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Opinions on worst case real returns...
Old 06-08-2016, 08:44 AM   #1
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Opinions on worst case real returns...

So had a discussion with a former colleague about worst case real returns given current outlooks. His view was conservative worst case scenario was 2% negative returns.

Others opinions? (Again WORST case real returns.)
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Old 06-08-2016, 08:49 AM   #2
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Possible....maybe even worse. Thing is "for how long?" One year, two years, ten years? I could see neg. returns for 2- 3 years but no longer than that. Also are you talking returns on equities? bonds? What asset class?
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Old 06-08-2016, 09:00 AM   #3
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James Mackintosh, "Investors who give up their pretensions to know where the economy is going can find ways to construct sensible portfolios." (wsj.com)

Aswath Damodaran, "My advice is that if you have an investment thesis that leads you to buy the stock, do so and stop worrying about what the talking heads on CNBC or Bloomberg tell you about it. If you have so little faith in your reasoning that you doubt it and are ready to abandon it the moment it is contested by a big name, you should consider investing in index funds instead."
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Old 06-08-2016, 09:02 AM   #4
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In worst case scenario I am thinking across overall portfolio. As to time horizon, greater than 20 years.

Again the exercise is to consider worst case scenario to determine bullet proof nature of projections. So as to stocks for example a boom/bust cycle that trends negative overtime. And as to interest rates (bonds), rate environment continues like today (interest rates not keeping pace with inflation).

I recognize this is an exercise in pessimism...
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Old 06-08-2016, 09:05 AM   #5
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I can see a case where long term equity return may be lower than they have been over the last 100 years. My reaction is to shoot for a lower equity allocation over time based on my needs and risk tolerance. Even so, at this point I do not expect my equity portion to go below 50%. Everyone has to do what makes sense to them, and no one knows what markets will do in advance.
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Old 06-08-2016, 09:23 AM   #6
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Originally Posted by LARS View Post
In worst case scenario I am thinking across overall portfolio. As to time horizon, greater than 20 years.

Again the exercise is to consider worst case scenario to determine bullet proof nature of projections. So as to stocks for example a boom/bust cycle that trends negative overtime. And as to interest rates (bonds), rate environment continues like today (interest rates not keeping pace with inflation).

I recognize this is an exercise in pessimism...
Portfolio of 100% Equities? 100% S&P 500? Or 50% US 50% international?
Or 50/50 Equities/Bonds?
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Old 06-08-2016, 09:38 AM   #7
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Portfolio of 100% Equities? 100% S&P 500? Or 50% US 50% international?
Or 50/50 Equities/Bonds?
Right - we need to know the composition of the portfolio.

IMO, the chances of a well-diversified portfolio (let's say 60/40, 25% ex-US) providing returns less than 0% are 0% (over 20 years).
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Old 06-08-2016, 09:48 AM   #8
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I don't know of any reason to assume that a 60/40 well-diversified portfolio would return anything less than, say, half of what it has done historically. So that would make my worst case scenario roughly 5%. Sure, one can imagine edge cases where the overall return would be below that, but statistically those would be quite unlikely.
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Old 06-08-2016, 10:00 AM   #9
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I don't know of any reason to assume that a 60/40 well-diversified portfolio would return anything less than, say, half of what it has done historically. So that would make my worst case scenario roughly 5%. Sure, one can imagine edge cases where the overall return would be below that, but statistically those would be quite unlikely.

Real return?


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Old 06-08-2016, 10:23 AM   #10
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No - he means nominal I believe. Still, if you figured inflation running 3%, that would give you 2% real.
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Old 06-08-2016, 10:28 AM   #11
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Worst case I can imagine?
Complete economic collapse rendering all financial institutions insolvent and massive social uprising, chaos, etc.

Has happened in the past and happening in some countries right now.

Worst I expect? Slightly worse than last 100 years.

The question is... what do I do?

Try and spend reasonably (around 2-3% SWR) and not think about it too much.

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Old 06-08-2016, 10:31 AM   #12
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Well, if we're talking worst case, this come close
.
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Old 06-08-2016, 10:44 AM   #13
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Worst Case I can imagine: SMOD https://twitter.com/smod2016?lang=en In which case, no worries!

Japan? That might be among the nontrivial possibilities (I exclude Zimbabwe, 1946 Hungary, Weimar germany, Venezuela...https://en.wikipedia.org/wiki/Hyperinflation). Nikkei closed at 38916 on Dec. 29, 1989, and is presently at 16,831.... (but you got some dividends along the way). If you retired that day and had 100% in that index, bad news.

Diversification is my response. On the equity side, 50/50 US/foreign (and Merriman slice/dice within that) Like Petershk, reasonable spending and keeping nondiscretionary costs as low as feasible. If 1-2% real return on our portfolio, we'll be fine--not fat and happy, but fine.
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Old 06-08-2016, 11:12 AM   #14
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Right - we need to know the composition of the portfolio.

IMO, the chances of a well-diversified portfolio (let's say 60/40, 25% ex-US) providing returns less than 0% are 0% (over 20 years).
Pretty much unless humanity experiences something like Nuclear war in which case who cares about portfolio return.
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Old 06-08-2016, 11:14 AM   #15
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Well, if we're talking worst case, this come close
As long as we don't go here, we can manage:
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Old 06-08-2016, 12:17 PM   #16
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Pretty much unless humanity experiences something like Nuclear war in which case who cares about portfolio return.

+1. Non portfolio related risks seem the most troublesome. Once we are dead I'll stop checking the S&P....

Over the next 20 years I think a real return of 6% is way more likely than1%, but I gotta keep spending like the 1% is going to happen for now.
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Old 06-08-2016, 12:56 PM   #17
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Table from https://www.aqr.com/~/media/files/pa...shiller-pe.pdf. Scatter plot is from Meb faber's website.
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Old 06-08-2016, 01:04 PM   #18
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The challenge with that chart and past data is there were so few periods with Shiller P/E above 21, and only one basically above 30 (dotcom period).
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Old 06-08-2016, 01:11 PM   #19
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Quote:
Originally Posted by mrfeh View Post
...IMO, the chances of a well-diversified portfolio (let's say 60/40, 25% ex-US) providing returns less than 0% are 0% (over 20 years).
+1

Quote:
Originally Posted by eta2020 View Post
Pretty much unless humanity experiences something like Nuclear war in which case who cares about portfolio return.
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Originally Posted by GravitySucks View Post
+1. Non portfolio related risks seem the most troublesome. Once we are dead I'll stop checking the S&P...
The personally worst case scenario for each of us is that we get diagnosed with a terminal disease, then die in one or two years.

Meanwhile, the S&P keeps setting new highs and takes off into a new bubble territory, but we are so much in pain and sadness to even notice, let alone care.
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Old 06-08-2016, 01:13 PM   #20
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The challenge with that chart and past data is there were so few periods with Shiller P/E above 21, and only one basically above 30 (dotcom period).
That's true that the amount of data is limited (and the rolling periods makes it seem like we have more than we do).

But we can use all of the data to establish the trendline. I.e. increasing PE10 monotonically results in crappier worst cases. So even though there might be only a few points with PE10 > 20, the extrapolation doesn't seem unreasonable to me.
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