Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Old 05-08-2021, 03:02 PM   #21
Moderator
braumeister's Avatar
 
Join Date: Feb 2010
Location: Flyover country
Posts: 21,716
Ever since I started making projections about my future finances, a long time ago, I've always used an estimated 2% real (over inflation) return. That has turned out to be very conservative.
__________________
I thought growing old would take longer.
braumeister is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 05-08-2021, 04:11 PM   #22
Thinks s/he gets paid by the post
 
Join Date: Dec 2015
Posts: 1,106
I'm of the opinion that the next decade will be nothing at all like the previous one.

US stocks by all measures are at least 2X over-valued. Bonds are of course being pressured by rising rates. And cash is near zero nominal and returning negative real. Aside from that, it's all good

Sure, the equities party might continue..for a while. But at some point (likely quite soon, IMHO), the appetite for risk is going to change - and when it does, it's not likely to be pretty (as in, 50+% drawdown, or as advisors often say "asset repricing" to revert to mean valuations).

Here's a really good article with some excellent historical perspective and very well-reasoned analysis on likely near term outcomes. While "no-one knows nuttin", the signs are blazing thermonuclear neon for any of us who are looking at things objectively and in terms of traditional market valuations.

https://www.advisorperspectives.com/...llapse-is-near

An interesting and relevant excerpt nets out just how bad things could get in the next decade or two..

The long timeframe of this chart belies just how hard the bad periods were. Period 3, the Great Depression and WWII, lasted 19.8 years with no real return (-0.5% annualized) and a paltry nominal return of 1.2% annualized. In those 20 years, there were three serious drawdowns; -79%, -50%, and -49%. Period 5, the 1960s and 1970s, lasted 16.3 years and lost 1.7% annualized real return. There were four major drawdowns; -18%, -36%, -52%, and -27%. Period 7, the dot-com and housing bubbles, was shorter at 8.5 years but lost 8.8% annualized real and had two major drawdowns: -47% and –52%. Despite these drawdowns eventually being recovered, they were severe enough to tempt selling at the wrong time and not experiencing the recovery.

Not to be a negative nelly, but I do truly believe the days of 8+% or even 5+% returns are long behind us for at least the next decade if not longer. Much more likely is a period where those of us in ER need to focus on capital preservation vs capital growth. YMMV, but JMHO.

Personally, I'm liking Gold and Inflation Protection assets..and foreign markets with much lower P/Es than the US. Especially foreign value and Asia Pac. And in Fixed Income, Floating Rate funds..sure..I'm not going to beat those investing in TSLA, AMZN, Bitcoin, etc..but my primary goal is to avoid the 50+% downdraft that I strongly believe is likely in 2021 or early 2022 at latest, not to outperform my neighbor investing in the latest hot stocks, crypto or funds..
24601NoMore is offline   Reply With Quote
Old 05-08-2021, 04:18 PM   #23
Thinks s/he gets paid by the post
 
Join Date: Sep 2012
Location: Seattle
Posts: 4,852
Stocks are not overvalued 2x if inflation gets to 100% over the next decade. That is only something like 7% per year.
Fermion is offline   Reply With Quote
Old 05-08-2021, 04:43 PM   #24
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 32,288
After 20 years in retirement I just take it year by year. Our investment strategy hasn't changed. Our portfolio has really grown. Meanwhile we get older each year......

When our net worth keeps up with inflation, I feel like I've won the lottery!!!!
__________________
Retired since summer 1999.
audreyh1 is online now   Reply With Quote
Old 05-08-2021, 05:27 PM   #25
Thinks s/he gets paid by the post
 
Join Date: Dec 2015
Posts: 1,106
Quote:
Originally Posted by Fermion View Post
Stocks are not overvalued 2x if inflation gets to 100% over the next decade. That is only something like 7% per year.
Not sure I follow. Inflation causes increases in company costs (labor, materials), which reduces EPS. If stock prices were to remain constant OR rise in that scenario, P/E ratios would become even further stretched than they already are. And by all measures - CAPE 10, Buffet ratio and many others, we're sitting at least at 2X+ "normal" at these levels.

Curious to hear more on how inflationary pressures are good for stock valuations, especially compared to historical levels. Maybe I'm just missing something..
24601NoMore is offline   Reply With Quote
Old 05-08-2021, 05:46 PM   #26
Thinks s/he gets paid by the post
 
Join Date: Sep 2012
Location: Seattle
Posts: 4,852
Quote:
Originally Posted by 24601NoMore View Post
Not sure I follow. Inflation causes increases in company costs (labor, materials), which reduces EPS. If stock prices were to remain constant OR rise in that scenario, P/E ratios would become even further stretched than they already are. And by all measures - CAPE 10, Buffet ratio and many others, we're sitting at least at 2X+ "normal" at these levels.

Curious to hear more on how inflationary pressures are good for stock valuations, especially compared to historical levels. Maybe I'm just missing something..
Companies pass on the costs to consumers eventually. The dollar buys less, the E in P/E goes up, even if that E can't buy as much as it used to, the P/E number goes down.

And there is obviously demand there, even at the higher prices. Look at lumber...people are willing to pay 300% inflation in just one year....you think they won't still buy toilet paper if it costs 10% to 15% more?
Fermion is offline   Reply With Quote
Old 05-08-2021, 06:28 PM   #27
Thinks s/he gets paid by the post
 
Join Date: Dec 2015
Posts: 1,106
Quote:
Originally Posted by Fermion View Post
Companies pass on the costs to consumers eventually. The dollar buys less, the E in P/E goes up, even if that E can't buy as much as it used to, the P/E number goes down.

And there is obviously demand there, even at the higher prices. Look at lumber...people are willing to pay 300% inflation in just one year....you think they won't still buy toilet paper if it costs 10% to 15% more?
Econ 101, and "Price In-elasticity". At a certain point, consumers will not pay the increased cost. For instance - I was looking to build a new retirement house. NO WAY I'm paying the current ridiculous lumber prices. So we're staying put in our current house.

And companies don't always just pass along their higher costs to consumers - because they have competition seeking to keep THEIR prices lower to win more marketshare. Econ 101 again. Another example - I went to buy mulch the other day. Supplier wanted too much to deliver (a ridiculous amount) because their labor and gas costs increased. I cancelled that order and found a different supplier who wasn't attempting to pass those costs along to me.

And I really don't see how the "E" in P/E goes UP when there's inflation. Someone will need to explain that one to me.

Historically, inflation is an equity price killer that causes - as they say, "asset repricing" (ie: crash).

I'm sitting at < 25% equities, a large part of which is international vs US. Sure, I'll miss out on the party to the upside - but my downside is very limited also. And I DO think the next decade is going to very painful for US equity holders. Guess we will see. (FWIW, I'm actually considering liquidating a big part of my remaining stock portfolio and moving mostly to cash. Sure, I'll "lose" 2-3% this year sitting on the sidelines. But I plan to buy US equities again at a LOT lower price that's more in line with historical average valuations - because equities ALWAYS revert to the mean valuations..eventually. Will that be 2021, 2022 or some other time? Hard to say, but I'm pretty confident it will be in 2021 or early 2022 at the latest for a whole host of reasons, not the least of which is that valuations are artificially super inflated at the moment largely due to Fed pumping and TINA..that's gonna wear off at some point. And when it does, it's not gonna be pretty as people stampede to the exits..).
24601NoMore is offline   Reply With Quote
Old 05-08-2021, 06:38 PM   #28
Thinks s/he gets paid by the post
 
Join Date: Sep 2012
Location: Seattle
Posts: 4,852
I guess I don't understand why earnings would not go up.

Say you have XYZ corp who uses energy and copper to make whirlygigs, which they sell for $10 each, making a 10% profit on each sale. This 10% is low enough that nobody else wants to get into the whirlygig business.

Now copper goes up 50% and they raise the price to $12 each, still making 10%...and it is still not worth it for anyone else to get into the same business because they would also have to pay more for copper.

But the company earnings have gone from $1 each whirlygig to $1.20 per whirlygig. Assuming wages stay the same and the demand for whirlygigs stays the same, they have increased earnings 20%.

I mean yeah, it is not this simple and I agree at some point people will stop buying whirlygigs but I don't think we are there yet, especially when you give everyone $5,000 free each year in whirlygig coupons from uncle sam.
Fermion is offline   Reply With Quote
Old 05-08-2021, 06:46 PM   #29
Thinks s/he gets paid by the post
 
Join Date: Sep 2012
Location: Seattle
Posts: 4,852
Here is a real world example. Boise Cascade has had the E portion of their P/E go way way up due to inflation of wood products. The market has rewarded the stock with a similar increase.

Even Buffett said his companies are going to be passing the costs along to the consumer this year with a 10% or more increase in product costs. You think he is not going to be increasing the E portion?
Attached Images
File Type: jpg income.jpg (147.7 KB, 52 views)
File Type: jpg bccstock.jpg (29.0 KB, 49 views)
Fermion is offline   Reply With Quote
Old 05-08-2021, 08:08 PM   #30
Moderator Emeritus
aja8888's Avatar
 
Join Date: Apr 2011
Location: The Woodlands, TX
Posts: 15,982
Quote:
Originally Posted by Fermion View Post
I guess I don't understand why earnings would not go up.

Say you have XYZ corp who uses energy and copper to make whirlygigs, which they sell for $10 each, making a 10% profit on each sale. This 10% is low enough that nobody else wants to get into the whirlygig business.

Now copper goes up 50% and they raise the price to $12 each, still making 10%...and it is still not worth it for anyone else to get into the same business because they would also have to pay more for copper.

But the company earnings have gone from $1 each whirlygig to $1.20 per whirlygig. Assuming wages stay the same and the demand for whirlygigs stays the same, they have increased earnings 20%.

I mean yeah, it is not this simple and I agree at some point people will stop buying whirlygigs but I don't think we are there yet, especially when you give everyone $5,000 free each year in whirlygig coupons from uncle sam.
Sooner or later, we will have wage inflation. That will raise manufacturer's costs, big time.
__________________
Everyone has a plan until they get punched in the mouth...philosopher Mike Tyson
aja8888 is offline   Reply With Quote
Old 05-08-2021, 08:21 PM   #31
Thinks s/he gets paid by the post
 
Join Date: Sep 2012
Location: Seattle
Posts: 4,852
Quote:
Originally Posted by aja8888 View Post
Sooner or later, we will have wage inflation. That will raise manufacturer's costs, big time.
But that will only lead to more price inflation as people have more money to spend.

Short term, I get it, the market won't like a spike in inflation. Long term though Apple will just sell the I-phone for $1400 each instead of $800.
Fermion is offline   Reply With Quote
Old 05-08-2021, 08:35 PM   #32
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
NW-Bound's Avatar
 
Join Date: Jul 2008
Posts: 33,393
In the past, during periods of high inflation the stock market return just could not keep up with inflation. Wages did.

This means that during high inflation, workers earning wages did better than retirees living on fixed income or investments.

The following chart shows that in the period of 1966-1982, the stock return was -59% after inflation. That means after 16 years, you had 41c on the dollar. And that is if you did not withdraw anything!


PS. I don't remember what investment/retirement guru has said this, and I will paraphrase. "Inflation is an efficient method to redistribute wealth from investors to workers".



__________________
"Old age is the most unexpected of all things that happen to a man" -- Leon Trotsky (1879-1940)

"Those Who Can Make You Believe Absurdities Can Make You Commit Atrocities" - Voltaire (1694-1778)
NW-Bound is online now   Reply With Quote
Old 05-08-2021, 08:41 PM   #33
Thinks s/he gets paid by the post
USGrant1962's Avatar
 
Join Date: Dec 2016
Location: DC area
Posts: 2,084
Quote:
Originally Posted by NW-Bound View Post
In the past, during periods of high inflation the stock market return just could not keep up with inflation. Wages did.

This means that during high inflation, workers earning wages did better than retirees living on fixed income or investments.

The following chart shows that in the period of 1966-1982, the stock return was -59% after inflation. That means after 16 years, you had 41c on the dollar. And that is if you did not withdraw anything!

Yes, and FWIW this is the case where the 4% rule didn't work by a smidge. ~3.6% did.
__________________
FI and Semi-ER March 24, 2017
Consulting to stay engaged

"All models are wrong, some are useful." - George Box
There is always a well-known solution to every human problem: neat, plausible, and wrong.” - H.L. Mencken
USGrant1962 is online now   Reply With Quote
But, Should We Really Expect Lower Returns Going Forward?
Old 05-08-2021, 09:03 PM   #34
Thinks s/he gets paid by the post
Markola's Avatar
 
Join Date: Nov 2013
Location: Twin Cities
Posts: 3,274
But, Should We Really Expect Lower Returns Going Forward?

All I know for sure is that, “going forward”, however one defines such a period, some things are going to zig while others zag, which is why I try to own a little of everything all over the world.
Markola is offline   Reply With Quote
Old 05-08-2021, 09:59 PM   #35
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 32,288
Equity market PE multiples tend to shrink when interest rates go up.
__________________
Retired since summer 1999.
audreyh1 is online now   Reply With Quote
Old 05-08-2021, 11:19 PM   #36
Thinks s/he gets paid by the post
 
Join Date: Aug 2016
Location: Northern Virginia
Posts: 4,834
Quote:
...1966-1982, the stock return was -59% after inflation...
Yes. and the reason stocks did poorly? Rising interest rates. Interest rates are the most powerful driver of equity values. S&P 500 earnings grew 7% annully but PEs were cut in half.

A cautionary example.
Montecfo is offline   Reply With Quote
Old 05-09-2021, 04:30 AM   #37
Thinks s/he gets paid by the post
DrRoy's Avatar
 
Join Date: Dec 2015
Location: Michigan
Posts: 3,944
Quote:
Yeah, I plan for lower returns. I just hope they aren’t negative!
+1
__________________
"The mountains are calling, and I must go." John Muir
DrRoy is offline   Reply With Quote
Old 05-09-2021, 06:14 AM   #38
Full time employment: Posting here.
 
Join Date: Oct 2015
Posts: 801
Quote:
Originally Posted by audreyh1 View Post
After 20 years in retirement I just take it year by year. Our investment strategy hasn't changed. Our portfolio has really grown. Meanwhile we get older each year......

When our net worth keeps up with inflation, I feel like I've won the lottery!!!!
^This is probably the simplest way to measure a "win" year after year, provided of course, you have not sacrificed your desired spending habits during any given year due to being consumed with seeing your pot grow. If a retiree can 1) spend year after year as planned, and 2) see his pot keep up with inflation (at least over some reasonable period), then I would say he/she has "won the game"!

On another note, I am starting to warm up to your concept of banking any excess annual withdrawal that is not spent as opposed to reinvesting it in the annual portfolio rebalance. Mentally, one more lever to pull in a down market to plug a hole!
DawgMan is offline   Reply With Quote
Old 05-09-2021, 06:33 AM   #39
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Midpack's Avatar
 
Join Date: Jan 2008
Location: NC
Posts: 18,625
So what’s the best course of “action” to maximize returns and avoid losses? I don’t get the need to point out hazards without thoughtful recommendations…
__________________
No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57

Target AA: 50% equity funds / 30% bonds / 20% cash
Target WR: Approx 2.5% Approx 20% SI (secure income, SS only)
Midpack is online now   Reply With Quote
Old 05-09-2021, 06:46 AM   #40
Full time employment: Posting here.
 
Join Date: Oct 2015
Posts: 801
Quote:
Originally Posted by Midpack View Post
So what’s the best course of “action” to maximize returns and avoid losses? I don’t get the need to point out hazards without thoughtful recommendations…


Not sure who this is directed to? My initial observation basically made the argument to stay the course, but perhaps arbitrarily handicap your expected returns going forward. Not sure what you mean by "thoughtful recommendations"?
DawgMan is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
What can we expect in returns street FIRE and Money 23 03-30-2017 06:18 AM
Buffett: Don't expect returns over 7% over next century cardude FIRE and Money 84 03-07-2008 05:30 PM
Diversifying Doesn't Lower Risk, But It Does Lower Potential Gain justin FIRE and Money 44 11-05-2005 05:16 PM

» Quick Links

 
All times are GMT -6. The time now is 01:47 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2022, vBulletin Solutions, Inc.