William J. Bernstein on Future Market Returns

[wabmester]

So if inflation creeps up do returns follow suit in a reasonable proportion, or do I need to save for a few more years before pulling the plug?

The only investments that automatically track inflation are those indexed to inflation (TIPS, i-bonds, etc).

Everything else is a crap shoot, but the market does its best to include an estimate of future inflation when it prices securities. Sometimes that estimate is way off, like during the hyperinflationary 70's, and both stocks and bonds suffer when that happens.

 

[bobbee25]

I realize that it isn't automatic nor guarenteed, just trying to get an idea if I am in the ballpark. Too conservative or agressive.
At 5% return with 2.5 inflation or 5.6 - 6 % return with 3% inflation I am in good shape, but is it realistic ?

 

[hocus]

Re: William J. Bernstein on Future Market Returnsu

At 5% return with 2.5 inflation or 5.6 - 6 % return with 3% inflation I am in good shape, but is it realistic?

It sounds to me that what you are asking is whether a take-out number of 2.5 percent above inflation or 3.0 percent above inflation is realistic. It's an easy question if you are invested in an asset class like TIPS that provides a highly predictable income stream. It's not so easy a question to answer if you are invested mostly in stocks, an investment class that provides a highly unpredictable income stream.

One of the big benefits of SWR analysis is to "translate" the unpredictbale income stream of stocks into something that you can count on. It does this by looking at what happens in a worst-case scenario. If your 3 percent take-out would survive the worst returns sequence that we have even seen, it's reasonable to say that your plan is pretty darn safe. There's no such thing as a sure thing, of course. But the number revealed by SWR analysis as "100 percent safe" is safe enough for most people.

There are two approaches to SWR analysis discussed at this forum. There is the conventional methodology approach you see in the study published at RetireEarlyHomePage.com and employed in FIRECalc. And there is the data-based methodology approach being developed and refined at the SWR Research Group board at NoFeeBoards.com. The big difference is that the conventional approach contains no adjustment for changes in valuation levels and the data-based approach does.

The conventional approach says that a 4 percent take-out percentage is "100 percent safe" for those with a 74 percent S&P stock allocation. The data-based approach says that a 2.5 percent take-out percentage is "95 percent safe" for those with an 80 percent S&P stock allocation. So a 2.5 percent take-out appears to be realistic under both approaches, but a 3.0 percent take-out appears to be a little high under the data-based approach. The fact that it is a little high does not mean that it will fail. It means that there is at least one historical sequence in the record which would cause it to fail if it happened to pop up in your retirement.