But, Should We Really Expect Lower Returns Going Forward?

[Markola]

I’m still waiting for someone to define “going forward.” Is that the next 18 months, 3 years, 5 years, 10 years, 20 years or forever? Admittedly, I’m of the persuasion that “Nobody knows nothin’” when it comes to predicting systems as complex as the global economy.

 

[NW-Bound]

I would not be greatly scared of a extended market drop. The current method of dealing with a downturn in the market is to dump money everywhere, which does seem to work pretty well.

10%, 20% drop, yeah, but 50% drop will always be a V with trillions of dollars pouring in during the right side of the V. There can be no other way now without a collapse of US society.

Inflation eating away though is where my concerns are. You can lose 50% of your purchasing power and not even realize you are being boiled.

A quick drop of the market will spur "helicopter money", as happened already twice in the last 20 years. Actually, it was not the market that prompted such action, but the horrendous shock to the economy. And there was really no alternative, although some may deny it.

A slow and steady inflation is really something else. As mentioned earlier, wages will generally keep up. Workers will be compensated for their effort. Investors, the rich fat cats on the other hand, will not have so much sympathy (and do they deserve it? ). That is what a retiree living on his investment needs to think about.

What can one do about it?

As USGrant1962 pointed out earlier, FIRECalc shows that a 3.6%WR would still succeed for that terrible inflationary period of 1966-1982. Success here means one would have enough to exactly die broke after 30 years.

Cut it down to 3%WR or less, and you will be OK. Throw in some SS, and you will not eat cat food. Simple!

 

[FREE866]

I have no idea what will happen in the future , but the fact that most people seem convinced we are going to see lower returns in the next 10-20 years tells me we probably won't haha



The most important consideration is your investment time frame ( not your age). A 60 year old today in decent health, barring a tragedy, has a very good chance at a 20-30 year + time horizon. That is a really long time. If you want or need growth you will want stocks as a high % of your AA. Cash flow needs and your own mental tolerance for volatility is a factor as well.

 

[38Chevy454]

I would not be greatly scared of a extended market drop. The current method of dealing with a downturn in the market is to dump money everywhere, which does seem to work pretty well.

10%, 20% drop, yeah, but 50% drop will always be a V with trillions of dollars pouring in during the right side of the V. There can be no other way now without a collapse of US society.

Inflation eating away though is where my concerns are. You can lose 50% of your purchasing power and not even realize you are being boiled.

Agree with the whole post above,l but especially the last sentence I bolded to point out. Inflation is the unfortunate consequence we are already starting to experience and I fear will become more of a factor in future. Gov't spending huge amounts on what seems like everything is only making it worse; far more than just the Fed quantitative easing as regarding propping up the markets.

 

[Alex The Great]

Rental properties is an absolute hedge against inflation. As mentioned above wages will always keep up with inflation, so raising the rent would be the way to beat it. But some work is involved, for sure. What do you think?

 

[24601NoMore]

The fabric of society is more woven into the market now than in the past so you cannot use the past history as an indicator of what might happen. A 50% drop without a recovery destroys local and state economies and creates a problem for people who need to get elected.

I mean anything *can* happen, I just think anything but a V shaped recovery is unlikely now.

But going forward, I do think we will get lower *real* returns, getting back to the OP. I think we might get 5% to 10% a year in the market but experience 5% to 8% of inflation each year as well.

There's no reason whatsoever to think "this time will be different" in terms how long it could take to recover from a 30-50% drop. Markets aren't controlled by politicians, and if FedGov continues to do the sorts of things that have been done lately (ie: flooding the system with cash) in an attempt to influence market recovery, that's only likely to make things worse - potentially a LOT worse.

So back to the original question..I do think we should expect lower returns going forward than we've seen this past decade. My own plan in fact ASSUMES this will happen, because it's just basic math. A 30-50+% drop that many pretty smart folks are expecting near-term (next 12-18 months) pretty much guarantees lower total returns over the next decade, unless you're prescient or lucky enough to pull off some good market timing and avoid the meltdown..

US equity valuations by all normal measures are at least 2X "typical". That simply can't - and won't - last as corporate earnings don't support the multiples we're seeing almost across the board (aside from perhaps Value stocks). Eventually, the party is going to end. And when it does, it's probably going to start a stampede like we haven't seen in a very long time..maybe even on the order of 1929 bad. Guess it all comes down to one's own comfort level as to whether that is likely to happen or not. I'm pretty confident in a 30-50+% drop over the next 12-18 months so am acting accordingly on my own investment strategy. But others may reach a different conclusion. If so, that's fine - but whatever conclusion one reaches should be based on hard data and the hard data at this point (eg: current S&P P/E of 37.89 [!!] vs historical average of ~19.4) is not pointing to things continuing and the greater likelihood, IMHO, is a reversion to mean - or perhaps an overshoot to the downside since psychology and group think tend to take over when something like that does start..

 

[Out-to-Lunch]

You know, there are two ways for P/E to normalize...

 

[Midpack]

There's no reason whatsoever to think "this time will be different" in terms how long it could take to recover from a 30-50% drop. Markets aren't controlled by politicians, and if FedGov continues to do the sorts of things that have been done lately (ie: flooding the system with cash) in an attempt to influence market recovery, that's only likely to make things worse - potentially a LOT worse.

So back to the original question..I do think we should expect lower returns going forward than we've seen this past decade. My own plan in fact ASSUMES this will happen, because it's just basic math. A 30-50+% drop that many pretty smart folks are expecting near-term (next 12-18 months) pretty much guarantees lower total returns over the next decade, unless you're prescient or lucky enough to pull off some good market timing and avoid the meltdown..

US equity valuations by all normal measures are at least 2X "typical". That simply can't - and won't - last as corporate earnings don't support the multiples we're seeing almost across the board (aside from perhaps Value stocks). Eventually, the party is going to end. And when it does, it's probably going to start a stampede like we haven't seen in a very long time..maybe even on the order of 1929 bad. Guess it all comes down to one's own comfort level as to whether that is likely to happen or not. I'm pretty confident in a 30-50+% drop over the next 12-18 months so am acting accordingly on my own investment strategy. But others may reach a different conclusion. If so, that's fine - but whatever conclusion one reaches should be based on hard data and the hard data at this point (eg: current S&P P/E of 37.89 [!!] vs historical average of ~19.4) is not pointing to things continuing and the greater likelihood, IMHO, is a reversion to mean - or perhaps an overshoot to the downside since psychology and group think tend to take over when something like that does start..

OK, you’ve painted the picture. Forgive me if I missed it but what do you recommend we all do? How have you positioned your assets?

There have already been hundreds of posts pointing out stocks are relatively expensive, bond yields can only go up which lowers fund NAVs and cash has been returning next to nothing for quite a while. Most here are well versed on market history & behavior. Tell us something we don’t know…

 

[disneysteve]

OK, you’ve painted the picture. Forgive me if I missed it but what do you recommend we all do? How have you positioned your assets?

I'd love to hear people's answers to these questions. Are any of you changing anything? Have you altered your AA? Have you sold off any greatly appreciated stock, and if so where did you park the money?


The only recent move we made was donating some appreciated stock to our synagogue. Our cost basis was very low as it was a stock that had been a 2nd generation spin off from 2 other companies so our cost was a couple of dollars per share and it is now over $60/share. I figured that slightly lowered our equity position and saved us a few hundred in taxes. It wasn't enough to move the needle on our AA though.

 

[24601NoMore]

OK, you’ve painted the picture. Forgive me if I missed it but what do you recommend we all do? How have you positioned your assets?

Well, I wouldn't presume to make recommendations to anyone as I don't have insight into anyone else's goals, AA, expenses or financial position. That said, I do think answering the question of "should we expect lower returns going forward" can only logically be done by looking objectively at current valuations which then leads to a "probably so (at least over the next decade or so)" answer to the original question..

In terms of my own strategy (FWIW and YMMV)..I've reduced equity exposure to ~25% of total portfolio value. Of that, roughly 1/3 is in Internationals with a heavy tilt to International Value. Also increasing AsiaPac and US Value exposure where I can find much more attractive PE ratios.

I've also bought Inflation Protection assets, a Gold ETF, REITs and a very flexible PIMCO fund that is a "go anywhere" Inflation Response fund that can hold TIPS, Emerging Markets Currency, Gold, Real Estate and similar assets. (My thinking on that one is to let the PIMCO experts - all of who are far smarter than me, determine what the right mix of inflation protection assets may be as inflation increases).

In terms of Fixed Income, I've increased exposure to short duration bond funds and have considered dialing back my longer duration funds, knowing that they're going to get hammered as rates go up.

All that said, I realize others may have totally different goals and none or little of this may be of help to anyone else's unique situation, but since you asked ..it's also worth mentioning that I'm not looking to run up the score at this point, but instead to fund ER with the lowest possible amount of risk that I can take, as a big drawdown is not something I want to go through at this point. Someone who wants to leave assets to others after death, or live more extravagantly than us in ER may have different goals and a need to take significantly more risk. All comes down to what you're trying to accomplish..

ETA - an AA that's heavy on US equities (especially Large Growth) is likely going to crush what I described above..at least in the short term until things eventually "reprice". But I'm looking to minimize risk and comfortably pay the bills, not shoot for the moon in terms of total returns or capital appreciation. And in the long run, the diversification I've described should achieve exactly that although there are of course no guarantees..lastly, on the topic of "don't take more risk than you NEED", there was a great piece (which I've posted before) by Rick Ferri originally published in Forbes where he makes a strong case that the "center of gravity" for retirees or those approaching retirement is a roughly 30/70 AA, although that can be dialed up or down based on individual circumstances and need..FWIW..https://www.forbes.com/sites/rickfe...nter-of-gravity-for-retirees/?sh=100e5e85dae9.

 

[FREE866]

Well, I wouldn't presume to make recommendations to anyone as I don't have insight into anyone else's goals, AA, expenses or financial position. That said, I do think answering the question of "should we expect lower returns going forward" can only logically be done by looking objectively at current valuations which then leads to a "probably so (at least over the next decade or so)" answer to the original question..

In terms of my own strategy (FWIW and YMMV)..I've reduced equity exposure to ~25% of total portfolio value. Of that, roughly 1/3 is in Internationals with a heavy tilt to International Value. Also increasing AsiaPac and US Value exposure where I can find much more attractive PE ratios.

I've also bought Inflation Protection assets, a Gold ETF, REITs and a very flexible PIMCO fund that is a "go anywhere" Inflation Response fund that can hold TIPS, Emerging Markets Currency, Gold, Real Estate and similar assets. (My thinking on that one is to let the PIMCO experts - all of who are far smarter than me, determine what the right mix of inflation protection assets may be as inflation increases).

In terms of Fixed Income, I've increased exposure to short duration bond funds and have considered dialing back my longer duration funds, knowing that they're going to get hammered as rates go up.

All that said, I realize others may have totally different goals and none or little of this may be of help to anyone else's unique situation, but since you asked ..it's also worth mentioning that I'm not looking to run up the score at this point, but instead to fund ER with the lowest possible amount of risk that I can take, as a big drawdown is not something I want to go through at this point. Someone who wants to leave assets to others after death, or live more extravagantly than us in ER may have different goals and a need to take significantly more risk. All comes down to what you're trying to accomplish..

ETA - an AA that's heavy on US equities (especially Large Growth) is likely going to crush what I described above..at least in the short term until things eventually "reprice". But I'm looking to minimize risk and comfortably pay the bills, not shoot for the moon in terms of total returns or capital appreciation. And in the long run, the diversification I've described should achieve exactly that although there are of course no guarantees..lastly, on the topic of "don't take more risk than you NEED", there was a great piece (which I've posted before) by Rick Ferri originally published in Forbes where he makes a strong case that the "center of gravity" for retirees or those approaching retirement is a roughly 30/70 AA, although that can be dialed up or down based on individual circumstances and need..FWIW..https://www.forbes.com/sites/rickfe...nter-of-gravity-for-retirees/?sh=100e5e85dae9.

I pretty much disagree with everything you said here , but thats OK


Just to point out a couple things....


With the S and P at 4235 and the IBES consensus at 190 for this year that puts the PE at 22 not 37 as you claim. Big difference. 2022 earnings are more important and those estimates are higher as well. Markets look forward not backward. Regardless, PE's are not predictive at all and history has shown us that.



That article you posted is from 2015 where he recommends a 30% equity allocation which , in hindsight, was horrific advice. As I said in earlier post, it depends on your investment time horizon. For me, trying to predict draconian decreases of 50% in the market and change my asset allocation doesn't help me fulfill my investment goals. My sense, is it won't do much for other long term investors either.

 

[24601NoMore]

I pretty much disagree with everything you said here , but thats OK

Just to point out a couple things....

With the S and P at 4235 and the IBES consensus at 190 for this year that puts the PE at 22 not 37 as you claim. Big difference. 2022 earnings are more important and those estimates are higher as well. Markets look forward not backward. Regardless, PE's are not predictive at all and history has shown us that.

That article you posted is from 2015 where he recommends a 30% equity allocation which , in hindsight, was horrific advice. As I said in earlier post, it depends on your investment time horizon. For me, trying to predict draconian decreases of 50% in the market and change my asset allocation doesn't help me fulfill my investment goals. My sense, is it won't do much for other long term investors either.

Like I said..depends on your goals. If you're trying to minimize risk and take only the risk NEEDED to achieve your goals, that was and continues to be fine advice. People who were around 30/70% AA sure had a lot better time last Mar-Apr than those at significantly higher equity allocations. Sure, it came back quickly THIS TIME. That's as we all know highly unusual and unlikely to repeat.

If, on the other hand, you're comfortable riding the bucking bronco up and down, and either need or WANT to, that's fine. But not everyone here is trying to run up the score as high as we can get it. Instead, there are actually those of us who want to minimize risk, meet our goals, and sleep well at night without watching heavy swings in our portfolios..if you're OK with that..great! But I personally don't ever want that kind of a swing in my portfolio again given my and DW's current ages. Because we may not have time to ever recover and get back to current portfolio levels..

And FWIW..current S&P PE is 37. IF earnings meet projections (no guarantee and we all know how accurate analyst projections tend to be, LOL), sure..FORWARD PE is lower. But CURRENT PE is 37, and that's insane. Market cap to GDP is also over 2X, which is 2X higher than "typical". There are a gazillion other indicators all of which are seen by people far smarter than I pretend to be that ultimately point to US equity being hugely overvalued - probably by at least double where we "should" be given historical averages. Yeah.."this time is different"..until it's not.

 

[FREE866]

Like I said..depends on your goals. If you're trying to minimize risk and take only the risk NEEDED to achieve your goals, that was and continues to be fine advice. People who were around 30/70% AA sure had a lot better time last Mar-Apr than those at significantly higher equity allocations. Sure, it came back quickly THIS TIME. That's as we all know highly unusual and unlikely to repeat.

If, on the other hand, you're comfortable riding the bucking bronco up and down, and either need or WANT to, that's fine. But not everyone here is trying to run up the score as high as we can get it. Instead, there are actually those of us who want to minimize risk, meet our goals, and sleep well at night without watching heavy swings in our portfolios..if you're OK with that..great! But I personally don't ever want that kind of a swing in my portfolio again given my and DW's current ages. Because we may not have time to ever recover and get back to current portfolio levels..

And FWIW..current S&P PE is 37. IF earnings meet projections (no guarantee and we all know how accurate analyst projections tend to be, LOL), sure..FORWARD PE is lower. But CURRENT PE is 37, and that's insane. Market cap to GDP is also over 2X, which is 2X higher than "typical". There are a gazillion other indicators all of which are seen by people far smarter than I pretend to be that ultimately point to US equity being hugely overvalued - probably by at least double where we "should" be given historical averages. Yeah.."this time is different"..until it's not.

Again, PE isn't predictive and markets look forward , not backward. And actually earnings have been blowing through estimates so that 190 number for 2021 is probably light.



I looked back at your previous posts and it seems like you've been scared of the market for years. It's probably best you have a small equity exposure as it does take a certain mindset to ride out volatility. Markets are always volatile--that's the emotional price we pay for outstanding long term returns.

 

[Midpack]

Like I said..depends on your goals. If you're trying to minimize risk and take only the risk NEEDED to achieve your goals, that was and continues to be fine advice. People who were around 30/70% AA sure had a lot better time last Mar-Apr than those at significantly higher equity allocations. Sure, it came back quickly THIS TIME. That's as we all know highly unusual and unlikely to repeat.

Sooner or later “it’s” come back every single time for over a 100 years - some times it is quick, some times not. Since most here are long term investors and not market timers, that’s all that we’re hoping to see again.

 

[24601NoMore]

Sooner or later “it’s” come back every single time for over a 100 years - some times it is quick, some times not. Since most here are long term investors and not market timers, that’s all that we’re hoping to see again.

I was more talking to the point raised by someone else up-thread about how they expect a "V-shaped" super fast recovery in asset prices should a 30-50+% "repricing" happen in the next 12-18 months. Most here realize that speedy of a recovery doesn't always happen and is in fact the exception rather than the norm..but it seems there's an increasing number of folks (like the person I was responding to) that seem to think recovery "usually"/almost always/always happens within a couple-few years, and that's obviously not the case as history has clearly shown.

 

[Midpack]

I was more talking to the point raised by someone else up-thread about how they expect a "V-shaped" super fast recovery in asset prices should a 30-50+% "repricing" happen in the next 12-18 months. Most here realize that speedy of a recovery doesn't always happen and is in fact the exception rather than the norm..but it seems there's an increasing number of folks (like the person I was responding to) that seem to think recovery "usually"/almost always/always happens within a couple-few years, and that's obviously not the case as history has clearly shown.

Many have been less than a year, others deeper & longer - but long term investors of any AA have done well just being patient. Why not show actual info instead of ominous conjecture?

 

[OldShooter]

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 directed to me, either but my answer is this: Not all problems have solutions. Since none of us know the future, there is no way to know how to optimally deal with it. Any "recommendations" would be at best guesses, so really not worth much. Professional economists demonstrate this every time they open their mouths.

Diversify. Don't market time. Stay the course. Looking at history, these rules seem to have worked pretty well despite rarely being optimum at any given time.

 

[24601NoMore]

Many have been less than a year, others deeper & longer - but long term investors of any AA have done well just being patient. Why not show actual info instead of ominous conjecture?

OK, here's the "actual info"..4 periods since 1905 of 15+ years to recovery from peak valuations (like we seem to be in now). How many of us even have 15 years left to recover if things "reprice" to the level that many experts are currently expecting?

That's kinda my point. I suspect many are not aware of numbers like this and instead look to the 2020 experience as being indicative of what can "usually" be expected in terms of recovery, and history does not support that.

 

[aja8888]

How many of us even have 15 years left to recover if things "reprice" to the level that many experts are currently expecting?

I'll be 78 in a few months.....I surely don't have a high probability of another 15.

 

[NW-Bound]

I'll be 78 in a few months.....I surely don't have a high probability of another 15.

Well, if one has a near horizon, then the long-term market does not matter as much.

This brings us back to the OP's question. He was not talking or asking about a swift market decline, meaning a crash. He was asking whether he was too conservative to expect a mere 5% average return going forward.

In the context of his post, I believe he meant 5% nominal return, which means perhaps only 2-2.5% real return going forward, or maybe even lower.

I am no fortune teller, but think it's better to be conservative in your outlook than not. Don't they say not to count your chicks before they hatch?

I prefer to be conservative, then get pleasantly surprised when things turn out better than expected.

 

[oscar1]

When our net worth keeps up with inflation, I feel like I've won the lottery!!!!

+1

 

[GravitySucks]

Well, as the great stand up philosopher said:
Hope For the Best, Expect the Worst"

https://youtu.be/W9FRqE7eMJQ

My most optimistic planning was 6%. My most expected looked much like Fido's RIP worst case - 2 years of loss nearing 30% and going side ways for another 5 years. My reality has been just fantastic over the last 8 years. Never thought it could be this good.

My highest expected case going forward is still 2 horrible years followed be 5 more years sideways. What do I do about it? Keep an AA of 60/40 and rebalance when the muse strikes.

 

[Midpack]

That's kinda my point. I suspect many are not aware of numbers like this and instead look to the 2020 experience as being indicative of what can "usually" be expected in terms of recovery, and history does not support that.

Some maybe, but as I said earlier, most people here are well aware of past market behavior. Many who have won the game have quit playing, e.g. hold smaller equity allocations. And all those past long recoveries are in FIRECALC, so we have a good idea how that plays out. If you’re saying this time it’s different…

 

[street]

+1

That most important item #1 there, when negated, overrides all the remaining items. It did happen to some popular posters we knew.

So, we cannot worry too much about 2 to 6.


PS. I myself almost could not make it to the early SS age of 62. So now, me worry?

So, glad all turned out well for you!

I'm not sure if gains will be lower or if a long down turns will happen. I would be happy even if on a average in the next 5 years, I got 3% would be fine with me.

 

[ncbill]

OK, here's the "actual info"..4 periods since 1905 of 15+ years to recovery from peak valuations (like we seem to be in now). How many of us even have 15 years left to recover if things "reprice" to the level that many experts are currently expecting?

That's kinda my point. I suspect many are not aware of numbers like this and instead look to the 2020 experience as being indicative of what can "usually" be expected in terms of recovery, and history does not support that.

Aren't your numbers ignoring dividends?