Best Mixed Portfolio?

[wildcat]

I would rely more on expected whole market returns rather than size/style if I were to plug n' chug numbers for FIRE success/failure. If you look at historical equity returns in developed countries, the 7% is a pretty good estimate for the whole market equity returns.

[Sam]

Originally Posted by wildcat

If you look at historical equity returns in developed countries, the 7% is a pretty good estimate for the whole market equity returns.

How did you come up with that 7%. Do you have a link?

[wildcat]

Originally Posted by Sam

How did you come up with that 7%. Do you have a link?

Bernstein of course and he has all of the studies you want in his books:

Basically: 7% returns - 3% inflation = 4% real

Do you want the link to Bernstein's website?

I can try to find the link for the world stock returns if you want. Australia was tops IIRC and I believe US was 3rd. But all and all, most were right around that 7% mark on average.

[Sam]

Yes please. I'd like to see the world stock return link.

I'm not questioning your (or Bernstein) 7% number. I would like to know what exactly is the definition of "whole market equity".

Personally, when I think of the US equity market, I think of SP500. And I know that SP500 returns is MUCH higher than 7%.

[wildcat]

Originally Posted by Sam

Yes please. I'd like to see the world stock return link.

I'm not questioning your (or Bernstein) 7% number. I would like to know what exactly is the definition of "whole market equity".

Personally, when I think of the US equity market, I think of SP500. And I know that SP500 returns is MUCH higher than 7%.

Whole market, to me, is the Wilshire 5000 or similarly the Total Market Index (like the one offered by Vanguard). Yes, the S&P weighs heavily on the returns.

As far as the S&P 500 returns being much higher than 7%, well you may have a point but it depends on how you look at things. If you strip out the bull market that has really been going on since the early 90s, that changes the numbers -- without looking, probably from a much higher than 7% return to a much closer to 7% return. Go back further and look at returns. Bernstein's book does a great job of this. Mean reversions always seem to show up along the way, especially when we are counting on the high returns we get so used to.

You might like this article he wrote on those long-term asset allocations:

http://www.efficientfrontier.com/ef/497/lonely.htm

It will take me a while to find a link for the world returns but I am free of charge

[Sam]

Wildcat,

From January 1926 through December 2006 the annualized total return for the S&P 500 was 10.50% per year, up from the annualized 10.44% rate in September 2006.

The quote is at the bottom of this page.

Standard & Poor's - (us,en)

[twaddle]

I think Wildcat is referring to the Gordon Equation, which predicts future returns based on the current dividend yield and historic dividend (or earnings) growth.

It's similar to the idea of using current bond yields to predict future bond returns, which of course is a much better indicator than historic performance.

[Sam]

Originally Posted by twaddle

It's similar to the idea of using current bond yields to predict future bond returns, which of course is a much better indicator than historic performance.

Did you forget the sarcasm emoticon? Some people might think you're serious.

[twaddle]

Originally Posted by Sam

Did you forget the sarcasm emoticon? Some people might think you're serious.

Heh. Think of it this way. If you want to predict the future speed of a car, which is a better indicator?

1) The past speed of the car

2) The current speed of the car

Future returns are a function of future growth and current yield. We can only guess at future growth, but we know current yield.

[wildcat]

You asked for it , everything you could possibly want to play with:

Global Financial Data

Scroll down (includes the effects of changes in currency):
http://forum.london.edu/lbspress.nsf...IRY+2006-1.pdf

Ok how about 1871, Schiller's US market returns since 1871 - not 1926?

Online Data

A good book at the library:

Amazon.com: Triumph of the Optimists: 101 Years of Global Investment Returns: Books: Elroy Dimson,Paul Marsh,Mike Staunton

I know about the 10% returns Sam. But again, strip out certain periods of HUGE returns and the numbers change. How much of that 10% could be the result of the past 16 years? A 16 year bull market is incredible. I think that was the point I was trying to make. Minus the HUGE returns following the Great Depression when they were giving away stocks, how do things look?

Food for thought:
Historical Stock Returns, Stocks/Shares/Equities Return, Performance, Data, Bond, Bonds, Dow, Nasdaq, S&P, Standard & Poors, NYSE, FTSE, Nikkei, Historic, ISEQ Irish Index, Gold Price/Market, 10, 20, 50, 100 year : from Finfacts Ireland

"So the timing of stock market investment is important. The last protracted bear market (period of falling prices) in US equities started in February 1966 and lasted until August 1982. The Dow Jones index value in February 1966 was 995 and 16 years later it stood at 777. So any investor who stayed fully invested in an average portfolio of shares in this period lost 22%. Yet over this time span there were four periods in which equities experienced strong rallies which boosted the Dow by 32%, 66%, 76% and 38% respective"

Hope that helps.

[wildcat]

Maybe we should move this to FIRE & Money. Might be good to make this discussion more visible.

[Sam]

Thanks wildcat for the links. I will take a look at them.

Originally Posted by wildcat

I know about the 10% returns Sam. But again, strip out certain periods of HUGE returns and the numbers change. How much of that 10% could be the result of the past 16 years? A 16 year bull market is incredible. I think that was the point I was trying to make. Minus the HUGE returns following the Great Depression when they were giving away stocks, how do things look?

I fail to understand your logic here. Why stripping out any periods at all? We are looking at past numbers which together give us an overall picture. If we begin to pick and choose, then we might as well not studying the past at all.

[wildcat]

Originally Posted by Sam

Thanks wildcat for the links. I will take a look at them.



I fail to understand your logic here. Why stripping out any periods at all? We are looking at past numbers which together give us an overall picture. If we begin to pick and choose, then we might as well not studying the past at all.

My logic is we are used to fantastic returns and the returns going forward could potentially look like some of those periods. So while we plug away at our spreadsheets, say we are planning and have 15 years to go, we have a return variable. Our results and our ability to FIRE depend on that return variable and then suppose a prolonged crappy market comes along -- everything changes. I guess my point is use the 7% but understand that the period you need those 7% returns may turn out to be very different, hopefully for the better

[Sam]

So you basically pick that 7% number out of thin air. Why not 4%? Why not 15%? Any of those number can be supported in a "certain" period in the past.

[wildcat]

Given that we have been on the upper echelon of returns for 16 years, I think it is wise to fly low. No, I don't pull the 7% out of thin air. It is based on the Gordon model and what other developed markets have achieved over very long periods of time. But go with what you are comfortable with, just trying to provide a 2nd opinion.

[Sam]

Originally Posted by wildcat

Maybe we should move this to FIRE & Money. Might be good to make this discussion more visible.

I missed this suggestion. Please feel free to move it to where you think is most appropriate.