What can we expect in returns

[street]

I believe there is a thread on what can be expected for return in percent but I couldn't find it.

So I know that 7% is used as a yearly percentage for return on stock/bond investments. That seems fairly high but what percentage would you guess over a 20 year span that we could expect?

Some of you may have tracked these numbers. I also know that each one has their money in different allocations etc. so all that makes a difference. I'm looking for a conservative number but with some history and returns over time.

 

[CaliKid]

I would probably use 5% if you have a reasonably aggressive portfolio.

 

[street]

I found the chart for 90 year history. Thanks

 

[NW-Bound]

We have visited this topic several times in this forum, before you got here. Basically, historical return is one thing, but looking forward in the immediate decades ahead is another. Even Bogle himself said that we should expect a lower return than that in the past.

Perhaps someone else may volunteer a link, but as I remember, one should still be OK with a WR of 3.5-4%, and with inflation adjustment too. In the past, one would die rich with that WR.

 

[Scuba]

It depends on your asset allocation and risk tolerance. If you are invested for the long term and can live with some volatility your options expand exponentially.

 

[NW-Bound]

OK, here it is.

In an interview in 9/2016, Bogle said 4% to 5% for stock, and that's before inflation which can run 1.5% to 2%. So, take out inflation and you have around 3% after inflation. Total return is going to be worse, if you hold some bonds.

Why the low returns? For stocks, it's because of high P/E, hence no room for P/E expansion. For bonds, it's because of low Treasury yields.

See: Bogle Forecasts Low Stock and Bond Market Returns

 

[calmloki]

OK, here it is.

In an interview in 9/2016, Bogle said 4% to 5% for stock, and that's before inflation which can run 1.5% to 2%. So, take out inflation and you have around 3% after inflation. Total return is going to be worse, if you hold some bonds.

Why the low returns? For stocks, it's because of high P/E, hence no room for P/E expansion. For bonds, it's because of low Treasury yields.

See: Bogle Forecasts Low Stock and Bond Market Returns

And thank you for your guesstimate on inflation. I have always wondered what others use for that figure as it seems so very important. I have been using 3%, so 2% would make my planning much happier. We are all just giving it our best guesses though - who knows when that bus is going to hit us, making all our careful plans for naught?

 

[target2019]

I've been using 2.5% for inflation. I'll bump that up to 3% this year.

 

[Totoro]

OK, here it is.

In an interview in 9/2016, Bogle said 4% to 5% for stock, and that's before inflation which can run 1.5% to 2%. So, take out inflation and you have around 3% after inflation. Total return is going to be worse, if you hold some bonds.

Why the low returns? For stocks, it's because of high P/E, hence no room for P/E expansion. For bonds, it's because of low Treasury yields.

See: Bogle Forecasts Low Stock and Bond Market Returns

+alot (can we stop agreeing for once?)

I use the same approach as Bogle. Mind you, he talked about the next decade but the next 20 years is quite similar. In fact, it should be more accurate as valuation swings even out.

Simply put: World GDP growth / earnings growth + Dividend yield - Inflation is a decent baseline to design scenarios around. The median scenario for me is roughly: 5% + 2% - 2% = 5% before costs.

World GDP growth / earnings growth is remarkably stable by the way. Inflation .. well I'm assuming that most rich countries have that under relatively control and as a high priority. Almost all of them target around 2%.

Anyway, as stated .. baseline. One meteor and we're toast. One car accident and I'm toast. A winning lottery ticket and I don't care ..

 

[NW-Bound]

And thank you for your guesstimate on inflation. I have always wondered what others use for that figure as it seems so very important. I have been using 3%, so 2% would make my planning much happier. We are all just giving it our best guesses though - who knows when that bus is going to hit us, making all our careful plans for naught?

You are welcome, but these numbers are not mine. They are Mr. Bogle's, as quoted from the interview that I provided the link to.

And Bogle said that these were his projection for the average over the next decade (or two). It is not for the next year.

 

[exnavynuke]

We can expect whatever we want. Reality is going to give us whatever it gives us anyway though, and I don't think anyone has a working crystal ball. As such, I plan using historic norms and don't try to second guess that with various "what if"s and "this person says XYZ" or "that person says ABC". Heck, if you listened to GMO last year you'd be in TIPS and out of equities and bonds since they were predicting negative returns over the next ten years for both US equities and bonds.

 

[NW-Bound]

Bogle never said to sell stocks. It's about the only thing there is. It simply will not give us the wonderful return of 1982-2000.

I am not a Bogle worshipper, but he and Shiller have been saying the same thing for a few years now. They are trying to temper the public's expectation for a wonderful market return.

 

[MichaelB]

Are the low future returns the result of low annual returns, or high volatility? This has very important implications for asset allocation.

 

[NW-Bound]

I have not seen Bogle say anything about volatility. Same as Buffett, Shiller, he never claims to know what the market will do this year, or the next.

I believe what he meant was that, 10 or 20 years from now, when we look back at the market performance of 2017-2037 we will see the annualized return as he projected. And he based it on economic conditions as he saw it.

PS. Regarding historical returns, Bogle dismissed it, saying in an interview that the economic condition now is nothing like the past, so one cannot project the past to the future. Shiller has been saying the same thing.

 

[street]

Thanks for the information. It is a guess because of all the factors that could effect what return we could get. I use 1.7% when I do some scenario's but I have really no method in using that number for a yearly return. I do know it would be conservative number and anything better would be very good.

Inflation number I always use 4% so I use the worst case scenario for my investments. Even with these numbers I still do fine for the long haul.

 

[Midpack]

Rick Ferri's 30 year forecast for most asset classes, as good as any IME. I didn't find a more current version.

https://portfoliosolutions.com/late...tfolio-solutions-30-year-market-forecast-2015

 

[Independent]

And thank you for your guesstimate on inflation. I have always wondered what others use for that figure as it seems so very important. I have been using 3%, so 2% would make my planning much happier. We are all just giving it our best guesses though - who knows when that bus is going to hit us, making all our careful plans for naught?

Correct. That's why we use bad-case scenarios for planning instead of most-likely.

If you want a market consensus on most-likely future CPI, you can compare the rates on TIPS vs. regular Treasury bonds.

The Fed does the calculation for 10 year maturities and produces this handy graph. https://fred.stlouisfed.org/series/T10YIE

The answer is 2.0% today. Over the last 13 years, it has gone as high as 2.75% and as low as 1.25%.

They also do a 20 year, which is just a little higher.

 

[NW-Bound]

In the immediate future, I would not be surprised to see inflation surging to 2.5% or higher. The market seems to anticipate this. My son is buying a home, and the 30-year-fixed rate is now past 4%.

 

[ERD50]

I expect the market to give us whatever it gives us. It doesn't make sense to me to 'expect' anything else.

If we had expectations that meant something, we could all happily be Dirty Market Timers.

Instead, use something like FIRECalc to see what has happened historically.

-ERD50

 

[ERD50]

In the immediate future, I would not be surprised to see inflation surging to 2.5% or higher. The market seems to anticipate this. My son is buying a home, and the 30-year-fixed rate is now past 4%.

I was surprised to see that. DD refinanced a few months ago and got just over 3% - but for a 15 year loan. I see 15 years are up a bit ~ 3.25%.

I do recall the 15-30 year delta significant back then too, but don't recall the numbers.

-ERD50

 

[NW-Bound]

I expect the market to give us whatever it gives us. It doesn't make sense to me to 'expect' anything else.

If we had expectations that meant something, we could all happily be Dirty Market Timers.

Instead, use something like FIRECalc to see what has happened historically.

-ERD50

Sure. It means that in the worst case, a 3.5% WR will leave one broke after 30 years. It's fine with me, as I do not expect to live for 30 years. And I still have SS as a safety margin.

Pension managers do not have this luxury. They have to have a projection of returns. And Bogle has been scolding them for setting it too high.

 

[ERD50]

Sure. It means that in the worst case, a 3.5% WR will leave one broke after 30 years. It's fine with me, as I do not expect to live for 30 years. And I still have SS as a safety margin.

Pension managers do not have this luxury. They have to have a projection of returns. And Bogle has been scolding them for setting it too high.

A little nit-pick of the numbers, but a 3.59% WR has been historically successful over 30 year tests (I just ran FIRECalc to verify that, with $1M portfolio for easy math). So 3.5% would leave you with a little.

$35,947 (out of $1M) provided a success rate of 100.0%

I feel that pension managers should be forced to assume nothing better than keeping up with inflation (even that can be challenging sometimes). If they fall behind for more than a few years, they should have to boost their contributions, or adjust their payout. People are depending on that promise, the predictions should be conservative.


-ERD50

 

[Totoro]

The Dutch pension funds currently have to use 1% real return I think - maybe even less. They also cannot increase payouts once their coverage drops below 110%, and have to reduce once it falls below 100% (if I recall correctly)

Regulators are doing their job here, even if it may be too conservative in the end.

 

[MichaelB]

I have not seen Bogle say anything about volatility. Same as Buffett, Shiller, he never claims to know what the market will do this year, or the next.

I believe what he meant was that, 10 or 20 years from now, when we look back at the market performance of 2017-2037 we will see the annualized return as he projected. And he based it on economic conditions as he saw it.

PS. Regarding historical returns, Bogle dismissed it, saying in an interview that the economic condition now is nothing like the past, so one cannot project the past to the future. Shiller has been saying the same thing.

I think Bogel's projections use a methodology similar to Shiller's PE10. If so, I think that means the averags are not annualized. If you add volatility into the mix, the projected returns fall. So, the low projection is even worse. And the volatility means you have to manage risk by keeping a safer allocation in stocks.