. Like Gross' New Normal, GMOs Asset Class expected returns, all of these look at where we are now - Now being ultra low interest rates and high equity valuations.

For example, historical bond returns have been around 5%. But you can correlate historical ten year bond returns with what the 10 year rate was at the inception of the 10 year period. Today 10 year TNote is what, about 1.5%?

While historical things like Monte Carlo or Firecalc are meant to stress test our situation, none really use today's valuations as a starting point. US markets really don't have much history that's helpful. Maybe Japan of the last 25 years would be a better comparison.

Hopefully they are really not after me, I'm just paranoid.

Well actually Firecalc does use today's stock valuations as a starting point, as they are similar to other periods in history. Just look at the graph of CAPE over the years and you will see similar valuations quite a few times. The low interest rates are virtually unprecedented however, as the only time I can see that they were this low were in 1940 or so. I plan on retiring soon and it doesn't give me a warm feeling either.


http://2.bp.blogspot.com/-R8Ezy3hMjZ...0/Cape+New.gif

http://static.seekingalpha.com/uploa...mer_origin.png


Then again if valuations are worth using one can always use European stocks?



http://www.valuewalk.com/wp-content/...rm-average.jpg
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Old 03-11-2015, 02:35 AM   #8
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Old 03-11-2015, 05:51 AM   #9
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Towards the bottom of the webpage are links to documents that show their methodology...
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Old 03-11-2015, 05:59 AM   #10
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Quote:
Originally Posted by gcgang View Post
While historical things like Monte Carlo or Firecalc are meant to stress test our situation, none really use today's valuations as a starting point. US markets really don't have much history that's helpful. Maybe Japan of the last 25 years would be a better comparison.
Periods of negative US real returns are indeed built in to FIRECALC and many other deterministic calculators, some longer than 10 years - the Great Depression & 1965-83. So in that sense it's not "different this time" that we know of. S&P 500: Total and Inflation-Adjusted Historical Returns

So are "today's valuations." S&P 500 PE Ratio

For those more concerned with a retirement income downside surprise vs upside , having conservative expectations seems prudent though, and we've been planning on real returns of 0-2%, and a historically low WR since long before the current "outlook."

Interesting OP link and it may well prove reasonably accurate (a correction in the next 10 years seems inevitable) - but that doesn't worry me. I am looking forward to Ferri's annual 30-year asset class projections, closer to the timeframe we're faced with.
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Old 03-11-2015, 07:31 AM   #11
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Based on their forecast, most of our equity allocation should be in emerging markets and MSCI EAFE.
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Old 03-11-2015, 07:44 AM   #12
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Those of us in withdrawal mode should be just as, or even more, concerned with volatility, not return. Peter Bernstein said low returns are the result of high volatility. If that is true we should expect to a great deal of marketplace volatility over the next decade across all asset classes.
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Old 03-11-2015, 07:58 AM   #13
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It's interesting to look back at their 2012 research... My very limited look seemed to indiscate they felt that eps outperformance was unlikely to sustain and that emerging market bonds would outperform mature market bonds.

Well... Being wrong or being too early has a similar portfolio impact.

I think most macro forecasters take the wrong approach. They attempt to increase their precision as opposed to attempting to decrease the margin of error between the range of possible outcomes.

The reason for this is that people (paying customers) like PRECISE numbers no matter how utterly incorrect they are historically (look at the department of energy's track record of predicting energy prices out 1-5 years... Yet policy is determined based on that).

This also results in a "ok, Mr cynical, what's your better system?"

Well... I don't have one. But I'd rather not use one than use one I know has so little predictive validity that I can't make actionable decisions with any more confidence than guessing.

I think ultimately investors have two choices:
1) diversified portfolio held over long time and get whatever returns the economy produces (1%, 5%, 10%, who knows).
2) spend huge amounts of time researching individual businesses and understand them really well so when they are REALLY cheap.. you MIGHT get a huge gain (I.e. like Buffett).

I think small amounts of time doing 2 is gambling... I think anything that tries to predict 1acvurately is astrology.

More and more I realize I'm crappy at the deep evaluation and should just live with whatever the general economy will return over time... Using the past return to hedge my risk by informing my spending.

A huge problem exists because people think that because they need something it must exist. Eldorado, the fountain of youth and turning lead to gold were all badly needed and yet...

You may live in a world where you need 7%, but only get 1%. Wishing for the 1% world to become the 7% world is a dangerous illusion imo.

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Old 03-11-2015, 08:41 AM   #14
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I get more nervous when the experts are overly optimistic.
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Old 03-11-2015, 09:25 AM   #15
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What's the difference between "expected returns" and "fortune telling?"

Is it gypsy versus ivy league background. My guess is the value is identical.


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Old 03-11-2015, 09:32 AM   #16
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What's the difference between "expected returns" and "fortune telling?"

Is it gypsy versus ivy league background. My guess is the value is identical.
So what do you use to plan?
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Old 03-11-2015, 09:54 AM   #17
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Thanks to big-papa for pointing out the below.

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Towards the bottom of the webpage are links to documents that show their methodology...
So, I read their rationale for the low expected return of US stocks, compared to the recent past performance. The gist of it is lower growth, lower yield, and P/E contraction.

For past 1983-2013:
Total Return 8.5% = Yield 2.6% + Growth 2.8% + Valuation Change 3.1%

For future:
Total Return 1% = Yield 2% + Growth 1.4% + Valuation Change (-2.4%)

Their above numbers appear to be real return or inflation adjusted, judging from the quoted past return because the 8.5% would be around 11.4% for the S&P 500 in nominal term for the 31-year period of 1983-2013. Average inflation in that period was indeed 2.9%.

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Are they including dividends?
The answer is yes, according to the above.
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Old 03-11-2015, 11:09 AM   #18
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Peter Bernstein said low returns are the result of high volatility. If that is true we should expect to a great deal of marketplace volatility over the next decade across all asset classes.
How did he arrive at that conclusion?

Low returns to me seem to be only the result of high volatility for those that buy at a peak and sell when low. In other words, high volatility gives bigger return spreads for individual investors.

You have a linky for this idea?

Low volatility can also mean low returns if earnings growth steadily goes down, and the stock market steadily goes down with it ..
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Old 03-11-2015, 11:52 AM   #19
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We are going to get whatever we get.

I am hoping (and expect) about 5% real long term (for 60/40 portfolio).

I could live in fear by going all cash or using very low withdrawals. Forcing worst case on myself.

Or alternatively stay invested and take reasonable withdrawals and be prepared to adjust (withdrawals) downward during bad years.

I'm taking the 2nd approach.
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Old 03-11-2015, 12:00 PM   #20
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We are going to get whatever we get.

I am hoping (and expect) about 5% real long term (for 60/40 portfolio).

I could live in fear by going all cash or using very low withdrawals. Forcing worst case on myself.

Or alternatively stay invested and take reasonable withdrawals and be prepared to adjust (withdrawals) downward during bad years.

I'm taking the 2nd approach.
Starting fully invested today in a diversified portfolio, this seems very unlikely unless you have an extremely long investing period and will be adding money regularly to the portfolio.

Ha
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