What % of return to you guys use to plot your portfolio gains for future years?

[Hiredgun]

I'm trying to project out the returns I will receive on my portfolio for the next 5 years, in order to determine the soonest time I can retire.

I have a mix of stocks (75% right now), bonds (15% right now), and reits (10% right now). I'm using 5% for what I expect the annual average return to be. However, I have no real basis for this number. I just don't expect to get the usual 8% investment planners use for the stock market.

What are you guys using for future projections? And what is your rationale? I'm trying to keep it simple (i.e. the 5%). I realize it all comes down to speculation, but what do you think?

 

[BigNick]

For 5 years I wouldn't bank on much more than 5% - history says you can do better, but history didn't predict the terrible returns from 2000-01-01 through 2009-12-31. I'd hope for 7-8% with the mix which you have, but 5 years is a short period, so to get 7-8% you have to accept a wider range of uncertainty.

If I were planning to retire with in 5 years with my portfolio as my main asset, I probably wouldn't have 75% in stocks. Currently my wishful thinking target is 3-4 years, realistic is 5-6, and I have 40% of my total net worth exposed to the stock market. If you can live with 5% return then I'd suggest turing n down the percentage of stocks, or maybe put some in one of those "click" funds that lock in gains above a certain amount.

 

[donheff]

Seems like a good guess. Better to guess low and be pleasantly surprised than high and be disappointed. I remember back in the late 90s (still using an FA) my FA was yapping about 15-20% annual returns as far as the eye could see. I looked at the models used in the various Monte Carlo schemes used at the time and used 7% real as my number. I wasn't sure I wanted to RE but I was interested in when DW and I would be FI so the choice would be ours. The 7% guesstimate ended up a lot closer to the money than the rosy scenarios.

 

[Spanky]

I use 6% return on a 60/40 (equity/fixed income) mix.

 

[BigNick]

I just crunched some numbers. If the market has years of +20%, +15%, +12%, +10%, and -15%, what do you think the average compounded gain is?

1. Guess. Write it down.
2. Open MS-Calc. Choose View/Scientific. Do 1.2 x 1.15 x 1.12 x 1.10 x 0.85. Click "x^y" and enter 0.2 (ie, take the 5th root of the number which you have). Now subtract 1.0 and multiply by 100 (or, just look at the numbers after the decimal point).

Disappointing, huh? That negative year hits you in two ways: firstly, 15% down more or less cancels the best year (20% up); secondly, the "divisor" (actually, the root) of the 3 remaining positive years is not 3 buy 5, because you in effect wasted two years.

See also this page which suggests that the historical, very-long-term return of the DJIA is about 1.64% over inflation.

 

[donheff]

I didn't do the calculations but roughly adding up the numbers in my head and dividing by 5 I get about 8% average. Doesn't take much of a drop to blow the long term averages does it?

 

[Ken11]

For a long term assumption I'm using 5.5% on a 60% equity allocation.
A few years back I would have used 7.5%.
This is per an FA.
However, all bets are off through 2011.

 

[ERD50]

I'm trying to project out the returns I will receive on my portfolio for the next 5 years, ...

I think the question and its application is flawed. So, IMO, the answers are not really helpful.

The way I would look at it is - you cannot make a meaningful estimate of returns for any 5 year period. It's too short. Look at any graph of the market, 5 year periods swing all over. They may well be negative. Less so over 10, 20, 30 years.

IOW, you need to look at the long view - what will your portfolio do over your lifetime, not the next 5 years.

-ERD50

 

[IndependentlyPoor]

Our allocation is pretty much 40%/50%/10% (equitites/bonds/cash, all index funds). Our total return history looks like this:

1 year	12.3%
3 year	1.0%
5 year	4.1%

Sucks doesn't it? It wasn't long ago that we considered 6% return an inalienable right. I haven't the slightest idea of what the next 5 years will bring, but we are not counting on the historical higher returns. We have taken real decisions based on this too, like continuing to rent instead of buying a condo.

 

[donheff]

I think the question and its application is flawed. So, IMO, the answers are not really helpful.

The way I would look at it is - you cannot make a meaningful estimate of returns for any 5 year period. It's too short. Look at any graph of the market, 5 year periods swing all over. They may well be negative. Less so over 10, 20, 30 years.

IOW, you need to look at the long view - what will your portfolio do over your lifetime, not the next 5 years.

-ERD50

That makes a lot of sense. When I think about it, I made my 7% estimate as a long term (40 year) projection. Things were all over the place in the ensuing 5-10 years.

 

[ejman]

According to Quicken, my return since I started investing in 1987 to date is 7.16%. The return since I ER'd at the end of 2002 is 7.36%. A 7% long term rate certainly has historical confirmation from my own personal data. The interesting thing is that although I'm currently at 60% stocks -40% bonds and cash the percentage in stocks was much higher before I retired.

But the dates that you pick make all the difference. I ran the same calculation using a March 2009 end date instead of to date. Then, the return from 1987 becomes 5.63% and the since ER return becomes 3.26%. This confirms on a personal level that short term predictions are a total crapshoot

 

[ziggy29]

I tend to calculate my expected long-term return in real (inflation adjusted) terms. I'm down to about a 55/45 mix right now, and I use 2.5% over inflation in my spreadsheet which looks at projections in current dollars. About half of my bonds are individual TIPS, most of which I purchased at the bottom in November 2008 at a real YTM of about 2.8% to 2.9%, so that part is more or less "locked in" (to the extent the CPI tracks real inflation) for varying terms (maturing in 2016, 2025 and 2032).

 

[CuppaJoe]

Retired almost two years. Rearview mirror shows about five percent gain (so nine percent) over those months. I'd be very happy to retain that gain over the next five years which, I think, would require a four percent return. A two percent would cut into that gain and my cushion and I'm planning for that. Minus two percent is possible and I can sleep with that.

 

[ejman]

For a long term assumption I'm using 5.5% on a 60% equity allocation.
A few years back I would have used 7.5%.
This is per an FA.
However, all bets are off through 2011.

I think all bets are off for any time period, except of course for December 21, 2012 when, as we all know, the world ends.

 

[LOL!]

I don't need to make future predictions, so I don't use any number. I'm happy with what I got for the last 3 years, so I expect to be happy with the next 3 years as well.

 

[Independent]

I'm trying to project out the returns I will receive on my portfolio for the next 5 years, in order to determine the soonest time I can retire.

I have a mix of stocks (75% right now), bonds (15% right now), and reits (10% right now). I'm using 5% for what I expect the annual average return to be. However, I have no real basis for this number. I just don't expect to get the usual 8% investment planners use for the stock market.

What are you guys using for future projections? And what is your rationale? I'm trying to keep it simple (i.e. the 5%). I realize it all comes down to speculation, but what do you think?

What are you doing with the rusult?

Maybe you are making some commitment based on this number (e.g. telling your boss that you will difinitely be gone in XX months and he should be hiring your replacement now).

Maybe it's just a general idea for your own enjoyment (gee, it looks like I might be able to retire in just xx months, isn't that nice).

I'd be noticeably more conservative in the first case than in the second.

 

[kcowan]

I use 7% over 30 years for cashflow planning and die broke purposes. Since we spend less than 3%, I am naturally cautious about actually getting 7% in a given year.

 

[Hiredgun]

I'm just using the 5% number as a gauge to run some numbers and determine the day I could ER if I wanted. Hopefully that is sooner than the 5 year deadline I have set for myself. I realize no one can guess the right number, even over long periods of time. I'm just looking for something that may be realistic in order to run the numbers.

I am hoping to increase my bond percentage (working on it right now) to 40-45% by the time I exit.

 

[bbbamI]

I'd be tickled to death to average 3.5%. Anything above is gravy.

Both retired for over a year...35/50/15.

 

[Meadbh]

I use 5% as a reasonable estimate for long term returns. But what's important is the real return, i.e. returns after inflation. The sequence of returns is also key. If you begin on a losing streak you are behind the eight ball.

I love to model scenarios using Excel. I enter a random series of returns (e.g. if I am modelling 5% on average, I might put in 3%, 4%, 5%, 6%, 4%, etc to simulate variation.) What if.....returns went to 3%? What if we had a bull market in 2015? A black swan in 2020?

Like bbbamI, if I get better than 3-4% real returns I will be happily surprised.

 

[Midpack]

Return itself is secondary IMO, I plan in terms of real return (returns less inflation). For long term planning, I use a real return of 1%, I'm projecting from 0-2%. If inflation is lower than I expect and/or returns are better than I expect (which is hopefully possible) - wunderbar! But I'd rather be "disappointed" on the upside than the downside. YMMV

 

[ziggy29]

For long term planning, I use a real return of 1%

You could load up on TIPS today and do better than that. Then again we're back to the argument over reported inflation and actual inflation...

 

[Midpack]

You could load up on TIPS today and do better than that. Then again we're back to the argument over reported inflation and actual inflation...

Sounds good on paper and you're more knowledgeable than I am, but TIPS haven't been around thru a period of high inflation yet, we'll see...

 

[ziggy29]

Sounds good on paper and you're more knowledgeable than I am, but TIPS haven't been around thru a period of high inflation yet, we'll see...

True, and that goes back to the question of whether the CPI is a useful indicator of the inflation a typical household sees. Because as long as the CPI remains fairly close to being an indicator of the "true inflation" the average person feels, it will work fine whether there is 1% inflation or 11%. However, if there is a large disconnect with higher inflation rates, who knows?

The obvious conflict of interest the government has in underreporting real inflation is why I don't have more than about 20% of my portfolio in TIPS. Nothing would work out better for the Treasury than very high inflation which is signficantly underreported in the CPI. Still, the real 2.8% YTM with very low credit risk was too good to pass on at the time.

 

[Nords]

I think all bets are off for any time period, except of course for December 21, 2012 when, as we all know, the world ends.

So, we're good with a perpetual 5% APY and one minor [-]blip[/-] discontinuity, right?

I'm just using the 5% number as a gauge to run some numbers and determine the day I could ER if I wanted. Hopefully that is sooner than the 5 year deadline I have set for myself. I realize no one can guess the right number, even over long periods of time. I'm just looking for something that may be realistic in order to run the numbers.
I am hoping to increase my bond percentage (working on it right now) to 40-45% by the time I exit.

The Gordon Equation comes up with numbers around 4-6%, which Bernstein considers reasonable for a "mature" economy, and which Buffett has also opined is a decent expectation. But they're very good at managing expectations.

2-3% over inflation might be a more reasonable goal. Hopefully that's a nominal return of 4-6%, not 18%.

There's nothing wrong with paying taxes on profits, but if you're changing your asset allocation in a taxable account you might want to consider the effect of taxes. When you ER you'll be in a lower (perhaps much lower) tax bracket and could adjust your AA during your first full year of ER with a much smaller tax bill. Of course you don't want to ER into a bear market that whacks your portfolio 50%, either, but there's perhaps a sweet spot between paying high 20% higher taxes to have the perfect ER AA and risking a 20% market drop while waiting until after you ER to adjust your AA.