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Opinions on worst case real returns...
06-08-2016, 08:44 AM
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#1
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Thinks s/he gets paid by the post
Join Date: Oct 2009
Posts: 1,190
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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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06-08-2016, 08:49 AM
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#2
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Recycles dryer sheets
Join Date: Feb 2015
Posts: 296
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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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06-08-2016, 09:00 AM
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#3
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Thinks s/he gets paid by the post
Join Date: Jan 2008
Posts: 1,495
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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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06-08-2016, 09:02 AM
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#4
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Thinks s/he gets paid by the post
Join Date: Oct 2009
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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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06-08-2016, 09:05 AM
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#5
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Thinks s/he gets paid by the post
Join Date: Dec 2015
Location: Michigan
Posts: 4,964
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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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06-08-2016, 09:23 AM
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#6
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gone traveling
Join Date: Sep 2013
Posts: 1,248
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Quote:
Originally Posted by LARS
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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Portfolio of 100% Equities? 100% S&P 500? Or 50% US 50% international?
Or 50/50 Equities/Bonds?
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06-08-2016, 09:38 AM
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#7
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Join Date: Jul 2013
Posts: 1,879
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Quote:
Originally Posted by eta2020
Portfolio of 100% Equities? 100% S&P 500? Or 50% US 50% international?
Or 50/50 Equities/Bonds?
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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).
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06-08-2016, 09:48 AM
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#8
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Join Date: Jan 2012
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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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06-08-2016, 10:00 AM
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#9
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Thinks s/he gets paid by the post
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Quote:
Originally Posted by Sojourner
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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Real return?
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06-08-2016, 10:23 AM
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#10
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 38,011
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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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Retired since summer 1999.
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06-08-2016, 10:28 AM
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#11
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Recycles dryer sheets
Join Date: Jun 2014
Posts: 440
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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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06-08-2016, 10:31 AM
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#12
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Administrator
Join Date: Jan 2008
Location: Chicagoland
Posts: 40,586
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Well, if we're talking worst case, this come close
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06-08-2016, 10:44 AM
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#13
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Thinks s/he gets paid by the post
Join Date: Apr 2012
Location: Nashville
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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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06-08-2016, 11:12 AM
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#14
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gone traveling
Join Date: Sep 2013
Posts: 1,248
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Quote:
Originally Posted by mrfeh
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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Pretty much unless humanity experiences something like Nuclear war in which case who cares about portfolio return.
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06-08-2016, 11:14 AM
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#15
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Join Date: May 2014
Location: Utrecht
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Quote:
Originally Posted by MichaelB
Well, if we're talking worst case, this come close
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As long as we don't go here, we can manage:
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06-08-2016, 12:17 PM
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#16
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Thinks s/he gets paid by the post
Join Date: Feb 2014
Location: Syracuse
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Quote:
Originally Posted by eta2020
Pretty much unless humanity experiences something like Nuclear war in which case who cares about portfolio return.
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+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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06-08-2016, 01:04 PM
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#18
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Join Date: May 2014
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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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06-08-2016, 01:11 PM
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#19
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Quote:
Originally Posted by mrfeh
...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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+1
Quote:
Originally Posted by eta2020
Pretty much unless humanity experiences something like Nuclear war in which case who cares about portfolio return.
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Quote:
Originally Posted by GravitySucks
+1. Non portfolio related risks seem the most troublesome. Once we are dead I'll stop checking the S&P...
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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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06-08-2016, 01:13 PM
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#20
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Thinks s/he gets paid by the post
Join Date: Jun 2010
Posts: 2,301
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Quote:
Originally Posted by Totoro
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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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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