What do you use as estimate (guess) regarding future rate of return?

[ggbutcher]

5%. Seems to be the biggest number I don't have to work too hard to get...

 

[samclem]

From Jason Zweig in today's WSJ: The New Era of Low Stock Returns

After more than six years of a bull market, investors should stare a cold, hard truth straight in the face: Future returns on stocks are likely to be far slimmer than the fat gains of the past few years.
Leading investment analysts think you will be lucky to squeeze out an average return of 2% annually, after inflation and fees, from a typical portfolio of stocks and bonds over the coming decade or so.
Investment expenses will loom much larger in a world of smaller expected returns. So will avoiding big mistakes.

That's based on historical returns when stocks are at today's valuations (Schiller's data), and by another estimating approach (based on dividends and dividends growth). William Bernstein agrees.

The author's observations and suggestions:

- First, you aren’t entitled to higher returns just because you feel you need (or deserve) them. . . .
- Take extra risk in a low-return world and you are likely to reap the risk without earning the reward. . . .

- You can also look overseas now. “The expected returns on foreign stocks are higher,” Mr. Bernstein says, “plus you’re buying the currencies cheap relative to the dollar.” . . .
- Next, treat every nickel like a manhole cover. Purge any expensive mutual funds, replacing them with well-diversified, low-cost index funds or ETFs. Against a backdrop of 2% returns, a half-percentage-point reduction in management fees will give a bigger boost to your returns than almost anything else you can do.

 

[Mulligan]

I assume 1% real return in my modeling (still in the accumulation stage) to factor in worst-case assumptions, but I realize that it will hopefully be better. Given that I have a large minority % exposure to oil/natural resources, it isn't too far off due to the plummeting we've seen lately in oil.



A few points to bring up, some of which have been pointed out by posters in various threads:

Current bond yields - FireCALC assumes a default, what, 60/40 portfolio mix? If 40% of your portfolio is bonds, and currently have a weighted yield of, what, 2% (maybe less?)...how does that compare with inflation, and what return will be going forward for bonds (both capital losses and microscopic yields)? How would another 5 years with your bond portfolio yielding this microscopic yield affect things? Remember that it's the first few years which can have huge ramifications later on in years 20-40. If 40% of your portfolio has a negative real yield for several years early on, how does that factor in with what your 60% of portfolio must do to compensate? Have rates ever been like this before in FireCALC's data inventory?

Before you answer that, read the other points below (especially the 'stock dividend yield point - which would do wonders to help offset non-existent bond yields)

One-time PE Expansion - If your average equity PE expands from perhaps 10 to more like 15-18 over the course of 60 years, that's a true one-time benefit to the investment returns which would NEVER be repeated....unless average PE expands again from 15-18 up to 25. Do you see this happening? Especially with world stock markets growing and making up a larger share of the equity pie?

Dividend Yields - Average stock dividend yields were ALMOST ALWAYS more than 4% for most of recent history up until perhaps 1980s. After that, zooming equity prices (coupled with economic expansion and PE expansion) dropped those dividend yields down to the S&P average yield of under 2% today. Do you think having 60% of your portfolio in equities yielding 4%-6% would be a significant factor in achieving a 4% SWR, irrespective of whatever the stock price did?

Now imagine what that does when that same 60% of your portfolio suddenly yields just 1.5%-2% instead of 4%-6%. Do you think it might have different results going forward during market gyrations? Yes, there will be capital gains to spend and grow your portfolio...but if you have to rely on eating up more of your portfolio capital gains to live off of, it becomes far more sensitive to the specific timing, compared to having your equities funding almost all of your expenses from dividends alone.

Tax impacts - as recently pointed out in this thread, there is also the specter of possible legislative policies which would have a true black swan impact to your models, completely unrelated to your asset mix, SWR, or any other calculations you previously worked up.

If you wish to take your chances with your models and assume higher real returns, then so be it....but don't act like those who take a more conservative approach for very legitimate, sound reasons are completely unrealistic and not basing their view on anything rational or real.

That PE expansion thing always has worried me. I do buy some mutual index funds monthly but don't pay attention and don't want to. Individually, I just buy higher yielding "safe" preferreds and nothing else (but that is not without warts either). I remember back in the day being told....Never buy a stock whose PE is higher than their growth rate. Ya that really works well today with the big caps any more. Of course I never here that philosophy discussed anymore either.


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[ERD50]

This was in response to my post #55, but I'm confused:

If you wish to take your chances with your models and assume higher real returns, then so be it....but don't act like those who take a more conservative approach for very legitimate, sound reasons are completely unrealistic and not basing their view on anything rational or real.

but how does that jibe with:

... I assume 1% real return in my modeling (still in the accumulation stage) to factor in worst-case assumptions, but I realize that it will hopefully be better. ...

If you are assuming 1% real, that is higher than the worst case static real return in the data-set (0.52% static real). So why do you say I'm taking chances with my models and assuming higher real returns? I am even more stringent, that number was for a 30 year retirement for reference, I plan to allow for longer, and I throw in a buffer on top of a 100% HSWR (at least that's my goal).


The rest of your post has to do with predicting the future. Sorry, can't help you there. But I still don't get how you consider yourself so conservative assuming 1% real, after all the possible doom & gloom you offered, when 1% is higher than what we have seen? Or infer that I think anyone else is unrealistic?

I don't recall criticizing anyone else's view of the future (correct me if I'm wrong). I've only been trying to separate out what the historic reports tell us versus what we decide to do based on the reports.

-ERD50

 

[Totoro]

But if you're interested in an opinion, Rick Ferri gives you one:Portfolio Solutions® 30-Year Market Forecast for 2015

Thanks for that link - he does seem very optimistic. 5% - 6% real in equities, 2.6% on 30 year TIPS (currently at 0.75%).

I hope he's right!

 

[Ed_The_Gypsy]

I am using 6% nominal for a 100% equities portfolio with 3% inflation for a 3% net real gain. Also using 2% COLA estimate for SS with a 25% haircut of SS in 2035 (IIRC).

Considering my recent performance, 6% may be optimistic.

Considering folding the tent and converting everything to Wellington (60/40).

 

[Fermion]

The future rate of return over a longish period is going to be about what it has been in the past, or things will change so much that it won't matter what you predict.

Too many programs and budgets depend on the future remaining similar to the past.

So 4% real?

 

[Spanky]

I am using 6% nominal for a 100% equities portfolio with 3% inflation for a 3% net real gain. Also using 2% COLA estimate for SS with a 25% haircut of SS in 2035 (IIRC).

Considering my recent performance, 6% may be optimistic.

Considering folding the tent and converting everything to Wellington (60/40).

I am using 6% as nominal and also considering switching some allocation to Wellington or Wellesley. The concern is that these funds do not have much international exposure.

 

[Hamlet]

22%. I have a system.