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03-10-2015, 05:10 PM
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#1
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Thinks s/he gets paid by the post
Join Date: Sep 2012
Posts: 1,570
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Expected Returns
Asset Allocation Website
Above is a link to Research Affiliates (Rob Arnott) outlook for asset class returns for the next decade, and it ain't pretty. Excep for EM stuff, looking at pretty close to 0% real returns.
You could dismiss this as discredited market timing, but that's not what they're doing. Like Gross' New Normal, GMOs Asset Class expected returns, all of these look at where we are now - Now being ultra low interest rates and high equity valuations.
For example, historical bond returns have been around 5%. But you can correlate historical ten year bond returns with what the 10 year rate was at the inception of the 10 year period. Today 10 year TNote is what, about 1.5%?
While historical things like Monte Carlo or Firecalc are meant to stress test our situation, none really use today's valuations as a starting point. US markets really don't have much history that's helpful. Maybe Japan of the last 25 years would be a better comparison.
Hopefully they are really not after me, I'm just paranoid.
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03-10-2015, 05:35 PM
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#2
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Thinks s/he gets paid by the post
Join Date: Oct 2006
Posts: 4,629
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I don't know about other asset classes. But, I'm pretty sure I can calculate the yield to maturity (based on current market prices) on the bonds I already own. And, I'll agree that isn't pretty.
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03-10-2015, 05:48 PM
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#3
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Moderator Emeritus
Join Date: May 2007
Posts: 12,901
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It's pretty much in line with my general expectation for low returns. As long as real returns remain positive, be it only slightly, my plan should work. But US small caps look really ugly on that graph.
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03-10-2015, 05:55 PM
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#4
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Moderator
Join Date: Oct 2010
Posts: 10,723
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Just as a gut check on these 10 year predictions, I'd like to see the 10 year historical on all of those indexes.
The average across all of the asset class predictions (except cash) is 2.22%.
I wonder what the historical 10 year would look like in comparison to the 2.22%.
I figure the money has to go somewhere, and if those 16 cover the world, then one would expect the average of them all to stay around the same over time. The "right" way to do the calculation would be to do a weighted average based on "market capitalization" of each class. So if US Large holds twice as much value as emerging markets, then the weighting would reflect that. But the average might be interesting anyway.
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03-10-2015, 06:52 PM
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#5
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Feb 2013
Posts: 9,358
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We just use 0 - 1% real return in a spreadsheet for retirement planning. If we can do better, cool. If not we won't have to move to a shopping cart under the freeway overpass.
We focus on liability matching strategies:
Matching strategy - Bogleheads
We're really into trying to find ways to cut recurring expenses and increase passive income because we can control those but we cannot control the stock market or the direction of interest rates. Every $1K we save off of retirement expenses not impacting our quality of life is another $50K in potential total retirement costs we won't need to fund.
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Even clouds seem bright and breezy, 'Cause the livin' is free and easy, See the rat race in a new way, Like you're wakin' up to a new day (Dr. Tarr and Professor Fether lyrics, Alan Parsons Project, based on an EA Poe story)
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03-10-2015, 09:11 PM
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#6
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Recycles dryer sheets
Join Date: Aug 2014
Location: Western Canada
Posts: 393
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Are they including dividends?
__________________
I'm not crazy. Honest, the judge had me tested.
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03-10-2015, 09:23 PM
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#7
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Thinks s/he gets paid by the post
Join Date: Aug 2009
Posts: 1,578
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Expected Returns
Quote:
Originally Posted by gcgang
Asset Allocation Website
Above is a link to Research Affiliates (Rob Arnott) outlook for asset class returns for the next decade, and it ain't pretty. Excep for EM stuff, looking at pretty close to 0% real returns.
You could dismiss this as discredited market timing, but that's not what they're doing. Like Gross' New Normal, GMOs Asset Class expected returns, all of these look at where we are now - Now being ultra low interest rates and high equity valuations.
For example, historical bond returns have been around 5%. But you can correlate historical ten year bond returns with what the 10 year rate was at the inception of the 10 year period. Today 10 year TNote is what, about 1.5%?
While historical things like Monte Carlo or Firecalc are meant to stress test our situation, none really use today's valuations as a starting point. US markets really don't have much history that's helpful. Maybe Japan of the last 25 years would be a better comparison.
Hopefully they are really not after me, I'm just paranoid.
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Well actually Firecalc does use today's stock valuations as a starting point, as they are similar to other periods in history. Just look at the graph of CAPE over the years and you will see similar valuations quite a few times. The low interest rates are virtually unprecedented however, as the only time I can see that they were this low were in 1940 or so. I plan on retiring soon and it doesn't give me a warm feeling either.
http://2.bp.blogspot.com/-R8Ezy3hMjZ...0/Cape+New.gif
http://static.seekingalpha.com/uploa...mer_origin.png
Then again if valuations are worth using one can always use European stocks?
http://www.valuewalk.com/wp-content/...rm-average.jpg
Sent from my iPad using Early Retirement Forum
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03-11-2015, 01:35 AM
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#8
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Dryer sheet aficionado
Join Date: Aug 2013
Posts: 26
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Hope for the best, prepare for the worst.
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03-11-2015, 04:51 AM
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#9
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Thinks s/he gets paid by the post
Join Date: Nov 2014
Location: Austin
Posts: 1,384
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Towards the bottom of the webpage are links to documents that show their methodology...
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03-11-2015, 04:59 AM
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#10
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2008
Location: NC
Posts: 21,303
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Quote:
Originally Posted by gcgang
While historical things like Monte Carlo or Firecalc are meant to stress test our situation, none really use today's valuations as a starting point. US markets really don't have much history that's helpful. Maybe Japan of the last 25 years would be a better comparison.
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Periods of negative US real returns are indeed built in to FIRECALC and many other deterministic calculators, some longer than 10 years - the Great Depression & 1965-83. So in that sense it's not "different this time" that we know of. S&P 500: Total and Inflation-Adjusted Historical Returns
So are " today's valuations." S&P 500 PE Ratio
For those more concerned with a retirement income downside surprise vs upside , having conservative expectations seems prudent though, and we've been planning on real returns of 0-2%, and a historically low WR since long before the current "outlook."
Interesting OP link and it may well prove reasonably accurate (a correction in the next 10 years seems inevitable) - but that doesn't worry me. I am looking forward to Ferri's annual 30-year asset class projections, closer to the timeframe we're faced with.
__________________
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 / 45% bonds / 5% cash
Target WR: Approx 1.5% Approx 20% SI (secure income, SS only)
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03-11-2015, 06:31 AM
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#11
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Thinks s/he gets paid by the post
Join Date: Dec 2004
Location: Minneapolis
Posts: 4,455
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Based on their forecast, most of our equity allocation should be in emerging markets and MSCI EAFE.
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May we live in peace and harmony and be free from all human sufferings.
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03-11-2015, 06:44 AM
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#12
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Administrator
Join Date: Jan 2008
Location: Chicagoland
Posts: 40,714
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Those of us in withdrawal mode should be just as, or even more, concerned with volatility, not return. Peter Bernstein said low returns are the result of high volatility. If that is true we should expect to a great deal of marketplace volatility over the next decade across all asset classes.
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03-11-2015, 06:58 AM
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#13
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Recycles dryer sheets
Join Date: Jun 2014
Posts: 440
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It's interesting to look back at their 2012 research... My very limited look seemed to indiscate they felt that eps outperformance was unlikely to sustain and that emerging market bonds would outperform mature market bonds.
Well... Being wrong or being too early has a similar portfolio impact.
I think most macro forecasters take the wrong approach. They attempt to increase their precision as opposed to attempting to decrease the margin of error between the range of possible outcomes.
The reason for this is that people (paying customers) like PRECISE numbers no matter how utterly incorrect they are historically (look at the department of energy's track record of predicting energy prices out 1-5 years... Yet policy is determined based on that).
This also results in a "ok, Mr cynical, what's your better system?"
Well... I don't have one. But I'd rather not use one than use one I know has so little predictive validity that I can't make actionable decisions with any more confidence than guessing.
I think ultimately investors have two choices:
1) diversified portfolio held over long time and get whatever returns the economy produces (1%, 5%, 10%, who knows).
2) spend huge amounts of time researching individual businesses and understand them really well so when they are REALLY cheap.. you MIGHT get a huge gain (I.e. like Buffett).
I think small amounts of time doing 2 is gambling... I think anything that tries to predict 1acvurately is astrology.
More and more I realize I'm crappy at the deep evaluation and should just live with whatever the general economy will return over time... Using the past return to hedge my risk by informing my spending.
A huge problem exists because people think that because they need something it must exist. Eldorado, the fountain of youth and turning lead to gold were all badly needed and yet...
You may live in a world where you need 7%, but only get 1%. Wishing for the 1% world to become the 7% world is a dangerous illusion imo.
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03-11-2015, 07:41 AM
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#14
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Recycles dryer sheets
Join Date: Dec 2014
Posts: 61
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I get more nervous when the experts are overly optimistic.
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03-11-2015, 08:25 AM
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#15
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Thinks s/he gets paid by the post
Join Date: Jun 2014
Posts: 1,069
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What's the difference between "expected returns" and "fortune telling?"
Is it gypsy versus ivy league background. My guess is the value is identical.
Sent from my iPhone using Early Retirement Forum
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03-11-2015, 08:32 AM
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#16
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2008
Location: NC
Posts: 21,303
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Quote:
Originally Posted by dallas27
What's the difference between "expected returns" and "fortune telling?"
Is it gypsy versus ivy league background. My guess is the value is identical.
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So what do you use to plan?
__________________
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 / 45% bonds / 5% cash
Target WR: Approx 1.5% Approx 20% SI (secure income, SS only)
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03-11-2015, 08:54 AM
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#17
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2008
Posts: 35,712
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Thanks to big-papa for pointing out the below.
Quote:
Originally Posted by big-papa
Towards the bottom of the webpage are links to documents that show their methodology...
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So, I read their rationale for the low expected return of US stocks, compared to the recent past performance. The gist of it is lower growth, lower yield, and P/E contraction.
For past 1983-2013:
Total Return 8.5% = Yield 2.6% + Growth 2.8% + Valuation Change 3.1%
For future:
Total Return 1% = Yield 2% + Growth 1.4% + Valuation Change (-2.4%)
Their above numbers appear to be real return or inflation adjusted, judging from the quoted past return because the 8.5% would be around 11.4% for the S&P 500 in nominal term for the 31-year period of 1983-2013. Average inflation in that period was indeed 2.9%.
Quote:
Originally Posted by Rick_Head
Are they including dividends?
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The answer is yes, according to the above.
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"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)
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03-11-2015, 10:09 AM
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#18
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Thinks s/he gets paid by the post
Join Date: May 2014
Location: Utrecht
Posts: 2,650
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Quote:
Originally Posted by MichaelB
Peter Bernstein said low returns are the result of high volatility. If that is true we should expect to a great deal of marketplace volatility over the next decade across all asset classes.
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How did he arrive at that conclusion?
Low returns to me seem to be only the result of high volatility for those that buy at a peak and sell when low. In other words, high volatility gives bigger return spreads for individual investors.
You have a linky for this idea?
Low volatility can also mean low returns if earnings growth steadily goes down, and the stock market steadily goes down with it ..
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03-11-2015, 10:52 AM
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#19
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Thinks s/he gets paid by the post
Join Date: Aug 2013
Posts: 1,660
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We are going to get whatever we get.
I am hoping (and expect) about 5% real long term (for 60/40 portfolio).
I could live in fear by going all cash or using very low withdrawals. Forcing worst case on myself.
Or alternatively stay invested and take reasonable withdrawals and be prepared to adjust (withdrawals) downward during bad years.
I'm taking the 2nd approach.
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03-11-2015, 11:00 AM
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#20
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Apr 2003
Location: Hooverville
Posts: 22,983
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Quote:
Originally Posted by RetireAge50
We are going to get whatever we get.
I am hoping (and expect) about 5% real long term (for 60/40 portfolio).
I could live in fear by going all cash or using very low withdrawals. Forcing worst case on myself.
Or alternatively stay invested and take reasonable withdrawals and be prepared to adjust (withdrawals) downward during bad years.
I'm taking the 2nd approach.
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Starting fully invested today in a diversified portfolio, this seems very unlikely unless you have an extremely long investing period and will be adding money regularly to the portfolio.
Ha
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