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Realistic Future Returns
Old 03-18-2006, 08:07 AM   #1
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Realistic Future Returns

I see mention of projections of reduced expectations of average future returns for equities and bonds.

What are the experts prediciting and what are the sources for those predictions?

And for those of you that are following - I have rollover funds on the way to Vanguard for consolidation and investment. :P
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Re: Realistic Future Returns
Old 03-18-2006, 09:53 AM   #2
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Re: Realistic Future Returns

Quote:
Originally Posted by Mysto
I see mention of projections of reduced expectations of average future returns for equities and bonds.

What are the experts prediciting and what are the sources for those predictions
You can read through articles at Bernstein's site or this summary.

The Gordon Equation says that a stock or a bond will return its income stream plus its growth rate. Of course you get to pick the numbers for that unstable equation, in which tiny variations of input result in huge variations of output, but 6.5% for stocks and 6% for bonds seems to be a concensus for long-term returns.

A much more detailed discussion of long-term returns is in "Triumph of the Optimists". It's a coffee-table book that can break your foot bones if you drop it, or that'll cut off circulation to your legs if you read it while it's resting in your lap, but it's a good review of long-term returns in 16 different countries. It's worth its weight in financial analysts or WSJ subscriptions. It'll make you stop worrying about next week or next year and you'll start thinking about inflation & decades-long returns instead of what the experts are predicting.

Keep in mind that these are average returns of the entire broad bond/stock market, not specific asset classes. The Gordon equation works for me as long as inflation stays around 2-3% for the next six or seven decades. How hard could that be?
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Re: Realistic Future Returns
Old 03-18-2006, 12:40 PM   #3
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Re: Realistic Future Returns

Large cap earnings should grow roughly in line with GDP growth. Long-run real GDP growth has averaged more than 3% for most of this century, but seems to be on a declining trend. If we assume ~3% real growth and ~3% inflation, nominal earnings growth is ~6%. Add to that a 1.75% dividend yield and future equity returns should be in the 7.75% range (give or take 3 percentage points).
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Re: Realistic Future Returns
Old 03-18-2006, 01:25 PM   #4
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Re: Realistic Future Returns

Bogle (Sr) says that he expects equity returns at about 6.5% for the next 10 years or so. But what does he know?

Short term? Use a coin on the thumb technique and select one side of the coin prior to flipping the coin.
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Re: Realistic Future Returns
Old 03-18-2006, 02:22 PM   #5
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Re: Realistic Future Returns

Expected real returns, tax deferred or paid from work when saving, past averages are trivia.
Saving U.S. Historical Current
Stock, Reits = (1/pe) - investing costs 7 - 2 = 5% 5.5 - .5 = 5%
Bonds, Bills = yield - inflation costs 6 - 3 - 1 = 2% 5.5 -3 - .5 = 2%

Heres my best guess.
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Re: Realistic Future Returns
Old 03-18-2006, 02:26 PM   #6
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Re: Realistic Future Returns

rmark, if you're right history will indeed rhyme!

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Re: Realistic Future Returns
Old 03-18-2006, 02:32 PM   #7
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Re: Realistic Future Returns

Plug in the costs of actively managed funds and watch my expectations fall. Its todays index funds at low cost that make that match possible.
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