Survey - Predict Stock Market Growth Average for next 7 - 10 years

[Gone4Good]

S&P 500 Return Calculator, with Dividend Reinvestment - Don't Quit Your Day Job...

But I assume that having retired at 38 you will likely live another 20 years.
Going back to 1900 I can not find any 20 years with negative inflation adjusted returns.

2% CD after inflation and taxes is pretty much 0% return if you are lucky. If equities earned only
2% they would still be better deal because they have favorable tax status.

Maybe this time it is different

Well, I certainly expect to live longer than 20 years. And I certainly don't expect to own a lot of CDs during most of that time. More than that, I hope I don't need to.

But right now CDs pay above market returns and have an incredibly valuable interest rate put option that I get for almost nothing. I know many folks here are wedded to a set and forget asset allocation (and that's fine) but in the rare instances when I can buy a security that guarantees me above market returns for less risk I like to jump on that.

I don't need to forecast 20-year negative real returns in equities to know that CDs are a good deal today. If in 2 years or even 2 days the market is offering up better options, I'll buy those instead.

It's also probably worth knowing that I'm not managing my finances to earn a hypothetical market return. I'm managing it to earn my withdrawal rate.

And when asset prices rise, my WR falls. Now after 7 years of good market returns, I don't need the same investment performance going forward as I did when I retired. So I need less risk.

It's also true that those 7 years of good market returns have lowered expected future returns on risky assets. So risk today yields less than when I retired.

So here's the punchline: if I need less risk than when I first retired, and if risk earns less today than it did then, what's the argument for wearing the same level of investment risk (or maintaining the same asset allocation) now as I had then?

I can't think of one.

 

[mickeyd]

The family crystal ball was just sent out for annual recalibration. I will have to respond at a later date after it is returned.

 

[nash031]

Well, I certainly expect to live longer than 20 years. And I certainly don't expect to own a lot of CDs during most of that time. More than that, I hope I don't need to.

But right now CDs pay above market returns and have an incredibly valuable interest rate put option that I get for almost nothing. I know many folks here are wedded to a set and forget asset allocation (and that's fine) but in the rare instances when I can buy a security that guarantees me above market returns for less risk I like to jump on that.

I don't need to forecast 20-year negative real returns in equities to know that CDs are a good deal today. If in 2 years or even 2 days the market is offering up better options, I'll buy those instead.

It's also probably worth knowing that I'm not managing my finances to earn a hypothetical market return. I'm managing it to earn my withdrawal rate.

And when asset prices rise, my WR falls. Now after 7 years of good market returns, I don't need the same investment performance going forward as I did when I retired. So I need less risk.

It's also true that those 7 years of good market returns have lowered expected future returns on risky assets. So risk today yields less than when I retired.

So here's the punchline: if I need less risk than when I first retired, and if risk earns less today than it did then, what's the argument for wearing the same level of investment risk (or maintaining the same asset allocation) now as I had then?

I can't think of one.

There isn't a one. So, I think you highlight the major difference between you and I as it pertains to our outlook. You are looking to reduce risk, and safely earn your WR. Thus, taking a less optimistic view of future returns is likely smart; you've won the game and have no real need to keep playing it if you don't want to. Thus, if you project less than 2% nominal, you have better options to earn that return for far less risk.

Me? If I'm projecting a 6% nominal in my accumulation phase or if I'm projecting 2%, it doesn't really matter. I am willing and able to take on more risk (within reason) and aim for 6% nominal, but if I end up with 10% or 1.89% or -5%, I can adjust the timeline and move forward from there.

Sure, I could project 1.89% and move assets around, but that's against my core strategy of minimizing costs and taxes (the things I can really control) while seeking a reasonable return.

 

[eta2020]

There isn't a one. So, I think you highlight the major difference between you and I as it pertains to our outlook. You are looking to reduce risk, and safely earn your WR. Thus, taking a less optimistic view of future returns is likely smart; you've won the game and have no real need to keep playing it if you don't want to. Thus, if you project less than 2% nominal, you have better options to earn that return for far less risk.

Me? If I'm projecting a 6% nominal in my accumulation phase or if I'm projecting 2%, it doesn't really matter. I am willing and able to take on more risk (within reason) and aim for 6% nominal, but if I end up with 10% or 1.89% or -5%, I can adjust the timeline and move forward from there.

Sure, I could project 1.89% and move assets around, but that's against my core strategy of minimizing costs and taxes (the things I can really control) while seeking a reasonable return.

Today people who hold cash equivalents feel comfortable. They shouldn't. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.

Warren Buffett Oct 16, 2008

PS I am sure we have people here who are way better then Buffet getting in and out of equities

 

[Fedup]

But Warren Buffet can lose 99% of his wealth and still be ok, for most of us not. That's why people are nervous. I know a young guy about 50, he sold out in 2014. His sister was down 11% from the peak and will sell into cash the minute she recovers the lost, that's what she told me a few weeks ago.


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[FUEGO]

For projection purposes, I've been using 4-5% real returns for 10+ year periods, so I voted in the 6-8% nominal range but expect closer to 6% rather than 8% unless inflation goes to 3%+.

Along the lines of Gone4Good's analysis. In rough round terms, 2% dividends, 2% earnings growth, 2% inflation = 6% nominal return. In my back of the envelope model I don't change the CAPE or PE ratio.

 

[jim584672]

I don't think post 2008 that any of the "normal" rules apply. I think stocks and bonds are not cheap right now. That doesn't mean they can't go higher.

 

[Corporateburnout]

I know a young guy about 50, he sold out in 2014. His sister was down 11% from the peak and will sell into cash the minute she recovers the lost, that's what she told me a few weeks ago.

And when will they go back in? Do they know? Or will they stay in cash for the duration?

The S&P lost 50% of its value during the great recession but the average return over the 7 years that followed is 15%. I know some people who panicked and sold out and are still waiting to get back in.

In most cases market timing does not work. Establishing an asset allocation based on risk tolerance with some tweaks if needed is a better approach in my opinion.

 

[Fedup]

And when will they go back in? Do they know? Or will they stay in cash for the duration?

The S&P lost 50% of its value during the great recession but the average return over the 7 years that followed is 15%. I know some people who panicked and sold out and are still waiting to get back in.

In most cases market timing does not work. Establishing an asset allocation based on risk tolerance with some tweaks if needed is a better approach in my opinion.

I don't know. I know when I left he was still in cash Dec 15, I hope he got in Feb.



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[eta2020]

But Warren Buffet can lose 99% of his wealth and still be ok, for most of us not. That's why people are nervous. I know a young guy about 50, he sold out in 2014. His sister was down 11% from the peak and will sell into cash the minute she recovers the lost, that's what she told me a few weeks ago.


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That is why one should have few years of spending sitting in cash.

 

[pb4uski]

But Warren Buffet can lose 99% of his wealth and still be ok, for most of us not. That's why people are nervous. I know a young guy about 50, he sold out in 2014. His sister was down 11% from the peak and will sell into cash the minute she recovers the lost, that's what she told me a few weeks ago. ...

I wonder what the sister is in since the index is only down about 5.2% from the peak and that doesn't include dividends.... with dividends I'm guessing it would be down only 3% or so. My diversified portfolio is only down about 1.5% from the peak so 11% is probably a misconception on her part or bad stock picking.

Besides the peak was less than a year ago. No risk... no reward.

 

[eta2020]

I wonder what the sister is in since the index is only down about 5.2% from the peak and that doesn't include dividends.... with dividends I'm guessing it would be down only 3% or so. My diversified portfolio is only down about 1.5% from the peak so 11% is probably a misconception on her part or bad stock picking.

Besides the peak was less than a year ago. No risk... no reward.

S&P 500 Already Hit a Record–If You Count Dividends - MoneyBeat - WSJ

I do not know if this is really true, but S&P is already in record territory if you include dividends. (which are low taxed)

 

[Gone4Good]

Today people who hold cash equivalents feel comfortable. They shouldn't. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.

Warren Buffett Oct 16, 2008

PS I am sure we have people here who are way better then Buffet getting in and out of equities

The fallacies here are three fold: 1) That people who hold cash today will hold cash forever; 2) That after a long bull market that has returned in excess of 200% from it's through that the return distribution of equities going forward is still somehow a random walk around it's historic mean and 3) that the people who bought equities in March 2009 (like me) still somehow need maximum equity risk even after earning ~17% compound annualized returns on equities for the last seven years.

So here's an analogy: you've won a ton of money at the roulette wheel when the manager comes and replaces the existing wheel with one that decreases your odds and potential payouts going forward. Do you keep playing on that wheel because "hey, nobody can predict the future" or do you cash in your chips and look for better odds somewhere or some-when else?

 

[Closet_Gamer]

For projection purposes, I've been using 4-5% real returns for 10+ year periods, so I voted in the 6-8% nominal range but expect closer to 6% rather than 8% unless inflation goes to 3%+.

Along the lines of Gone4Good's analysis. In rough round terms, 2% dividends, 2% earnings growth, 2% inflation = 6% nominal return. In my back of the envelope model I don't change the CAPE or PE ratio.

Inflation is really key here. Otherwise portfolio returns are like knowing how much gas is in the tank but not knowing your MPG.

I've got a portfolio that is 45 stock, 25 bonds and 30 that is in a high interest bearing NQDC plan. (The interest rate on the NQDC plan is higher than the long term returns for stocks and the company has a pristine balance sheet, which is why I'm so far into it. If the company suddenly turned into Enron, be on the lookout for a suicide post...)

When I leave megacorp the NQDC plan will earn prime+1 until each tranche matures over the 7 years following my departure. As the money comes out of the NQDC, I will blend towards a 60/40 AA.

I'm assuming I can earn a 3% real RoR over the next 15 years...which is in the end all that matters.

Curious if people think that's reasonable.

 

[Gone4Good]

Regarding the fallacy that "no one can predict future market returns" we'll go back in time and recall this thread I started on March 7, 2009 a day or two from the ultimate market bottom . . .

As measured by P/E-10 (currently 11.8x), stocks have traded this cheap or cheaper during 10 different periods over the past 100 years. Someone who bought the S&P 500 at the beginning of any of those 10 periods always earned positive returns over the next ten years (with reinvested dividends). Average returns were 11%. The lowest return was 5.8%, earned from October 1931 to September 1941.

So the worst historical 10-year return for stocks bought at current valuations of 5.8% beats money market funds yielding 1%, 10-year treasuries yielding 2.87% and very nearly beats intermediate investment grade corporate bonds yielding 6.11% (for VFICX). Meanwhile median returns for stocks over these 10 periods were close to 10% with the best 10-yr return reaching 18.6%.

SPX returns over the 10 year period immediately following a P/E-10 valuation of 11.8x:

Oct 1946 - Sep 1956 . . . . 18.61%
Sep 1953 - Aug 1963 . . . . 16.04%
Nov 1941 - Oct 1951 . . . . 15.97%
Jul 1974 - Jun 1984 . . . . . 11.97%
Dec 1916 - Nov 1926 . . . . . 9.77%
Apr 1938 - Mar 1948 . . . . . 9.52%
Aug 1934 - Jul 1944 . . . . . . 9.41%
Oct 1907 - Sep 1917 . . . . . 7.54%
Jun 1913 - May 1923 . . . . . 7.17%
Oct 1931 - Sep 1941 . . . . . 5.78%

Many of us have been planning on below average stock returns because of high valuations. Well, those below average returns have already been realized and are now in the rear-view mirror. It's time to start raising your expectations for future returns.

The analysis is no different today. It's the conclusion that's different.

 

[eta2020]

Regarding the fallacy that "no one can predict future market returns" we'll go back in time and recall this thread I started on March 7, 2009 a day or two from the ultimate market bottom . . .



The analysis is no different today. It's the conclusion that's different.

Folks pushed back then. They push back now. I'll keep doing what I'm doing which is working quite well.

That threat was called "Why I'm Not Selling Stocks Now" not "Why I sold before crash and now I am buying"

But look if you possess investing skills that surpass 99.9 of professional money managers then who can argue with you.

Most of us do not possess market timing skills to enter market with days of generational low.

 

[Gone4Good]

That threat was called "Why I'm Not Selling Stocks Now" not "Why I sold before crash and now I am buying"

That is indeed the title. And I admit I didn't buy on that day . . . I bought SPX, mid-cap, small-cap, international equities and REITs on March 2, 2009.

 

[kcowan]

But that includes reinvested dividends and it's not clear whether the question was about Total Returns or the level of the S&P. So the S&P index price growth is probably in the <2% area.

So my response assumed nominal returns (no dividends) not adjusted for inflation. What was the intent?

 

[Gone4Good]

But look if you possess investing skills that surpass 99.9 of professional money managers then who can argue with you.

I don't have the same goals as a professional money manager.

From the lows of 2009 until 2015 generic equity investments generated a compound annual return of around 17%. I now have far more money than I thought I'd have when I retired in 2010. I can bank those gains and live off them for a very, very long time.

A portfolio manager can't do that.

More than that, if next year the market returns -15% and the professional money manager returns -13% that's a huge win for him. I don't see it that way.

Meanwhile, if the market returns 15% and I earn 2%, I'm still sitting pretty. Not so for the money manager.

The way I figure it based on the returns I've already banked even if I go 100% into CDs now, which I'm not doing, my break-even to an 8% equity market return doesn't happen until sometime in 2023. I didn't start my retirement planning on 8% equity returns. So I have a very long window with which to beat my retirement plan return rate. And personally, I don't think it's a huge gamble to bet we'll have another bear market between now and 2023?

I don't measure success the same way a professional money manager does. I'm not sure why I'd use him as a meaningful comp.

 

[eta2020]

And personally, I don't think it's a huge gamble to bet we'll have another bear market between now and 2023?

Not for you because you know how to get into bull market within few days of its start.

But as I said this is not something that many people are capable to do.

 

[Gone4Good]

Not for you because you know how to get into bull market within few days of its start.

But as I said this is not something that many people are capable to do.

I do plan on buying equities (increasing my equity allocation) during the next bear, and selling into the next bull. Doesn't seem that hard. Unless you're saying that no one can predict a bear market that is currently happening.

Incidentally, while I did buy on March 2, my much larger purchases were on October 8th after a weekly drop of 22% and with the S&P off 37% from it's high. The S&P would continue to fall by another 3rd. So no, I didn't catch the bottom perfectly but those October 8th prints are still crazy in the money.

Selling those shares now seems an easy call in comparison to buying them.

But that is the secret, isn't it? No one wants to buy stocks when they've dropped 22% in a single week. And no one wants to sell them after they've returned 17% annually over many years. But that's how I roll.

 

[Fedup]

I wonder what the sister is in since the index is only down about 5.2% from the peak and that doesn't include dividends.... with dividends I'm guessing it would be down only 3% or so. My diversified portfolio is only down about 1.5% from the peak so 11% is probably a misconception on her part or bad stock picking.



Besides the peak was less than a year ago. No risk... no reward.

She's all in index fund. The make up of the index fund is what I'm uncertain. For example, the TSP funds are all index funds but the I and S funds are still down, I think more than 10% if I recall. Only the C is now the same or near the same.


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[Fedup]

The fallacies here are three fold: 1) That people who hold cash today will hold cash forever; 2) That after a long bull market that has returned in excess of 200% from it's through that the return distribution of equities going forward is still somehow a random walk around it's historic mean and 3) that the people who bought equities in March 2009 (like me) still somehow need maximum equity risk even after earning ~17% compound annualized returns on equities for the last seven years.

So here's an analogy: you've won a ton of money at the roulette wheel when the manager comes and replaces the existing wheel with one that decreases your odds and potential payouts going forward. Do you keep playing on that wheel because "hey, nobody can predict the future" or do you cash in your chips and look for better odds somewhere or some-when else?

Exactly. I discover an old Newsweek or Times article in 2006 writing about the bull market that was 4 years long. That may explain why I was in CDs in 2007. Also while I didn't buy at the bottom in March 2009, I didn't lose half to start out with. And the stock market is not the only investments to make money and keep up with inflation. I bought a property in 2012 that has gone up 50% or more from the pile of cash that was earning less than 1%. There are more ways to skin a cat. So effectively my cash was double or more, returning 100%.


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[Fedup]

Regarding the fallacy that "no one can predict future market returns" we'll go back in time and recall this thread I started on March 7, 2009 a day or two from the ultimate market bottom . . .



The analysis is no different today. It's the conclusion that's different.

Yes, tell that to Joe Kennedy before 1929 crash.


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[Fedup]

I do plan on buying equities (increasing my equity allocation) during the next bear, and selling into the next bull. Doesn't seem that hard. Unless you're saying that no one can predict a bear market that is currently happening.

Incidentally, while I did buy on March 2, my much larger purchases were on October 8th after a weekly drop of 22% and with the S&P off 37% from it's high. The S&P would continue to fall by another 3rd. So no, I didn't catch the bottom perfectly but those October 8th prints are still crazy in the money.

Selling those shares now seems an easy call in comparison to buying them.

But that is the secret, isn't it? No one wants to buy stocks when they've dropped 22% in a single week. And no one wants to sell them after they've returned 17% annually over many years. But that's how I roll.

Nobody catches the bottom. Nobody sells at the top. It's delusional(not you) to think so but that doesn't mean one keeps following the mantra you can't time the market successful and dump 100% in the market, especially this is your retired retirement account. If you are still working then you can buy at the dip. But it's not the case for some of us retirees. No more new money.

I did buy at the top in 2008 for some small IRA money and they did recover nicely. But that's small amount, peanuts if you ask me. Maybe I should have the don't care attitude when it comes to stocks.


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