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Future return rate?
Old 07-23-2007, 10:47 AM   #1
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Future return rate?

I read things that say that "everyone" expects the stock market to return less in the future.

Threads like this.

So, who has their crystal ball working? The Vanguard Total Stock Market Fund has returned 11.8% over the past 5 years, and 7.6% over the last 10.

Does reversion to the mean say that we're gonna get smacked eventually if we're in the market, so it'll all average out to 4% after inflation? That's what it's been. Is total return going to go even lower?

Is it another case of "past performance is no indication of future results", or whatever? Is it a case of nobody knows, so we'll just try to cover our butts by saying that until low returns show up. If they don't show up, great.

Since the market keeps going up, what's driving it? American consumption alone?

-CC
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Old 07-23-2007, 10:59 AM   #2
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several unaswerable questions here! for what it's worth, i am using 7.5% (nominal) for my planning purposes
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Old 07-23-2007, 11:14 AM   #3
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Originally Posted by CCdaCE View Post
The Vanguard Total Stock Market Fund has returned 11.8% over the past 5 years, and 7.6% over the last 10.
And 11.04% over the last 15 years (since inception in 1992).


For normal planning, I use 9% nominal, or 6% above inflation.
For worst case planning, I use 7% nominal (4% above inflation), and expect to die broke.
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Old 07-23-2007, 11:16 AM   #4
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There are only two major problems that I see in retirement planning - one is what is the future rate of return the second is that nobody knows when they are going to die (OK, .my uncle did - the judge told him)

Many experts say that they expect returns to be lower in the future, others point to the fact that the global economy changes the predictions.

I'm going to plan for the worst and hope for the best. I can make it on 2 1/2 to 3% real return. That avoids disappointment and should ensure I have funds left at the end of my life. I can adjust later if necessary. If I leave some for my heirs then great.
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Old 07-23-2007, 11:26 AM   #5
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I'm going to plan for the worst and hope for the best. I can make it on 2 1/2 to 3% real return. That avoids disappointment and should ensure I have funds left at the end of my life. I can adjust later if necessary. If I leave some for my heirs then great.
Ditto. Planning on a 4% CPI-p and 8% return (4% real return).
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Old 07-23-2007, 11:43 AM   #6
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Quote:
Originally Posted by CCdaCE View Post
I read things that say that "everyone" expects the stock market to return less in the future.

Threads like this.

So, who has their crystal ball working? The Vanguard Total Stock Market Fund has returned 11.8% over the past 5 years, and 7.6% over the last 10.

Does reversion to the mean say that we're gonna get smacked eventually if we're in the market, so it'll all average out to 4% after inflation? That's what it's been. Is total return going to go even lower?

Is it another case of "past performance is no indication of future results", or whatever? Is it a case of nobody knows, so we'll just try to cover our butts by saying that until low returns show up. If they don't show up, great.

Since the market keeps going up, what's driving it? American consumption alone?

-CC
I think the lower future expectations are due to the maturity of the american economy. 100 years ago it more closely resembled an "emerging market" as opposed to the economic superpower it's become today. As a result the possibilities for supercharged growth are somewhat lower than they were in the past.

I'd think of it this way… US economy over the past 100 years = microsoft (or similar company) over the last 25… US economy over the next 50 years = Microsoft over the next 50. The future obviously looks different from the past in this regard.

I think this is why so many are looking at overseas markets that may not have seen this rapid appreciation yet.

Just my $.02
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Old 07-23-2007, 11:47 AM   #7
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There are only two major problems that I see in retirement planning
only two?!:confused:
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Old 07-23-2007, 03:13 PM   #8
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Well lets see...


- Will there be a reversion to the mean?
- Will earnings continue to grow?
- Will inflation continue or will we see stable monetary policy or deflation?
- Will baby boomers with no savings take on more risk and plow brazillions into equities?
- Will already-invested BB'ers withdraw money from equities as they age?
- Will the mature economy of the US show the same returns it has in the past?
- Will there be changes to tax and retirement plan rules that will change (for better or worse) investments in equities?
- Will everyone finally figure out that indexes are as good or better than stock picking and managed funds, causing market volatility to drop to nearly zero? (ha ha... just kidding)
- Will any of the 950,000,000 possible disruptive events like wars, terrorist attacks, yada yada continue happening at their current rate, higher rates, or will they disappear?
- Will godzilla attack tokyo or manhattan this time?
- How will investors react emotionally to any or all of this stuff?

I'm going to go with about a 7-7.5% rate of return, which after my personal rate of inflation is about a 1-1.5% real rate of return.
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Old 07-23-2007, 03:21 PM   #9
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I really don't know and frankly, I don't care. You shouldn't either. Just live your life and enjoy it. There is nothing that can happen that you won't be able to deal with one way or another.
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Old 07-23-2007, 03:24 PM   #10
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Death, pestilence and stuff...
- Cure for dying (can your portfolio last 1000 years)
- Peak oil
- SARS
- Bird Flu
- Republican re-election
- Democrat election
- Bush and Putin destroying the earth just to stay in power longer
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Old 07-23-2007, 03:35 PM   #11
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Well lets see...


- Will there be a reversion to the mean?
- Will earnings continue to grow?
- Will inflation continue or will we see stable monetary policy or deflation?
- Will baby boomers with no savings take on more risk and plow brazillions into equities?
- Will already-invested BB'ers withdraw money from equities as they age?
- Will the mature economy of the US show the same returns it has in the past?
- Will there be changes to tax and retirement plan rules that will change (for better or worse) investments in equities?
- Will everyone finally figure out that indexes are as good or better than stock picking and managed funds, causing market volatility to drop to nearly zero? (ha ha... just kidding)
- Will any of the 950,000,000 possible disruptive events like wars, terrorist attacks, yada yada continue happening at their current rate, higher rates, or will they disappear?
- Will godzilla attack tokyo or manhattan this time?
- How will investors react emotionally to any or all of this stuff?

I'm going to go with about a 7-7.5% rate of return, which after my personal rate of inflation is about a 1-1.5% real rate of return.
Hmm... So, what you are bragging about saying is that your nest egg is large enough to support 1-1.5% withdrawal.
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Old 07-23-2007, 03:38 PM   #12
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Nah, my brags arent that subtle. See the weedwhacker thread for an example.

Since I dont have to pay a mortgage, car payments or any other kind of debt, I dont have to pay for health care (normally anyhow, the last 3 months have been a PITA), and we have my wifes part time income...its probably more a case that I've structured our expenses to not need a large withdrawal rate.

In fact, my wifes pay more or less covers the bills. We only dip into the portfolio for capital expenses.
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Old 07-23-2007, 04:05 PM   #13
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I think the lower future expectations are due to the maturity of the american economy. 100 years ago it more closely resembled an "emerging market" as opposed to the economic superpower it's become today.
Agree with above. Bernstein talks about as countries mature and become more stable, their returns decrease (because risk decreases) - gives examples of "past superpowers" like Romans, UK, etc.

Additionally, equities globally are less "risky" than 30 years ago - better information and transparancy, more transaction liquidity, better accounting standards - all translate into "lower returns" and higher PE's.

Additionally in the short term, I'm convinced the US government and people are tapped out on debt and the hollowing out of our manufacturing base doesn't support durable earnings forward.

But I don't worry about it. I gotta believe that a 4% real return will continue to be possible with high probability for a portfolio heavily diversified across asset classes, currencies, and coutries.
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Carryin' on...
Old 07-23-2007, 04:47 PM   #14
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Carryin' on...

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Originally Posted by Alex View Post
I really don't know and frankly, I don't care. You shouldn't either. Just live your life and enjoy it. There is nothing that can happen that you won't be able to deal with one way or another.
Well, that's what I've been doing so far. I was just bringing up a talking point, I guess.

Thanks, everyone else, for your replies. "Plan for the worst and hope for the best" is all a person can do.

-CC
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Old 07-23-2007, 04:55 PM   #15
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Eh, I think making sure your future rate of return doesnt fly your retirement face first into the ground is an effort worth taking.

But thats me...
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Old 07-23-2007, 05:32 PM   #16
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Well, that's what I've been doing so far. I was just bringing up a talking point, I guess.

Thanks, everyone else, for your replies. "Plan for the worst and hope for the best" is all a person can do.

-CC
In the end that is the only way we can go.

In some ways this thread reminds me of the Science Fiction classic by Asimov - The Foundation series:
From Wikipedia:
Quote:
the premise of the series is that scientist Hari Seldon spent his life developing a branch of mathematics known as psychohistory, a concept devised by Asimov and Campbell. Using the law of mass action, it can predict the future, but only on a large scale; it is error-prone for anything smaller than a planet or an empire.
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Old 07-23-2007, 07:56 PM   #17
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Predictions are hard, especially about the future.

Yogi Bera.
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Old 07-23-2007, 09:31 PM   #18
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Not to put anyone down who is participating in this thread -- especially me . But this reminds me of all the newspaper articles I see with a "?" at the end of the title. Generally that means that nothing will be answered after the reader completes the article.

Have you ever noticed that? Is there life after death? When will I die? Will my money run out? ........? .......?

Les (sorry, could not resist a little cynicism -- time to turn on the TV)
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Old 07-23-2007, 10:41 PM   #19
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Eh, I think making sure your future rate of return doesnt fly your retirement face first into the ground is an effort worth taking.

But thats me...
yeah sure, and prognosticating about the rate of future returns helps how exactly?
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Old 07-24-2007, 05:01 AM   #20
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People are wondering about the long-term health of the US/global economy. Without wanting to enter into "prognostication".. I think most individual Americans will continue to experience a "bad" economy and companies will continue to experience a "good" economy, overall. As US megacorps and multinationals go ever more overseas I can't see how this disconnect won't just continue to heighten.

Apparently finding a few dead moments between bikini-clad Miss Something-orOthers and Hooters waitress interviews.. Cavuto had on this guy (emph. mine):

Quote:
Jon Huntsman, Sr., the founder of Huntsman Corporation and a member of the Forbes 400, came on to talk about how his company has expanded and profited, while at the same time insinuating that America, as a whole, has benefited.

Cavuto opened by asking Huntsman whether the rally in the market will continue.

Huntsman said, "We have to remember that America is part of a remarkable global economy. Some countries...are exploding. We have a Middle East exploding. [!!!] We have emerging countries doing better than they have ever done historically. So, America, for the first time in history, is now, Neil, the beneficiary of all of these countries' economic expansions and developments. I think it is a wonderful time."

Huntsman continued after Cavuto asked what's driving all this: "Companies spent the last ten years to globalize. You look at our company ten years ago and we were 95% in the United States. Today, we're 25%. Doesn't mean because we don't love America. We love America, but we have to go where the markets send us and we're 50% in Europe and the Middle East, 25% in Asia. So, you look at these companies that have their base in America, have their innovation in America, have their base management in America, and we've become globalized enterprises and in that context Neil, I think we've become extremely valuable and that's where the world is headed."

Cavuto wondered if it all looked a little "frothy," and Huntsman said, "Well, Yeah." He said, "We're seeing America as part of the great global economy and I say hallelujah, let's keep riding this pony."

Cavuto wondered if it "keeps riding," and Huntsman said he thinks it does. He said he was in China "the other day" and "40 million new people a year move into the middle class...the purchasing class. It's like we're creating a nation the size of France every single year in these countries. As long as this purchasing power comes in Neil, I think we're in pretty good shape going forward."
News Hounds: Average Americans Left Out of Neil Cavuto's Life Styles of the Rich, Dow 14,000 Party

There are two messages here: one accurate and one mendacious. There's a lot of 'growth' out there to be exploited in the big, wide, world (accurate). Companies like Huntsman's are "valuable" to America (mendacious).

The latter myth is particularly pernicious in the case of Huntsman: I looked 'em up and they were a family enterprise up 'til 2005 when they floated shares, but in 2007 they were snapped up by a private equity group. The current governor of Utah is one of the scions of the Huntsman family. Huntsman pere is a main supporter of Romney (more private equity).

Unless you feel that private-equity profits "trickle down" to the little guy to any important degree.. I guess I don't see how Huntsman the company is valuable to anyone but a select few. They give a lot to charity (and as devout Mormons 10% pre-tax to the Church is supposedly the rule anyway, right off the bat) and they donate $ for buildings at business schools and so forth. Good for them. But let's not pretend that their concentrated wealth and power is somehow a reflection of how great things are in the US. It's just a reflection of how great things are in the US for the Huntsmans. (Hallelujah!) Let's not forget who's "riding the pony" and who's being ridden.

As ER/investors we might be able to grab on to the pony's tail, IF we look, as Huntsman does, overseas. But the investor class is not average; I have a feeling the average US worker will see things get much worse.

[and for the "vultures".. life will continue to be pretty good:
A Homer For The Babe Ruth Of Vulture Investing - Forbes.com
]The Life of a Vulture - Forbes.com


So the short answer:
Quote:
Since the market keeps going up, what's driving it? American consumption alone?
global development, apparently.
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