More Gloom and Doom? Long-term real returns of 2.1%

[RonBoyd]

Quote:

Originally Posted by NW-Bound After living in a small motor home for a month on a recent trek, I found that it was not all that bad. Heck, it was even fun.

I recently spent six days on Amtrak... I can tell you that RVing is pure luxury compared to how bad it could be. Our "bricks & sticks" house is nice and comfortable but I don't miss it that much while "on the road." I would not willingly give that up but if disaster struck, I could and would easily move on.

[NW-Bound]

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Originally Posted by RonBoyd ... Our "bricks & sticks" house is nice and comfortable but I don't miss it that much while "on the road." I would not willingly give that up but if disaster struck, I could and would easily move on.

We had the same experience.

However, we were "travelers", meaning we were exploring new places every few days and there were always new things to discover. Of course, for full-timers, the cost of gas would force them to be more of the "camper" type, to stay in a place for a bit longer. As vagabonds cannot check out books from local libraries, they will need their own copies of books to read. See how I am already planning things out? Anyway, I am keeping this to myself. Hopefully it will not come to that. No point in alarming the missus unnecessarily.

[Cattusbabe]

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Originally Posted by NW-Bound I have recently decided that I am not going to worry anymore. I may not be filthy rich, but I still have more than many people. And if it gets too tough, I will just take off in my little motor home, and get myself an annual camping pass for $225 in New Mexico. Party on!

I'm with you. I like this essay by Roger Cohen and I agree, we will manage.

http://www.nytimes.com/2010/10/05/op...ref=rogercohen

[audreyh1]

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Originally Posted by NW-Bound As vagabonds cannot check out books from local libraries, they will need their own copies of books to read. See how I am already planning things out?

You'd be surprised about how flexible things can be at libraries.

Also - there are great used bookstores across the country (if you can find them) where you can exchange books for very cheap.

Just to help your planning along....

Audrey

[Nords]

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Originally Posted by audreyh1 You'd be surprised about how flexible things can be at libraries. Also - there are great used bookstores across the country (if you can find them) where you can exchange books for very cheap.

I'm waiting for the RV community to publish a peer-reviewed vagabonder's analysis of e-readers vs cheap bookstores/libraries...

[samclem]

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Originally Posted by FIRE'd@51 Thus, over that time period, real GDP grew at ( 1920 / 506.6 ) ^ 0.02 = 1.027 , or 2.7% per year, compounded Certainly corporate earnings have grown as fast, if not faster than real GDP This would get us to an expected 4.7% real return on stocks From 1950-2000, the same calculation yields a real GDP of 3.2%, which would imply an expected real return on stocks of 5.2%

I'm just trying to follow along: How did you derive the 4.7% return on stocks from the 2.7% pa GDP growth? (perhaps: there was an unstated 2% pa increase in stock price, which was added to the estimated 2.7% earmings to get 4.7%)

One factor to consider: In 1920, the total tax burden (federal, state, local) was approx 20% of GDP. Today it is approximately 40%. Would this off-the-top deduction from GDP not decrease corporate earnings?

[haha]

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Originally Posted by FIRE'd@51 Certainly corporate earnings have grown as fast, if not faster than real GDP

If by corporate earnings you mean earnings of publically owned companies, this is in conflict with the data put forth by Dimson et al in Triumph of the Optimists. The reason given, as I remember, is that much growth is contributed by early stage private companies which cannot contribute to the returns of outside investors.

Ha

[RonBoyd]

The Dark Art of Statistical Deception

Quote:

It’s using numbers to prove what you know in your heart is true, even when you know it’s not. Numbers have a particular ability to fool us. It’s using that ability to turn nonsense into something that is believable with numbers.

[FIRE'd@51]

Quote:

Originally Posted by samclem I'm just trying to follow along: How did you derive the 4.7% return on stocks from the 2.7% pa GDP growth? (perhaps: there was an unstated 2% pa increase in stock price, which was added to the estimated 2.7% earmings to get 4.7%) One factor to consider: In 1920, the total tax burden (federal, state, local) was approx 20% of GDP. Today it is approximately 40%. Would this off-the-top deduction from GDP not decrease corporate earnings?

I made an addition mistake. My number should have been 4.9% since my growth rate of 2.7% was 1.7% more than theirs (1%). So 3.2% + 1.7% = 4.9%. My second number (using 1950-2000 GDP data) should have been 5.4% (not 5.2%).

Essentially, Arnott is saying that the expected real return on stocks = current dividend yield + expected real dividend growth. This is the steady-state Gordon-Shapiro model. He then takes the current yield on the S&P 500 of 2.2% and adds a projected 1% real growth rate to get 3.2%. If you believe the long-term (and long-term here theoretically means forever for the model Arnott is using) real growth of corporate earnings (and dividends) will only be 1%, then you pretty much have to agree with Arnott. So, as I see it, the question reduces to how much you believe the 1% growth number.

[audreyh1]

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Originally Posted by Nords I'm waiting for the RV community to publish a peer-reviewed vagabonder's analysis of e-readers vs cheap bookstores/libraries...

That's easy. Books on e-readers aren't nearly as cheap! no contest.

[keegs]

As was suggested by a few of you already, we're in a global economy. Higher returns will likely require a larger concentration of US based multi-nationals as well as foreign based investments and currencies in our portfolios.

[Midpack]

It's not out of the question by any means, but if I could be guaranteed a 2.1% real return for the rest of my life, I'd take it. I am assuming 0-2% real return in the decades ahead, but I'm pretty conservative given a 30-40 year "retirement."

[MichaelB]

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Originally Posted by audreyh1 This is the most clear-headed post I have read all week. Thanks! Audrey

Thanks!

[FIRE'd@51]

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Originally Posted by haha If by corporate earnings you mean earnings of publically owned companies, this is in conflict with the data put forth by Dimson et al in Triumph of the Optimists. The reason given, as I remember, is that much growth is contributed by early stage private companies which cannot contribute to the returns of outside investors.

This table gives S&P 500 earnings and dividend data. From 1960-2009 nominal GDP grew at 6.9% annually (from the BEA table linked in post #15), while nominal S&P 500 earnings grew at 6.2%. Clearly, my assumption that S&P 500 earnings kept pace with GDP was incorrect, probably for the reason you suggest.

Using my inflation factor from post #15 of 0.136 on the earnings data from the NYU table gives a real earnings growth for the S&P 500 of about 2% over the last half century, double that used by Arnott and West in their projection.

[Gone4Good]

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Originally Posted by audreyh1 You'd be surprised about how flexible things can be at libraries. Also - there are great used bookstores across the country (if you can find them) where you can exchange books for very cheap.

Yup. Just walked into one with a bunch of books we'd already read. Left with two "new" books and $8 more in our pockets than when we started. Book swaps are even better deals.

[Gone4Good]

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Originally Posted by FIRE'd@51 This table gives S&P 500 earnings and dividend data. From 1960-2009 nominal GDP grew at 6.9% annually (from the BEA table linked in post #15), while nominal S&P 500 earnings grew at 6.2%. Clearly, my assumption that S&P 500 earnings kept pace with GDP was incorrect, probably for the reason you suggest. Using my inflation factor from post #15 of 0.136 on the earnings data from the NYU table gives a real earnings growth for the S&P 500 of about 2% over the last half century, double that used by Arnott and West in their projection.

Shiller's data yields similar conclusions. His 10-year average S&P earnings grew in real, compounded terms, by 1.7% from 1959 to 2010.

A complicating factor is that these earnings are on a "per-share" basis. Have shares increased or decreased over the past 50 years? I suspect they've increased and that, as a result, underlying earnings growth has been greater, but I don't have actual data on this.

[DblDoc]

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Originally Posted by audreyh1 That's easy. Books on e-readers aren't nearly as cheap! no contest.

They are free if you check them out of your library...

DD

[obgyn65]

I have similar plans but not in New Mexico - in Central America instead...

Quote:

Originally Posted by NW-Bound And if it gets too tough, I will just take off in my little motor home, and get myself an annual camping pass for $225 in New Mexico. Party on!

[audreyh1]

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Originally Posted by DblDoc They are free if you check them out of your library... DD

You can check out ebooks from the library? Download to your own personal reader? Restrictions on ebook sharing are pretty severe.

Of course there is quite a bit of public domain available for next to nothing or free on e-readers.

Audrey

[harley]

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Originally Posted by audreyh1 You can check out ebooks from the library? Download to your own personal reader? Restrictions on ebook sharing are pretty severe. Of course there is quite a bit of public domain available for next to nothing or free on e-readers. Audrey

Here's the info from one of my local library systems.

About this Resource - NetLibrary eBooks : Libraries : Arlington, Virginia