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Why is this time different?
Old 03-21-2013, 03:39 PM   #1
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Why is this time different?

I hear a lot about "the new normal" in that we should barely expect 4 or 5% returns for the next "" years.

What is different this time?? After the Great Depression the 50s' and 60's were wonderful. After the inflationary 70's, the 80's and 90's were great.

What is different this time Why not expect 7-8% for the next 20 years after the awful 00's??

What is different this time?
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Old 03-21-2013, 03:46 PM   #2
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Quote:
Originally Posted by dtbach View Post
I hear a lot about "the new normal" in that we should barely expect 4 or 5% returns for the next "" years.

What is different this time?? After the Great Depression the 50s' and 60's were wonderful. After the inflationary 70's, the 80's and 90's were great.

What is different this time Why not expect 7-8% for the next 20 years after the awful 00's??

What is different this time?
Without meaning ANYTHING political: What is different is we won't have Ronald Reagan or Paul Volker around. Naturally, YMMV.
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Old 03-21-2013, 03:49 PM   #3
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Originally Posted by dtbach View Post
What is different this time Why not expect 7-8% for the next 20 years after the awful 00's??

What is different this time?
Asteroids.
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Old 03-21-2013, 03:51 PM   #4
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give it another 10 years... around 2025, the "new normal" will be 10% yearly returns and everyone will be talking about how we're too financially advanced and smart to ever get stuck in another lost decade like the 00's - wonder what the next bubble will be? The 30's might be painful.
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Old 03-21-2013, 03:55 PM   #5
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Aging world populations, slowing rather than pushing economic growth?

A.

Quote:
Originally Posted by dtbach View Post
I hear a lot about "the new normal" in that we should barely expect 4 or 5% returns for the next "" years.

What is different this time?? After the Great Depression the 50s' and 60's were wonderful. After the inflationary 70's, the 80's and 90's were great.

What is different this time Why not expect 7-8% for the next 20 years after the awful 00's??

What is different this time?
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Old 03-21-2013, 03:59 PM   #6
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It's not, talking heads have been outlining why it's bad different or good different forever. And they're right until they're wrong, someone has to be even if neither side has a clue to begin with.

What would be different would be if no one was saying 'this time it's different.'

The lower projected returns are probably based on reversion to mean, stands to reason, but no guarantee there either - the market has defied logic longer than we expect many times.
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Old 03-21-2013, 04:09 PM   #7
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Less low-hanging fruit?
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Old 03-21-2013, 04:38 PM   #8
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You have every reason to be skeptical.

In any case, the sequence of returns affects the longevity of your portfolio as much if not more than these doom & gloom long term average numbers.

If you withdraw 4% adjusted for inflation from your portfolio and obtain a constant 2% real return, your portfolio will last 34 years.

Good luck on finding a constant 2% real return over that period of time.
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Old 03-21-2013, 05:11 PM   #9
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I think what is different is "last time" is not felt to necessarily be representative....in other words there is no certainty that past performance will influence future results. Some feel that the prior 150 years is too short a time period to say what "normal" should be. No matter how you slice it there are enough important differences between the past and the future to make forecasting dicey. The changes in our own country and the world all interact in unforeseen and unforeseable ways.
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Old 03-21-2013, 05:17 PM   #10
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The changes in our own country and the world all interact in unforeseen and unforeseable ways.
Which is the way it has always been.
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Old 03-21-2013, 05:18 PM   #11
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IMO, the difference is the global debt levels...

As a % of GDP, a lot of countries (including their citizens) have the highest debt level ever, outside of a war...


Without money, people cannot buy things... when people cannot buy things GDP suffers... when gvmt cannot buy things GDP suffers...

Once debt gets under control, either by writing it off (hard on the debt holder, look at Cypress) or long term payoff, then things will get back to normal...
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Old 03-21-2013, 05:19 PM   #12
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The 50's started with half the world in ruins and a great demographic boom fueling a strong demand for goods. The 80's started with a cheap stock market and cheap bond market. Today? The bond market is very expensive, the stock market is not cheap, demographics have become a headwind, and demand is tepid at best. And while credit is cheap, we won't be able to spend our way out of this one given our already high level of indebtness.
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Old 03-21-2013, 05:43 PM   #13
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Which is the way it has always been.
Maybe not quite when trying to extrapolate market returns. In much of the past, the market was mostly the US market, not as much globalization. Now with emerging markets, etc. market returns are not necessarily the same. In fact the so called "average" returns of 7%-8% are pretty much a US average...in other countries they have not seen returns like that...hence in answering the OP question...the reason this time might be different is that it was never fair to make long term statements about averages when it was a localized and narrow phenomenon in the first place.
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Old 03-21-2013, 05:58 PM   #14
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Old 03-21-2013, 07:00 PM   #15
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Originally Posted by Midpack View Post
It's not, talking heads have been outlining why it's bad different or good different forever. And they're right until they're wrong, someone has to be even if neither side has a clue to begin with.

What would be different would be if no one was saying 'this time it's different.'

The lower projected returns are probably based on reversion to mean, stands to reason, but no guarantee there either - the market has defied logic longer than we expect many times.
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Old 03-21-2013, 08:23 PM   #16
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Quote:
Originally Posted by dtbach View Post
I hear a lot about "the new normal" in that we should barely expect 4 or 5% returns for the next "" years.

What is different this time?? After the Great Depression the 50s' and 60's were wonderful. After the inflationary 70's, the 80's and 90's were great.

What is different this time Why not expect 7-8% for the next 20 years after the awful 00's??

What is different this time?
Do you know if the talking heads were predicting boom times ahead after the times you listed?

It could be the predictions today are as wrong as they have always been.
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Old 03-21-2013, 08:50 PM   #17
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What is different this time Why not expect 7-8% for the next 20 years after the awful 00's??
Different people have different estimates of the equity risk premium. To really understand you have to read through their analyses (eg. like Equity Risk Premiums (ERP): Determinants, Estimation and Implications ) and understand their assumptions/flaws/etc.

Also keep in mind that most people provide a point estimate, e.g., like 6% per year when there really is huge uncertainty bounds around that estimate (i.e. could be much higher or lower).

I would also treat analyses based on simple averages of historical values as the worst way of estimating forward returns.
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Old 03-21-2013, 10:17 PM   #18
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I have no idea what the rate of return going forward is going to be but it's interesting to see that my annual rate of return (per Quicken) since 1/1/2009 is 12%. This is on a conservative 55/45 equities/bond allocation. I'm sure many have done far better. Over the last four years there have been many many forecasts of armagedon and worse (asteroids anyone?). I've come to the conclusion that the only thing I can do is stick to my AA and ignore predictions. Maybe really and truly nobody knows and the Gurus have a knack for marketing and self promotion but little else.
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Old 03-21-2013, 10:44 PM   #19
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I will be the contrarian and question your basic premise that we are 'after' anything. I think we are still in the middle of something that is not over yet. One could conjecture that just because we are no longer in the deepest part of the ocean, and were able to come up for air, that does not mean we are on dry land yet.
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Old 03-22-2013, 05:03 AM   #20
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The less rosy predictions are based on an assumption that the basis for returns (in a general sense) has itself been devalued. In a way, that seem reasonable.

For example: If population increases faster than innovation can dream-up new ways to provide for the same standard of living over the greater number of people, then resource scarcity will depress average standard of living, and that will reach back into financial returns in various ways.

The same mechanism would result from a reduction in the ability to exploit superior power overseas, either due to other nations learning how to retain a greater portion of the benefits from their own value, or simply due to a reduction in the willingness to engage in such exploitation of opportunities.

I think there is also a feeling that "where-we've-been" has been supported to a great extent on mortgaging the future, and that credit is running out. That also seems reasonable - you cannot keep borrowing more and more forever right? - but that's really only an appeal to sensibility. There is no mathematically provable ceiling there. The limit, and therefore the effect of any such limit, would be imposed by human discretion, to a great extent, and there are good reasons to think that that will happen, but no real assurance that it will.

It does seem to me that the measures that have been applied throughout the last eighty years or so to keep the economy growing are losing their efficacy - that the same things that our leaders did in the in the past, following the lead of those before them and those before them, are going to be sucking wind. We figuratively (and probably literally, too) need to find a different fuel for the engine. I'm not terribly optimistic. A SWR of 4% would probably point me toward ER at 55, and to be honest I may not have a choice, but if I do, I think it would be foolish to make decisions, heavily dependent on Social Security income (as my figuring is) and a SWR of 4%.
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