Realistic Investment returns: 7-10 years

[Dtail]

I use 6% nominal for the Equity portion for those retirement calculators which request that data.
Perhaps bonds will not return 4% currently, but one doesn't need to go to 2% either, as many folks on this site who don't have stock exposure and/or have locked into higher yielding 5 yr CD's, are receiving over 3% yields on their Fixed Income portion of the portfolio.

 

[Badger]

It is all a BIG guess but I if pressed would go with a very conservative one. Hope for the best but plan for the worst. It is no different than predicting the outcome of a football game. Crunch the numbers all you want for a prediction but nobody seemed to do a good job of that on 9/29/2008. Without getting into particulars I think there is a good chance the market will have returns on the low side for at least the next decade given all the things that are happening nationally and internationally.



Cheers!

 

[levindb]

I assume 3% above inflation and expect to run out of money at age 105.

By being conservative in the ROI, I might have extra money if I live longer. I think it is better to be thrilled with great returns, than to worry about a bad year...main goal is to not run out of money. If we have a great year, I can Blow That Dough and buy a new toothbrush or that fancy toilet paper.

 

[MichaelB]

IMO market volatility is more important than average return. A low average return over a decade means very high volatility, which is a worse case scenario for someone in early retirement with little or no non-portfolio income.

Anyone expecting low average returns should be focused on high quality portfolio diversification.

 

[Fermion]

You guys are missing a few data points.

Will there be any wars? Will there be any breakthrough technological discoveries in science and medicine? How will the rapidly expanding space travel by private companies play out?

If you can answer the above then I think you can predict the returns for the next 10 years. And please let me know first!

 

[corn18]

Why the animosity towards predicting returns? You have to pick something or what's the point of investing at all? Just put it all in cash and hope inflation doesn't eat you alive? That's silly.

I think of it as a mosaic. I use Firecalc and Flexible Retirement Planner @ 95% for one number.

I use my spreadsheet with 2% real returns for another.

I can also put a SORR hit on day one of retirement in my spreadsheet to see what that does.

I use VPW.

I use a social security bridge model.

All of these spit out a number I need to retire. My spreadsheet is the most generous if I don't put in a SORR hit. Firecalc/FRP is the most conservative. VPW is in the middle. So I use Firecalc/VPW.

In the end, it all comes down to managing risk. We chose to do that with a bigger nest egg that has a lot of room to cut if things go south. And by cut, I mean fluffy stuff like a new Accord Touring every 5 years can be downgraded or delayed or buy a used car. Instead of spending $25k this year on travel, we spend $5k (or even $0). And there are so many other places we can cut. Who spends $1500/mo on food and dining for two people? We do right now, but could easily cut that in half or more.

So that's our plan. Retire FAT and cut as needed if the crap hits the fan. That means I have to work another 2 years, though. Ack Barf!

 

[ERD50]

Why the animosity towards predicting returns? You have to pick something or what's the point of investing at all? ...

False premise.

My point is, we can have some realistic expectations (not a prediction) that the market will likely move within a range of values. And we can base our investments on that range. Trying to pick a specific number just does not seem helpful to me. I like to be helpful, so yeah, I have a bit of 'animosity' towards the idea that a single number is helpful. The odds are high you will be wrong!

So we look at the historic range for 10 years, might be a bit larger range, no way to know, but it's a reasonable base to work from (just like historic weather isn't a predictor of next years weather, it gives a pretty good idea of the max/mins to expect).

So I look at the low end, and think about if my AA is low enough for me to be comfortable if that comes to pass. And I look at the high end, and think about if my AA is high enough to take advantage of that - because I'm going to need some of those above average years in order to survive the below average years. I am doing that, w/o picking a single number, so your premise is false.

And as Michael_B pointed out earlier, a single number doesn't take into account volatility, which can have a big effect in the draw-down phase.

-ERD50

 

[Sunset]

IMO market volatility is more important than average return. A low average return over a decade means very high volatility, which is a worse case scenario for someone in early retirement with little or no non-portfolio income.

Anyone expecting low average returns should be focused on high quality portfolio diversification.

A low average return could also be the result of a decade of low volatility with low returns. It does not have to be a positive number either, could be a -2%.

 

[Montecfo]

I questioned whether OP could get 4% for bonds, and showed that OP's mix would (based on my stock reversion gains) require the lofty 4% return on bonds to achieve 5.5% overall.

I don't actually believe OP can get 4% in bonds, and therefore OP's return will be less.

I agree. If we are in a stable interest rate environment then I think 1 to 3% for bonds and 4 to 6% for equities are reasonable ranges.

In my opinion, interest rate direction is the most powerful driver of investment returns.

But honestly, whatever you project will be wrong so I try not to overthink it.

 

[OldShooter]

... A low average return over a decade means very high volatility ...

Really? I have never heard that. It seems even counterintuitive. Citation or link?

... high volatility which is a worse case scenario for someone in early retirement with little or no non-portfolio income. ...

Not true. A good AA will have non-equity assets specifically planned to use against SORR risks. Portfolio income from pension and SS is just one example.

Really, volatility is very overrated as a universal surrogate for risk. It ovbsiously works for Markowitz, who got a Nobel for the idea, but IMO it is an example of what H. L. Mencken observed over a half-century ago: "Every complex problem has a solution which is simple, direct, plausible—and wrong."

 

[OldShooter]

Why do people use nominal returns for forecasting? I can't imagine converting all of my spreadsheets to nominal dollars and having to predict inflation. I just use 2% real for my 60/40 portfolio and put everything in now year dollars.

As someone who spent far too much of his life building models I will tell you:

In order for a model to be useful, its important input parameters must be visible and subject to sensitivity testing. To say that predicting inflation is hard is certainly no revolutionary insight, but to conclude that it should then be ignored is just head-in-the-sand. Inflation varies and, importantly, the spread between nominal return and real return varies over time and among assets. Pretending difficult things do not exist does not make them go away.

 

[Spock]

False premise.

My point is, we can have some realistic expectations (not a prediction) that the market will likely move within a range of values. And we can base our investments on that range. Trying to pick a specific number just does not seem helpful to me. I like to be helpful, so yeah, I have a bit of 'animosity' towards the idea that a single number is helpful. The odds are high you will be wrong!

So we look at the historic range for 10 years, might be a bit larger range, no way to know, but it's a reasonable base to work from (just like historic weather isn't a predictor of next years weather, it gives a pretty good idea of the max/mins to expect).

So I look at the low end, and think about if my AA is low enough for me to be comfortable if that comes to pass. And I look at the high end, and think about if my AA is high enough to take advantage of that - because I'm going to need some of those above average years in order to survive the below average years. I am doing that, w/o picking a single number, so your premise is false.

And as Michael_B pointed out earlier, a single number doesn't take into account volatility, which can have a big effect in the draw-down phase.

-ERD50

While I practically have a PhD in spreadsheets, its still a lot easier to model with a single value in a single cell and play "what if?"
than it is to create a sheet that uses a range of values. Even major pension funds base their funding on a single return value (and are catching heat to lower their projections from 7% while only hitting 5.1% over the last 10 years in a major bull(x) market).

Some tools will use a range of returns with Monte Carlo simulations, but I'm not up for making one of those unless I can market it.

So while returns will vary year to year, a single number is a necessary simplification.
I just use a variety of single numbers.

 

[corn18]

False premise.

My point is, we can have some realistic expectations (not a prediction) that the market will likely move within a range of values. And we can base our investments on that range. Trying to pick a specific number just does not seem helpful to me. I like to be helpful, so yeah, I have a bit of 'animosity' towards the idea that a single number is helpful. The odds are high you will be wrong!

So we look at the historic range for 10 years, might be a bit larger range, no way to know, but it's a reasonable base to work from (just like historic weather isn't a predictor of next years weather, it gives a pretty good idea of the max/mins to expect).

So I look at the low end, and think about if my AA is low enough for me to be comfortable if that comes to pass. And I look at the high end, and think about if my AA is high enough to take advantage of that - because I'm going to need some of those above average years in order to survive the below average years. I am doing that, w/o picking a single number, so your premise is false.

And as Michael_B pointed out earlier, a single number doesn't take into account volatility, which can have a big effect in the draw-down phase.

-ERD50

False premise.

 

[corn18]

While I practically have a PhD in spreadsheets, its still a lot easier to model with a single value in a single cell and play "what if?"
than it is to create a sheet that uses a range of values. Even major pension funds base their funding on a single return value (and are catching heat to lower their projections from 7% while only hitting 5.1% over the last 10 years in a major bull(x) market).

Some tools will use a range of returns with Monte Carlo simulations, but I'm not up for making one of those unless I can market it.

So while returns will vary year to year, a single number is a necessary simplification.
I just use a variety of single numbers.

Here, here! It's just one piece of a mosaic. I let the fancy models do the work of accounting for 30 years of ups and downs. My spreadsheet then uses that to tell me how much cushion I have assuming a simple, real return.

 

[corn18]

As someone who spent far too much of his life building models I will tell you:

In order for a model to be useful, its important input parameters must be visible and subject to sensitivity testing. To say that predicting inflation is hard is certainly no revolutionary insight, but to conclude that it should then be ignored is just head-in-the-sand. Inflation varies and, importantly, the spread between nominal return and real return varies over time and among assets. Pretending difficult things do not exist does not make them go away.

Huh? Using real returns does account for inflation.

 

[ERD50]

While I practically have a PhD in spreadsheets, its still a lot easier to model with a single value in a single cell and play "what if?"
than it is to create a sheet that uses a range of values. ...

Easy doesn't necessarily make it right or helpful. Anyhow, it's not hard if you use the right tool.

Enter the data into something like FIRECalc, set the portfolio life to 10 years (or whatever). You can see what the historical ranges have looked like. Inflation for the period is included, use any AA you like. Easy-peasy, and will tell you far more than a spreadsheet with a single number in it.

If you think the near future will be better/worse than any period in the past, throw in a fudge factor, you're doing that anyhow with your spreadsheet.

Here you go, it's so easy, I just did it:

60/40, start with $1M, no spending -

Here is how your portfolio would have fared in each of the 139 cycles. The lowest and highest portfolio balance at the end of your retirement was $707,621 to $3,168,347, with an average at the end of $1,718,847. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

I'll let you do the math to reverse that back to annual compound growth, I'm going to have some lunch, I worked up an appetite.

ETA, done with lunch. That's a range of negative ~ 3.4% to positive 12.2% for 10 years
-ERD50

 

[OldShooter]

Huh? Using real returns does account for inflation.

No. It oversimplifies by assuming that real returns are unaffected by inflation. Also by not recognizing that once an inflated dollar is received, it earns a real return.

A number of years ago I wrote a monte carlo model to look at TIPS returns. It was quite striking. The saver holding TIPS wants high inflation during the early investment period. The same inflation towards the end of the period didn't have nearly the benefit.

 

[corn18]

No. It oversimplifies by assuming that real returns are unaffected by inflation. Also by not recognizing that once an inflated dollar is received, it earns a real return.

A number of years ago I wrote a monte carlo model to look at TIPS returns. It was quite striking. The saver holding TIPS wants high inflation during the early investment period. The same inflation towards the end of the period didn't have nearly the benefit.

Ok.

 

[USGrant1962]

This thread reminds me of my sig.

V V

 

[MichealKnight]

Projections and Expectations IS real investing

Mind you, most of my investment experience is not on paper Wall Street stuff with 30-something analysts showing cute graphs and saying "buy! Strong Buy intrinsic value!!! Secular bull market!" on CNBC with cute green arrows and graphs.

IMO - real business, and real investing DOES have some sort of prediction, expectation, or baseline. When a landlord invests in apartment buildings does he say "Hmmmm, Joe and Buffy will pay whatever rent they are in the mood for so I can't predict"...or does he based on homework, competitive values, history, future trends - make SOME sort of guess as to what rent he can command? When someone buys or starts a business - isn't there some forecast about how many donuts, cars, vegetables he or she will sell...what his expenses will be and what the net profit or loss will be?

When Google or CocaCola give guidance on next year's earnings, or analysts post their expectations for Exxon earnings we don't tell him "no use in guessing, it is what it is"? Nope. Real business, and real business requires some guessing - - anyone who would invest with no inkling as to their expectation of profits and loss is either as cool and calm as Gandhi - or a lemming who hasn't seen the ball since kickoff.

Nobody is always right. But many people - sometimes - can be close some of the time.

Best case scenario. Worst Case scenario. Realistic Scenario. All are legit things to think about and develop strategy and expectations from.

 

[HI Bill]

...real business, and real investing DOES have some sort of prediction, expectation, or baseline...
When Google or CocaCola give guidance on next year's earnings, or analysts post their expectations for Exxon earnings we don't tell him "no use in guessing, it is what it is"? Nope. Real business, and real business requires some guessing - - anyone who would invest with no inkling as to their expectation of profits and loss is either as cool and calm as Gandhi - or a lemming who hasn't seen the ball since kickoff.

Nobody is always right. But many people - sometimes - can be close some of the time.

Best case scenario. Worst Case scenario. Realistic Scenario. All are legit things to think about and develop strategy and expectations from.

This may work if one is investing in a single stock that is not held in mutual funds or ETFs. The disconnect today, is that MF and ETF folks buy and sell based on headlines, and market trends...not company performance. Big banks and investment firms hold and sell stock shares in aggregate, disconnecting performance from share price.

Here's an example. My former company went public this year. Share price started at $24, which was fairly valued based on an independent company, which valued the ESOP shares of the company annually, based on backlog, profit, debt, and similar companies. Today, just six months later, or so, the share price has skyrocketed by some 74%. The ESOP still owns ~80% of the shares, and nothing fundamentally has changed in how the company does business, or what its profit margins are. Daily, I watch the value of the stock typically go up when the market goes down, and vice versa. People are using the stock as a hedge, but as more and more of the stock is integrated into ETFs, the more it seems to mirror the market's total return. The PE ratio is currently 31, compared to Apple's 23.6.

 

[NW-Bound]

... My former company went public this year. Share price started at $24, which was fairly valued based on an independent company, which valued the ESOP shares of the company annually, based on backlog, profit, debt, and similar companies. Today, just six months later, or so, the share price has skyrocketed by some 74%. The ESOP still owns ~80% of the shares, and nothing fundamentally has changed in how the company does business, or what its profit margins are. Daily, I watch the value of the stock typically go up when the market goes down, and vice versa. People are using the stock as a hedge, but as more and more of the stock is integrated into ETFs, the more it seems to mirror the market's total return. The PE ratio is currently 31, compared to Apple's 23.6.

The higher P/E ratio would be justified if your former company had a better growth prospect than that of Apple.

Market efficiency proponents will say that investors know something that you don't.

 

[HI Bill]

The higher P/E ratio would be justified if your former company had a better growth prospect than that of Apple.

Market efficiency proponents will say that investors know something that you don't.

Market efficiency proponents would be wrong . There's no way the former company has better growth prospects than Apple! My former company does the same work as my current company, and the relative share prices of the two clearly show the former is overpriced. Consulting companies have limited profit margins, because they're selling labor hours, and labor hours in the US, for engineering, environmental, defense, and construction aren't cheap. I'm not complaining, though, as my ESOP shares have gained 73%...just waiting for the correction!

 

[Gumby]

Quoting myself from October. I haven't bothered to see if there is anything more recent.

You have to choose your own inflation projection, but the current nominal projections are fairly low for the next ten years. With even a relatively low amount of inflation, a portfolio may have a difficult time sustaining a "4% rule" draw.:

Recent projections for U.S. Equities for next 10 years

Vanguard -- 3.5 - 5.5 % https://advisors.vanguard.com/insights/article/IWE_InvComMktPrspctvsOct2019

Black Rock -- 6%
https://www.blackrock.com/institutions/en-us/insights/charts/capital-market-assumptions

J.P. Morgan -- 5.25 - 6%
https://am.jpmorgan.com/us/institutional/ltcma-2019-executive-summary

 

[NW-Bound]

Market efficiency proponents would be wrong . There's no way the former company has better growth prospects than Apple! My former company does the same work as my current company, and the relative share prices of the two clearly show the former is overpriced. Consulting companies have limited profit margins, because they're selling labor hours, and labor hours in the US, for engineering, environmental, defense, and construction aren't cheap. I'm not complaining, though, as my ESOP shares have gained 73%...just waiting for the correction!

Eh, how do you dare argue against a Nobel laureate?

Anyway, is there any way you can divest of some of the shares if you think they are overvalued?