Realistic Investment returns: 7-10 years

[MichealKnight]

Ladies, Gents, Conservatives, Liberals, Vegetarians, Libertarians and all the ships at sea........

I'm going to ask this crystal ball question, but preface it with a few pleas:

*FireCALC: Yes, aware of it, have played with it.

*Market Timing - fully agree, not always possible.

So hoping for actual guesses....or basic opinions - free of our feelings on market timing or our devotion to firecalc.

Really hoping for people's opinions...no different than picking a stock, or making a sports prediction.

For a 7-10 year outlook..... and a 60/40 portfolio.... what do you feel is a realistic years return. NOMINAL return.

The reason I ask... if I early retire in 2020.... the nominal returns I'm hoping for hover around 5.25%-5.5%.

I look at the popular VWINX (Wellesley)....and of course the last 40+ years shows a nice 9% return. Many states seem to depend on 8% returns for their pensions. So when I see those numbers, I feel that my 5.5% desire is almost 40% LESS than people are used to in recent decades. Frankly I wonder what a 40% drop in investment income would mean for the nation and world but I digress.

Bottom line: is 5.5% (NOMINAL). wishful pie in sky thinking? Is it a slam dunk? Is it sort of realistic? Would really appreciate your guesses or opinions on this...and specifically, what you feel a 60/40 portfolio might return over the next 7-10 years.

Thanks for reading.

 

[Sunset]

I think the S&P will return 6.5% without inflation.

I base this on the past 10 yrs of the S&P ending 2018 returning 12.1% per yr. Which is a few % points higher than historical. Thinking this will someday revert to the mean, it suggests a lower return for some time in the future.
The safe choice is to assume the future is starting 2020.

With these low interest rates, can a person expect to get 4% in bonds over the next decade ?

If you do, then (6.5% × .6) + (4% ×.4) = 5.5%

 

[MichealKnight]

Thanks so much for the reply. Admittedly I'm not experienced with these things....but seems that higher yielding (lower quality) muni bonds have been paying 4%+.

Also - I didn't want to mention it because it's a whole new can of worms - but part of my "40" in the 60/40 might not be bond heavy. Seriously considering a net-leased McDonald's property - in a decent metro area, with McDonald's corporate guaranty - it's paying 4.2%-ish, with 1.5% yearly bumps. Certainly not risk-free - - - but I believe that McDonald's is gonna be ok, and that as long as it's a good locale - usually - McD stores don't go under. I look at the metro area my small biz has been located in since 1999.....thru the recession and the boom.....only *1* BurgerKing is closed. But all 3 McD, 3 Wendys, 2 Taco Bells, even Checkers - - all are still there.

 

[BeachOrCity]

Start with basic math in equities. Long term returns for the average large basket of stocks should be Dividends + Inflation + GDP. Currently that is about 6% or so. Everything else is just earnings growth outstripping inflation and gdp which is unsustainable. Or an expansion of the multiple investors will pay for a dollar of earnings. Also unsustainable.

The same logic can be applied to bonds which people should view as over the long haul just paying the underlying rate.

This is why the market was basically flat from 2000 to 2013. Earnings and inflation grew but the multiple shrank. It is also why the past 8 years from 2011 to 2019 grew so much faster than earnings. The multiple investors would pay grew.

 

[BeachOrCity]

The math in the above works out to 4.4% by the way if assuming 2% in bonds.

 

[audreyh1]

I think the S&P will return 6.5% without inflation.

I base this on the past 10 yrs of the S&P ending 2018 returning 12.1% per yr. Which is a few % points higher than historical. Thinking this will someday revert to the mean, it suggests a lower return for some time in the future.
The safe choice is to assume the future is starting 2020.

With these low interest rates, can a person expect to get 4% in bonds over the next decade ?

If you do, then (6.5% × .6) + (4% ×.4) = 5.5%

Why did you use 4% for bonds then when it seems unreasonable to expect it?

SEC yield is now more like 2.2% on core bond index funds tracking the commonly used BBAgg benchmark. SEC yield is generally considered a reasonable prediction of future long-term average returns when you buy into a bond fund.

 

[HadEnuff]

Ladies, Gents, Conservatives, Liberals,
......

Bottom line: is 5.5% (NOMINAL). wishful pie in sky thinking? Is it a slam dunk? Is it sort of realistic? Would really appreciate your guesses or opinions on this...and specifically, what you feel a 60/40 portfolio might return over the next 7-10 years.

Thanks for reading.

I think it's less than a slam dunk, especially given the returns of the last decade.

 

[DrRoy]

I believe that half of historic returns is reasonable in the current environment. I am hoping that it is not too optimistic. That would make this year an outlier, likely due to Fed easing and the equivalent of new QE.

 

[mrfeh]

I could hazard a guess, but I'm not sure what the point would be.

Nobody knows. Save as much as you can while still living life.

 

[jimbee]

I think the S&P will return 6.5% without inflation.

I base this on the past 10 yrs of the S&P ending 2018 returning 12.1% per yr. Which is a few % points higher than historical. Thinking this will someday revert to the mean, it suggests a lower return for some time in the future.
The safe choice is to assume the future is starting 2020.

But what if the past 10 yrs of stock market return (higher than historical) was a return to the mean for the 10 yrs before that (lower than historical)?

 

[LRDave]

I am expecting a rough next 10 years (and planning accordingly), but what do I know?

I thought the Astros were a slam dunk too....

 

[marko]

I usually plan on a 6% return each year.

My 5, 10 and 15 year returns on 60/40 are 8%, 9% and 7.5% respectively. Year-to-year of course is a different story.

I don't see any reason that a 5% return should be considered difficult to achieve in the future but as others have said, what do I know.

 

[mountainsoft]

For a 7-10 year outlook..... and a 60/40 portfolio.... what do you feel is a realistic years return. NOMINAL return.

The reason I ask... if I early retire in 2020.... the nominal returns I'm hoping for hover around 5.25%-5.5%.

According to Vanguard, a 60/40 mix has historically returned 8.6%.

https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations?lang=en

Of course, that is the long term average. In the short term, a 60/40 mix has lost 26.6% and could take a few years to recover. So you need to be prepared if the market tanks 26% again after you retire.

I currently have a 50/50 mix and use a 6.5% return with a 7% standard deviation in my estimates. I came up with those numbers after using my specific funds (VBTLX and VTSAX) in the Portfolio Visualizer over a variety of different time periods.

https://www.portfoliovisualizer.com/backtest-portfolio

Of course, past success does not guarantee future performance. Your 5.5% estimate sounds reasonable, but I would factor in the deviation also. a 6.5% return with a 7% deviation is safer than a 5% return with a 10% deviation.

 

[Midpack]

I could hazard a guess, but I'm not sure what the point would be.

Nobody knows. Save as much as you can while still living life.

+1, I’m not sure what the value is in guessing, and that’s all it is no matter what data or experience one might have. And real return is more useful than nominal anyway.

I use conservative guesses and hedge with a very low WR. YMMV

 

[Jerry1]

+1, I’m not sure what the value is in guessing, and that’s all it is no matter what data or experience one might have. And real return is more useful than nominal anyway.

I use Rick Ferri’s and other guesses and hedge with a very low WR. YMMV

Even using market averages is a guess. My guess is that a 60/40 portfolio can at least beat inflation. So in order to retire early and feel comfortable, my planning was very conservative, i.e., a very low WR.

My financial planner uses something over 5.5% and has me finishing the game with more than twice what I have now. That’d be great. My real plan has me ending with what I have now. I’d be happy if I end having spent my last dollar. It’s all a guess but we do have some control as we go along.

 

[enjoyinglife102]

I know at least as little as everyone else and maybe less but at these valuations and historically low interest rates, a lost decade of zero returns seems a lot more likely than historically average returns. Not sure what math anyone does to get 4% out of bonds when the 10 year is currently less than 2%.

 

[ERD50]

I could hazard a guess, but I'm not sure what the point would be.

Nobody knows. Save as much as you can while still living life.

+1, I’m not sure what the value is in guessing, and that’s all it is no matter what data or experience one might have. And real return is more useful than nominal anyway.

I use conservative guesses and hedge with a very low WR. YMMV

+1

And while the future may not mimic the past, we should at least look at the data for ref:

So historically, maybe -5% to +20%? There, does that help (no, not really!). Adjust for 60/40, and then factor in inflation.

No point in guessing - prepare for the worst, and you get what you get.

-ERD50

 

[Sunset]

Why did you use 4% for bonds then when it seems unreasonable to expect it?

SEC yield is now more like 2.2% on core bond index funds tracking the commonly used BBAgg benchmark. SEC yield is generally considered a reasonable prediction of future long-term average returns when you buy into a bond fund.

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.

 

[MichealKnight]

thanks

I questioned OP could OP 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.

Re the bonds..... I didn't want to turn it into a Real Estate thread.

But the "40%" - of the 60/40 will be mostly into real estate, with an expectation of 4% returns. I currently have 2 rental condos....each yields 4.6% - - this is after all expenses. The next piece would be a commercial building - that is leased to a McDonald's or Taco Bell. Realistically- they are paying 4.5% - - with 1.5% average yearly bumps. So I'm figuring 4% for the "40" part of the portfolio. Not risk free but neither are bonds. I also like it because it's not "paper" magic tricks like stocks and bonds - rather it is real property and I feel that Amazon can't Prime a taco. Sure, GrubHub is there - but they don't market or cook or serve the food. The risk is McDonald's or Taco Bell going down - which I highly doubt. The next risk is my particular property doesn't get re-leased - -- which is a real risk. However - I feel if it's in a decent metro area - be it DC, Raleigh, Durham, Atlanta - - most likely the chains re-up the lease and if they don't, usually other chains want to come in.

 

[mrfeh]

I know at least as little as everyone else and maybe less but at these valuations and historically low interest rates, a lost decade of zero returns seems a lot more likely than historically average returns.

+1

Both bonds and equities are expensive right now. If I were to make a guess, it would be below historical returns.

 

[PatrickA5]

I'm estimating my 45/55 portfolio will return 4.5% nominal. I suppose it's possible I could be off 5-10% up or down, but I'm pretty sure I've hit it on the head. Nobody can for sure tell me I'm wrong for at least 10 years.

 

[GravitySucks]

Nobody knows nothin.

Hoping for a steady 3% over the next ten years. Expecting about 7% over the next twenty years. Planning for a minus 25% next year followed by a flat five years.

 

[Qs Laptop]

For a 7-10 year outlook..... and a 60/40 portfolio.... what do you feel is a realistic years return. NOMINAL return.

8.47%.

Fidelity did a study of index returns from 1926 to the most recent recent year end data and found a 60/40 portfolio returned an average of 8.47%.

Now, the fine print shows some indexes were from 1976 forward; some were from 1987 forward; some from 1970 forward, but the S&P 500 was from 1926 forward and US intermediate term bonds were from 1926 forward.

 

[razztazz]

I few yrs back Jack Bogel was asked this in an interview. He did some quick math in his head with a 50/50 AA. I remember this because he joked that it was easier to do the math in his head if he used 50/50 instead of 60/40. Anyway he said with then current expectations over the next 10 yrs a 50/50 port would provide something like a (one-half %) real return. Wasn't looking good. And this was a few yrs ago. We've been almost steadily upward since then (except for last year's quicky-reboot.) So, perhaps we've even eaten up part of what he was expecting to give the 1/2% real return and the ten yrs starting now will be even grimmer?

I don't know what Bogel's predictive powers were. I know he did not like to "predict" per se. And I know he was not a Harry Dent et al type, always with the grand predictions. But as some above have referenced, he did know how to do "the math" of the thing.

 

[kgtest]

I usually plan on a 6% return each year.

My 5, 10 and 15 year returns on 60/40 are 8%, 9% and 7.5% respectively. Year-to-year of course is a different story.

I don't see any reason that a 5% return should be considered difficult to achieve in the future but as others have said, what do I know.

+1 all my spreadsheet "variables" includes 6% returns averaged out in the future. It's the best guess I can allow myself to plan against, without being too conservative.

Every year I beat 6% means the race gets shorter, and every year I don't it gets a little longer. But in the end, it's still ABOUT 12 more years of runnin.

Other variables are annual raises, COL, inflation @2%. I check my personal inflation risk against my budget. As long as I don't lose pay, we should be able to keep up with 2% inflation for the next 12 years and accomplish any goals we have with 6% returns at the rate we are saving ~40-50% of Gross.