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Future Stock and Bond Returns!?
10-08-2015, 06:55 AM
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#1
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Join Date: Feb 2006
Posts: 4,872
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Future Stock and Bond Returns!?
One of the critical inputs to any retirement income calculation is the size and distribution of investment returns. Some models use historical averages and standard deviations, but recently Pfau has used current intermediate US Government bond rates and then taken the premium in return from stocks that you would expect from the historical data and also uses that data to derive a distribution in returns. The paper is here and the critical numbers are given in Table 1.
https://www.onefpa.org/journal/Pages...%20Income.aspx
This obviously predicts lower than historical average returns. Is this the best way to estimate future returns?
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”
Current AA: 75% Equity Funds / 15% Bonds / 5% Stable Value /2% Cash / 3% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
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10-08-2015, 07:46 AM
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#2
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Moderator
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So if you buy into this, when filling out retirement calculators, you would set stocks at 7.2%, bonds at 2.4% and inflation at 2.1%? Not much different than 6%, 3%, 2.5% I typically use.
The graphic is not quite right..."Correlation Coefficients" should extend one more column to the left. Not that Wade's reading this or anything, lol!
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10-08-2015, 08:05 AM
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#3
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Join Date: May 2013
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I would take a select/ultimate approach to future returns
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You can't be a retirement plan actuary without a retirement plan, otherwise you lose all credibility...
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10-08-2015, 08:10 AM
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#4
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Join Date: Jul 2013
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Quote:
Originally Posted by sengsational
So if you buy into this, when filling out retirement calculators, you would set stocks at 7.2%, bonds at 2.4% and inflation at 2.1%? Not much different than 6%, 3%, 2.5% I typically use.
The graphic is not quite right..."Correlation Coefficients" should extend one more column to the left. Not that Wade's reading this or anything, lol!
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+1
When I use firecalc, I use conservative numbers very similar to these. Better to be safe than sorry.
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10-08-2015, 08:10 AM
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#5
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Join Date: Feb 2006
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Quote:
Originally Posted by sengsational
So if you buy into this, when filling out retirement calculators, you would set stocks at 7.2%, bonds at 2.4% and inflation at 2.1%? Not much different than 6%, 3%, 2.5% I typically use.
The graphic is not quite right..."Correlation Coefficients" should extend one more column to the left. Not that Wade's reading this or anything, lol!
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Yes there is a small formatting error in the table. This Bogleheads wiki page perhaps points out the danger of using historical averages. I like that the expected returns are broken out into different stock classes rather than Pfau doing a lumping together of a GDP weighted international returns from a lot of countries. Of course he has to set some general parameters to have any chance of attacking the problem.
https://www.bogleheads.org/wiki/Hist...pected_returns
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”
Current AA: 75% Equity Funds / 15% Bonds / 5% Stable Value /2% Cash / 3% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
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10-08-2015, 08:49 AM
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#6
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Join Date: May 2014
Location: Utrecht
Posts: 2,650
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Quote:
Originally Posted by sengsational
So if you buy into this, when filling out retirement calculators, you would set stocks at 7.2%, bonds at 2.4% and inflation at 2.1%? Not much different than 6%, 3%, 2.5% I typically use.
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Although that is quite different for stocks?
Stocks 4.8% real vs. 3.5% real is 30% less.
I currently use 6.5% & 2.0% inflation as most likely in my models (so 4.5% real) for stocks. Bonds I don't use, CDs and savings instead, which are actually yielding in my portfolio roughly 2% (CDs 3.4%, savings 1.5%) and dropping.
For what it's worth.
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10-08-2015, 05:00 PM
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#7
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Join Date: Jun 2010
Posts: 2,301
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Quote:
Originally Posted by nun
Pfau has used current intermediate US Government bond rates and then taken the premium in return from stocks that you would expect from the historical data and also uses that data to derive a distribution in returns.
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Quote:
This obviously predicts lower than historical average returns. Is this the best way to estimate future returns?
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There are a variety of ways to calculate expected returns that all sound plausible (and they all typically yield lower than historical returns). Is Pfau's method the best? I doubt it -- not because I think it is inherently bad but because there are lots of other methods that could just happen to be a little bit better.
I skimmed through the link and I didn't see any experimental results to show that his method is better than using say Schiller PE10 to set expected returns. This is something that can be tested on historical data (e.g., in the same way Schiller showed that PE10 is better than PE1, Pfau could show that his method > PE10). However I think there's a strong possibility that the limited data would make many comparisons inconclusive.
FYI the book I always hear referenced for expected returns is
http://www.amazon.com/Expected-Retur...&creative=9325
available as free PDF download here
http://www.cfapubs.org/toc/rf/2012/2012/1
I've not read this (it's on my todo) but suspect it might be helpful.
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10-08-2015, 09:36 PM
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#8
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Join Date: Jun 2014
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I use 7% real overall, but higher for small,mid-cap, emerg. Why, because i accept the data. Underestimating is just as dangerous as over.
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10-08-2015, 10:36 PM
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#9
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Quote:
Originally Posted by dallas27
I use 7% real overall, but higher for small,mid-cap, emerg. Why, because i accept the data. Underestimating is just as dangerous as over.
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Just curious why underestimating would be dangerous?
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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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10-08-2015, 10:52 PM
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#10
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Join Date: Feb 2006
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Quote:
Originally Posted by dallas27
I use 7% real overall, but higher for small,mid-cap, emerg. Why, because i accept the data. Underestimating is just as dangerous as over.
Sent from my iPhone using Early Retirement Forum
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Everyone's working with similar data, but it's how its weighted and analyzed that matters.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”
Current AA: 75% Equity Funds / 15% Bonds / 5% Stable Value /2% Cash / 3% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
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Future Stock and Bond Returns!?
10-08-2015, 10:56 PM
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#11
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Thinks s/he gets paid by the post
Join Date: Jun 2014
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Future Stock and Bond Returns!?
Quote:
Originally Posted by daylatedollarshort
Just curious why underestimating would be dangerous?
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Time = money
Possibly time > money
Sent from my iPhone using Early Retirement Forum
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10-10-2015, 01:24 PM
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#12
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Dec 2004
Location: the City of Subdued Excitement
Posts: 5,588
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Quote:
Originally Posted by sengsational
So if you buy into this, when filling out retirement calculators, you would set stocks at 7.2%, bonds at 2.4% and inflation at 2.1%? Not much different than 6%, 3%, 2.5% I typically use.
The graphic is not quite right..."Correlation Coefficients" should extend one more column to the left. Not that Wade's reading this or anything, lol!
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I use 6%, 2% and 3% and I am concerned that 3% for my personal inflation rate is too low for my situation and where we live. Inflation is local.
Geometric means.
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I have outlived most of the people I don't like and I am working on the rest.
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10-10-2015, 05:31 PM
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#13
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: May 2006
Location: west coast, hi there!
Posts: 8,808
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What period of time is this prediction covering? 10 years, 20 years, ... ?
BTW, 10 year TIPs are at 0.6%.
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