What Investment Rate of Return do you Use?

[devans0]

I have literally gone back to school on investing. FI gave me some free time so I decided to learn more about economics and investing. I missed these the first time around in school. An economics and accounting professor told me that he aims for 15% returns. He doesn't disclose specifics of his portfolio, but I am working on learning how he works his fishing spots. It is hands-on intensive searching for value in the small cap ponds. That kind of return has me questioning everything I accepted as truth about investments. One thing that is clear, there are quite a few businesses that have lost sight of their business is about, as they have grown. Culling these businesses out of my miniscule personal mutual fund is my education. If it works out, I'll increase beyond play money.

[Golden sunsets]

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Originally Posted by devans0 I have literally gone back to school on investing. An economics and accounting professor told me that he aims for 15% returns. I am working on learning how he works his fishing spots. First rule of his econ class, "TNSTAAFL". It is hands-on intensive searching for value. I am questioning everything about investments.

What does your Econ professor say about the uncompensated risk of investing in individual equities?

[Golden sunsets]

To all; I'm the OP and I want to thank all of you for sharing your data points and those like Racy who have shared professional's predictions. I had a conversation on this topic with my 31 year old son yesterday. I shared with him the gist of the responses to my question on this thread and he was initially shocked at the consensus of such low percentages for future growth. He is just entering the wealth accumulation stage and is assuming 7.5% -8.0% real in a heavily equity centric (50% international) portfolio. He did observe that the conservative responses of this board's projections are obviously reflective of our age/retirement status. On the other hand whatever future returns turn out to be will be the same for him as for this group( after factoring in a more or less aggressive AA). So for projection purposes I've settled on 5% nominal for Equities and 2% FI with 2% inflation. Fortunately for me our SWD rate will still be well below 2%.

[Totoro]

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Originally Posted by Golden sunsets He is just entering the wealth accumulation stage and is assuming 7.5% -8.0% real in a heavily equity centric (50% international) portfolio.

Let him investigate historical returns over 20-year periods and calculate the real return on equity investments + the range of returns. Be sure to take into account expenses and potential taxes.

Then let him explain why he is more optimistic (as he will find out) about the future than the typical return ranges of the past.

[devans0]

Speaking from conversations, that professor gave stats that diversifying to 17 or so stocks ( vague from my poor recall.) reduced that risk by 90%. The unexpected detail was that by the studies he cited said that diversifying across sectors made almost no difference. He has two PHDs and is working to his third. What makes him more credible to me is that he is successful at investing. I disagree with his austerity conservativism bent, though. This professor is probably closer to your son's age, so risk is rewarded in the long term and he has recovery time.

[eta2020]

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Originally Posted by devans0 Speaking from conversations, that professor gave stats that diversifying to 17 or so stocks ( vague from my poor recall.) reduced that risk by 90%. The unexpected detail was that by the studies he cited said that diversifying across sectors made almost no difference. He has two PHDs and is working to his third. What makes him more credible to me is that he is successful at investing. I disagree with his austerity conservativism bent, though. This professor is probably closer to your son's age, so risk is rewarded in the long term and he has recovery time.

If we could really get 15% annual returns he would not be a professor but some kind of financial whiz money manager.

Now I am sure looking back he is capable to construct portfolio that returns even more then 15%

[NW-Bound]

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Originally Posted by eta2020 Now I am sure looking back he is capable to construct portfolio that returns even more then 15%

Who needs a stinkin' portfolio? Just a single stock, the right one, will do the job.

[eta2020]

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Originally Posted by NW-Bound Who needs a stinkin' portfolio? Just a single stock, the right one, will do the job.

Even crook Bernard Madoff was not doing 15% annually

[NW-Bound]

That's because Madoff pretended to have a portfolio, and not a single stock.

It turned out that he had "no stock".

[Danmar]

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Originally Posted by mathjak107 because of sequence risk anything less then a 2% real return average over the first 15 years of a 30 year retirement stands a very high chance of failing at 4%. that is what caused all our worst case scenario's . so odds are 0% will not support a 4% inflation adjusted return , you would have to draw less if 10 or 12 years in to retirement you were at zero . . .

Yes, my point. If you are really this pessimistic are you adjusting your WR accordingly? Once retired you really only have to settle on a SWR, which you can adjust if actuals dictate of course. It would be consistent if your SWR reflected both average returns and sequence of return risks. I doubt many people do this. Rather they fall back on Firecalc which inherently has higher historical returns than many forecast now.

[Whisper66]

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Originally Posted by devans0 An economics and accounting professor told me that he aims for 15% returns. ......

Aw shucks, I "aim" for 15% returns also......and probably achieve it as seldom as anyone else does....doesn't hurt to aim though!

[pb4uski]

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Originally Posted by devans0 ...An economics and accounting professor told me that he aims for 15% returns. ...

WADR, if he was actually achieving 15% returns then he wouldn't need to work. Be skeptical of his claims. There is no such thing as a free lunch.

[devans0]

Fifteen percent is in the high range, way above prudent safe returns at later stages.

If I was still young, I would have a huge portion for riskier returns. Even now, I still have room for risk for my allocations. Even a 5% portion returning 12% real, funds my bareboned living expenses. I am not willing to write that off. My prof concentrating on a the small cap area that isn't followed by analysts, leaving gaps in MPT. He is using his know how to exploit those gaps.

My own portfolio has increased 4 times since the low of 2008. Note the cherry picking of time and the unstated boosts by contributions.

[stepford]

With 3 PhDs he must be at least 3 times as smart as I am. No wonder he can achieve 3 times my rate of return.

[devans0]

Still two and working on the third PHD, but yes, he is that ambitious, driven and smart.

[NW-Bound]

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Originally Posted by pb4uski WADR, if he was actually achieving 15% returns then he wouldn't need to work. Be skeptical of his claims. There is no such thing as a free lunch.

With 15% return, I would need just a stash of $1M to generate way more than my current expenses, and still have a lot left over to allow for inflation. That would be nice.

Perhaps he started out late, and still needs to build up his principal.

[daylatedollarshort]

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Originally Posted by devans0 Still two and working on the third PHD, but yes, he is that ambitious, driven and smart.

The folks at Long Term Capital had a lot of fancy degrees, too, and even a couple of Nobel prize winners, and made good returns for awhile until they didn't:

"Initially successful with annualized return of over 21% (after fees) in its first year, 43% in the second year and 41% in the third year, in 1998 it lost $4.6 billion in less than four months following the 1997 Asian financial crisis and 1998 Russian financial crisis requiring financial intervention by the Federal Reserve, with the fund liquidating and dissolving in early 2000."

https://en.wikipedia.org/wiki/Long-T...tal_Management

If someone had a surefire way to make 15% a year without fail, logically they would be a high level investor or investment manager and not working as a college professor.

[Meadbh]

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Originally Posted by Danmar For those already retired why do you forecast total returns at all? I've been retired 9 years and just spend what divs I get. These are very easy to forecast. Some years total return is great others not so much. Why forecast total returns other than to project what my heirs might get? Actual divs seem way more useful and certain? Even if you are not a div investor, why forecast returns once retired?

Some of us wouldn't get by on dividends alone. We need to take a total return approach.

[NW-Bound]

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Originally Posted by Meadbh Some of us wouldn't get by on dividends alone. We need to take a total return approach.

More than total return meaning cap gain in addition to dividends, I may have to dip into principal too.

I have become a spendthrift, but hey, if you cannot spend your stash, whose can you spend? Your kids' inheritance?

They will be grateful enough that I leave them the two homes, and not take out reverse mortgage on them.

[Danmar]

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Originally Posted by Meadbh Some of us wouldn't get by on dividends alone. We need to take a total return approach.

Yes I understand that. I shouldn't have mentioned divs, a red herring. Although a dividend approach is not strictly dependent on portfolio size..

Have you read my subsequent posts? Why forecast total returns when the actuals are so easily observed? What would you do differently other than adjust your SWR down? Based on forecast rather than actuals?