Which rate of return on assets?

[Latamgringo]

Hi

Building a fire model where the rate of returns are crucial

Wondering which rates people are using for

- sp500
- fixed income
- real estate

?

Thanks

[big-papa]

Quote:

Originally Posted by Latamgringo Hi Building a fire model where the rate of returns are crucial Wondering which rates people are using for - sp500 - fixed income - real estate ? Thanks

Anything anybody comes up with is going to be a guess because the future is unknowable. The rates of return might be crucial, but they aren't deterministic, either.

That said, there are models out there that have some validity, but the error bars can be huge!

For example 1/PE10 (aka 1/CAPE) is often used for real returns 5-10 years out for the SP500 or a Total Stock Market index.
Read up on Shiller's PE10 (google).
A source for the data: https://www.multpl.com/shiller-pe


For fixed income, go to Morningstar and look at the SEC yield of whatever fund you're interested in. Look up also the average duration. The SEC yield is a decent predictor of the nominal next N years out where N is the average duration.

For long term returns, Credit Suisse reports that worldwide since the early 1900's, stocks return 5.0% real compound annual growth rate and bonds return 2.0% real compound annual growth rate. Of course in any year, returns could be higher or lower and they can be higher or lower than this for multiple years, decades even.

Of course every investment and advisory house has their own predictive models. Such as:
https://www.blackrock.com/institutio...et-assumptions
https://www.capitalmarketassumptions.com/matrices/
https://www.callan.com/capital-market-projections/
https://interactive.researchaffiliat...EAR&terms=REAL

For everything above, pay attention to whether the return predictions are real or nominal and adjust accordingly.

You can also try tools like www.portfoliocharts.com
It includes a number of different types of analysis, including how many years it would take to get to FIRE in the past (with min and max) with different asset allocations and savings rates. Of course the future, being unknowable and all, may end up requiring more or fewer years than the past ever required.

Good luck!
Big-Papa

[audreyh1]

Quote:

Originally Posted by Latamgringo Hi Building a fire model where the rate of returns are crucial Wondering which rates people are using for - sp500 - fixed income - real estate ? Thanks

Is this for your own personal use?

I recommend using a historical model like Firecalc.

Guessing rates of return is pretty much impossible.

[joeea]

Quote:

Originally Posted by Latamgringo Building a fire model where the rate of returns are crucial

What does "crucial" mean in this context?

Is it important that your rate of return assumption is accurate over many years?

Is it important that your rate of return reflects the rate used by some "authority"?

When building a model, it's important to clearly state the assumptions upon which it is built.

[street]

I have done some long range projection just for an idea where things could be at. I have always used 2% even being invested heavy in equities. I would think it would be a conservative percentage to use but also maybe a very real number as we really don't know.

[imoldernu]

Not a recommendation, because we don't "invest" per se. It was a good time for IBonds in 2000 thru 2003, so we maxed the $30K/person/year. With the inflation clause, this has averaged 5.4%, so we don't even think about the market. There was also a small annuity that started with 4 year of variable rates (around 8% to 11%) that dropped to a minimum of 4% after that..
Between those, and Social Security CPI adjustment, we're doing OK, and haven't touched our retirement nest egg now, 30 years.

On the real estate end, we did pretty well... Since 1958, we've moved 22 times, during which period, we owned 8 homes... Each move produced a moderate profit maybe averaging about 8%. after subtracting upgrade expenses.

So... not what would be called a great success, but we're very happy, and
feel safe.

Starting over, we probably would do things differently, but would keep some part of our assets in government bonds, with an inflation adjustment guarantee.

We all have events that that tend to shade our actions. Ours came in 2008, when my best friend retired early, with a lump sum investment of $850,000 the dropped to $300.000 in a few months. I remember the trauma and sadness, as they left our 55+ Florida snowbird community to go back to Illinois. He eventually recovered, but the event affected our investment thinking.

The other part of risk avoidance, probably came from my folks, who often spoke of the great depression which was still in effect when I was little kid.
Who else here, remembers potato-peel soup?

[marko]

Quote:

Originally Posted by audreyh1 Is this for your own personal use? I recommend using a historical model like Firecalc. Guessing rates of return is pretty much impossible.

+1
Don't waste your time. There are a dozen good/great calculators out there designed by some really, really smart, clever teams of people who've back tested things 218 ways.

Unless you're one of them, your "crucial" results will likely be worthless.

[wmc1000]

Quote:

Originally Posted by street I have done some long range projection just for an idea where things could be at. I have always used 2% even being invested heavy in equities. I would think it would be a conservative percentage to use but also maybe a very real number as we really don't know.

+1

2% is what we use also to be fiscally conservative and we use a 4% inflation factor too.

[OldShooter]

Quote:

Originally Posted by marko ... really, really smart, clever teams of people who've back tested things 218 ways. ...

No one can reliably predict the economy or investment returns. Backtesting proves nothing.

Nate Silver in "the signal and the nosie" has a chapter entitled "Drowning in Three Feet of Water" where he discusses economic forecasting. One of the funniest stories:

"In September 2011, ECRI [Economic Cycle Research Institute, one of the big guns in forecasting] predicted a near certainty of a 'double dip' recession. 'There's nothing policy makers can do head it off,' it advised. 'If you think this is a bad economy you haven't seen anything yet. ...'

"The S&P 500 gained 21% in the five months after ECRI announced its recession call, while GDP growth registered at a fairly healthy clip of 3.0%."

That said, we all need to plug numbers into our models. The way to do this is to make multiple runs as "sensitivity analysis." (https://en.wikipedia.org/wiki/Sensitivity_analysis) IOW, try to find the numbers where your plan begins to run into problems, then you can look at historical numbers to guess your future.

IMO, the FireCalc and other gadgets that produce numbers to a tenth of a percent are just jokes. In reality, an 80% confidence prediction is probably about the same as 100%. A more intellectually honest way to report would be in 4 or 5 categories using words like "Based on history, your plan looks like it might have problems." or "Based on history, your plan looks pretty good."

[jebmke]

the only "rate of return" I use is for fixed income since that is what our IRAs are in. I assume zero real return. It makes it easy to calculate future RMDs.

[racy]

I believe that Bogle & Kitces predict something like nominal returns of 4% for stocks, 3% for bonds & 2% inflation through the 2020s. Which is less than historical returns. But, who knows? (Personally, I use their numbers. I prefer being on the conservative side when forecasting).

[marko]

Quote:

Originally Posted by OldShooter No one can reliably predict the economy or investment returns. Backtesting proves nothing. IMO, the FireCalc and other gadgets that produce numbers to a tenth of a percent are just jokes. In reality, an 80% confidence prediction is probably about the same as 100%. A more intellectually honest way to report would be in 4 or 5 categories using words like "Based on history, your plan looks like it might have problems." or "Based on history, your plan looks pretty good."

My point wasn't that FireCalc should be taken as gospel, but that trying to re-invent the wheel, presumably on an Excel sheet, was likely as waste of time by comparison.

OP stated that the results were 'crucial'. I'd lean toward FireCalc et al results before I'd trust my own home-made 'gadget'.

[street]

Quote:

Originally Posted by wmc1000 +1 2% is what we use also to be fiscally conservative and we use a 4% inflation factor too.

Yes, I also use the 4% inflation rate also.

[Big_Hitter]

read this

https://www.amazon.com/Investments-1...gateway&sr=8-2

[MichaelB]

Quote:

Originally Posted by Big_Hitter read this https://www.amazon.com/Investments-1...gateway&sr=8-2

Not even a hint of what the link is about?

[Big_Hitter]

Quote:

Originally Posted by MichaelB Not even a hint of what the article is about?

it isn't an article; it's a textbook that used to be the SOA and CFA syllabi