Foolish economic girly-man

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I take all my assets and determine the average return I have been getting over the past 10 years plus my average savings rate.

retire@40

Yup, you are an optimist alright. May I also suggest naive, if you use the average results of the late 1990's as a predicter of your future results.

This was a stellar time of returns and to use this as an average you'd have to be a fool.

[unclemick]

Hats off to Zell - got me pissed off enough to go register to vote - haven't done that since I voted against Nixon and for the knuckle brain that ran against him.

Deep Throat is still my favorite - "Follow the money."

Hence - stick with the Nowegian widow - the yield of your portfolio is real money - anything else is lagniappe.

[wabmester]

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Hi Wab! *Still on the diet. *Pretty faithful except for the sugar in my nightly glass of wine. *I already lost 4 lbs, even though that was not the goal. *Interesting.

You'll probably get the urge to take a nap or two as your body transitions from burning sugar to burning fat. *Drink a ton of water, and eat plenty of roughage (lettuce, broccoli, etc.) * You'll eventually regret ignoring this latter advice *

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Re. your post You forgot one: Chances that we'll all end up dead * * * * * *100%

I'm optimistic that this probability will be reduced *someday

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-- Chances that we'll see the historical worst 30-year US market returns in our future lifetime: > 20%.

Wab,

Do you happen to know what the worst 30 year period return of the Market was?

[wabmester]

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Do you happen to know what the worst 30 year period return of the Market was?

That's something FIREcalc can tell you. * Set your withdrawal rate to 0. *It looks like the period from 1903-1932 was the worst. * Ignoring inflation, your $1000 investment in 1903 would have become $4482 in 1932.

Edited to add that that's an annualized return of about 5%. Sort of a savings account with a ton of volatility

The best 30-year period yielded about 13%.

The best 17-year period was the horse most of us rode in on: 1982-1998 at 18%!

[retire@40]

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retire@40 Yup, you are an optimist alright. May I also suggest naive, if you use the average results of the late 1990's as a predicter of your future results. This was a stellar time of returns and to use this as an average you'd have to be a fool.

Looking at the results of the past 10 years (1994 to 2004), the markets have returned 10%. I think most people would agree that's a reasonable return to expect long-term in the stock market. Heck, over the past 28 years, the Vanguard S&P 500 made an average of 12% a year.

[wabmester]

retire@40, if ***** were here he would surely explain to you that the fact that the stock market grew much faster than the economy in the last 30 years is *not* a good thing for the future of the market.

[unclemick]

I tell my niece and nephews(20 yrs minimum to retirement) - keep the faith and DCA on.

For us old pharts in ER - different kettle of fish - stay reasonably diversified, balance income and 'expected' growth, mind the store.

Given the horse I rode in on - that's a balanced index - roughly 60% stocks with a REIT, and dividend tilt.

Not to mention non cola pension, SS in one year and willingness to aggressively frugalize dryer sheet usage to the point of getting out the clothes line if required.

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Looking at the results of the past 10 years (1994 to 2004), the markets have returned 10%. I think most people would agree that's a reasonable return to expect long-term in the stock market.

retire@40,

I think it may be hard to find a single person here that would agree with that statement!

I am planning for a real return *of 3% with a 60/40 stock/bond Portfolio, and there are some folks here that call that wildly optimistic.

Why don't you run FIRECalc with your plan and see if it holds up over the historical returns of the last 120 years or so. I believe that things going forward won't be as bad as 30 periods in our past history. But then again some call me an optimist here

[Jane]

Past performance is not an indicator of future performance.

Although a little good news of the day: US job rate is picking up:

http://www.globeinvestor.com/servlet...0903/wjobs0903

But please, don't increase your SWR as yet...

Jane

[cute fuzzy bunny]

My view is if I I rode in fast on a horse, that horse is tired.

Theres an awful lot of data mining here for comforts sake.

Bottom line is, long term we do have a predictor of stock valuations: the gordon equation. According to it, you can draw a line from one year out 20-30 years and get a result. Short term the real numbers wander back and forth across that line. But eventually the weight of financial mathematics brings it back.

For those who dont want to read the book and do the math, we're WAY above the line right now, which all but assures that during the next 10-20 years we're going to see not only weaker returns but inevitable losses in equities.

Factoring in the greatest bull market in history and glomming another decade onto the back of it and saying the future will be almost as good? Thats not optimistic, thats something else but I'll be nice and not say it.

Oh and Jane, dont go buying the jobs numbers. You know how those work? They get some real data, and then they add what they 'think' the rest of it is based on economic performance data they get from another government division. By the way, that other government division looks good if the economy is reported as doing well, so you can bet theres some data manipulation and mining going on over there.

In essence, the jobs folks say "if the economy is doing well, then small businesses MUST be getting started in response to that economic goodness and other small businesses must be adding people...we dont have a mechanism to count those jobs so we've simply come up with a formula to guess what those are. We stuck that white paper on a link 47 pages down on a web site somewhere, put in an asterisk and a 3 point footnote in one 500 page report, and then we added these numbers to our jobs data and stuck it in a bar chart that makes the jobs numbers look great!. Because they must be because the economy is up!".

Which ignores the opinion that most small business owners and prospective business starters are being very conservative with the current economical situation, and the fact/opinion that many business owners are leveraging our productivity improvements and oursourcing to reduce costs.

My opinion (and its just that) is that our economic upturn was created with credit cards and HELOCs, that the jobs situation is no better than it was 2-3 years ago, and that we're going to see a sliding economic downturn starting later this year and lasting into the end of 2005. Cant guess any further than that.

But lets come back to this in a year and see how good my guess is...

TH,

Oh you're one of those Fricken Pessimists! - Almost as bad as a Communist in the 1950's!

And yes I agree with you

[Marshac]

I had never heard of the gordon model, so I found a good description:

http://news.morningstar.com/doc/arti...hsection=Comm1

As for the jobs report... the nice thing that they always leave out is the fact that it takes 150,000 NEW jobs just to employ the people entering the workforce. :P

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I had never heard of the gordon model, so I found a good description: http://news.morningstar.com/doc/arti...hsection=Comm1 As for the jobs report... the nice thing that they always leave out is the fact that it takes 150,000 NEW jobs just to employ the people entering the workforce. * :P

From the article:

"However, the 4.75% expected return for the S&P 500 is relatively lackluster compensation, which provides even more incentive, in our opinion, for investors to find individual stocks that can outperform the market as a whole. :

Naw, I 've got an easier method. Just go to Las Vegas and ask the man spinning the roulette wheel whether the little ball will land on Red or Black and then bet Accordingly

[cute fuzzy bunny]

Marshac - good hunting, thats a decent explanation of it and what you should expect.

By the way, as explained in "The four pillars of investing", the gordon equation is not only good for the US stock model, it works on just about every prior civilizations "equity market".

Bernstein uses an analogy in the 4 pillars that I like and use often. A man walks a dog from his apartment to the park. The dog runs back and forth during the walk. The mans path is the gordon equation. He's going to the park. He's gonna get there. You can bank on it. The dogs path is the day to day movements of the stock market. Its the speculative (and unpredictable) component of the market. Indexers say they buy the total market and go fishing, and let the gordon equation pay them off over the long haul without worrying about where the dog will go tomorrow.

Make sure you also read this one (which was pointed to from the first article):
http://news.morningstar.com/doc/arti...114455,00.html

Note that they expected return range for the next decade or two (2.1-4.2%) is before inflation, and almost completely consumed by it.

This is what you're going to get, in aggregate, from the broader markets over the next 10-20 years unless PE's go higher (and they're already more than 50% higher than average), or earnings rates accellerate to a rate higher than any time in history.

Now someone needs to jump in and explain how we'll get historic return rates 'because thats the way its always been and the future will be the same', when all the other parameters are banging their heads on levels that have no historic analog.

You're stuck with the paradox of "its not going to be 'different this time' because its going to be different this time." :P

If you buy into the historical mathematical model, you have to buy into what the same models tell you is going to happen going forward.

This is the thing thats bugged me about index investing from the get-go. If you buy into indexes at the point where they're at or below the "gordon line", long term over 20+ years you're going to make a very predictable amount of money. If you buy in above that line, especially if you're well above it, you can count on making nothing or losing money over 20 years.

I think it DOES matter when you get in. Or get out.

But you can wait a long time before seeing results. Clearly the market looked overvalued against the gordon equation in the mid 90's. But it kept going higher. You can lose a lot of money waiting for "the right time".

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Note that they expected return range for the next decade or two (2.1-4.2%) is before inflation, and almost completely consumed by it. This is what you're going to get, in aggregate, from the broader markets over the next 10-20 years unless PE's go higher (and they're already more than 50% higher than average), or earnings rates accellerate to a rate higher than any time in history.

Hey retire@40 - Now here's a pessimist for you *


As far as the Gordon equation, It's probably correct in that no matter what happens the data inputs can be adjusted (mined) to give the proper answer.

This will be done 5 years after the actual results of the market. With of course an annotation of why the adjustments had to be made in light of the economic conditions that have just transpired and how they were 'different' than previous history.

[cute fuzzy bunny]

Its not pessimistic at all, unless you count reality as pessimism!

As far as mining, thats the beauty of the gordon equation. The inputs are all real numbers. Over decade long periods of time its ability to predict returns is quite solid.

Its simply earnings and dividends. Theres no ability to mine anything, exclude anything, or enhance anything. Unless all the companies in the index being analyzed are fudging their earnings.

Now if you believe companies will boost earnings to rates far higher than the highest we've ever seen, that dividend rates will be doubled, or that productivity improvements will be far higher than they've been in the past, then you might see a higher rate of return than that 2-4%. But then you'd have to be saying that its "going to be different this time". Right?

Otherwise, we'll return to the mean and proceed from there. Whether it happens all at once like in 1929, or over 20 years like 1965 and whether it happens next year or ten years from now...well...you'll have to ask the dog.

So TH,

If you really believe what you are saying, why do you have anything invested at all?

Why not get a CD that pays a higher interest rate like ***** and just wait for the correction.

I'm not saying it's not going to happen, I'm saying I have no clue, therefore I am invested.

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A man walks a dog from his apartment to the park. The dog runs back and forth during the walk. The mans path is the gordon equation. He's going to the park. He's gonna get there. You can bank on it. The dogs path is the day to day movements of the stock market. Its the speculative (and unpredictable) component of the market.

Ha, I don't think Bernstein has a dog. My pooch pulls me to the park, then starts the random walk/sniffing, then I have to pull him back home.

[wabmester]

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Note that they expected return range for the next decade or two (2.1-4.2%) is before inflation, and almost completely consumed by it.

I think you misread the part about inflation. They talk about dividend/earnings growth "ignoring inflation." In this context, it means that instead of the 1.25% they used, inflation would bring that up to 4.25% or so.

In other words, those return numbers you're throwing around are "real" rather than "nominal."