Long-Term Market Returns

[OldShooter]

Am I the only one that thinks many folks % returns are excessively (perhaps conservatively) low? My research has always shown long term nominal returns (not accounting for inflation) of close to 10% for the market, with real returns being closer to 7% (net of inflation). But I'm certainly no pro

I typically use 7% (net of inflation) in my calculations, under the assumption that if I have $XYZ today and contribute $ABC per year for 10 years earning 7% annually, I will have $ZZZ 10 years from today, in today's dollars (not the dollars of 2029). In reality, my stash will be larger but by using a real return, it lets me know what I will be able to spend 10 years from now, in today's dollars.

Or are my assumptions totally whack??

Well, as I tried to point out in post #11, I don't think using one's highest accuracy estimate for future planning is wise and if I understand you, that sounds like what you are doing.

The reason is that the consequences of a "miss" are asymmetric. Underestimating is not really a problem, but overestimating returns could result in running out of money. Stirring inflation into the pot (not that it isn't important) is the same -- consequences of an error are assymetric.

So IMO we can play with these numbers, consult crystal balls, fortune tellers, and astrologers, but in the end we had better be conservative with our planning numbers. "Excessive conservatism" is probably judged only in the eye of the beholder.

 

[Archman]

............I'd be interested to hear what number others use for long-term forecasting - or how you approach it over such a long term.,,,,,,

For my calculations in Monte Carlo simulations, I have a time frame of 40 years, 4% average annual return, with standard deviation of 7.5% ( due to being ~half in equities), with a 3% inflation.

 

[NW-Bound]

Am I the only one that thinks many folks % returns are excessively (perhaps conservatively) low? My research has always shown long term nominal returns (not accounting for inflation) of close to 10% for the market, with real returns being closer to 7% (net of inflation). But I'm certainly no pro

I typically use 7% (net of inflation) in my calculations, under the assumption that if I have $XYZ today and contribute $ABC per year for 10 years earning 7% annually, I will have $ZZZ 10 years from today, in today's dollars (not the dollars of 2029). In reality, my stash will be larger but by using a real return, it lets me know what I will be able to spend 10 years from now, in today's dollars.

Or are my assumptions totally whack??

When people talk about long-term market return, they use a number that is computed over several decades. Any period of 10 years can deviate significantly from that average. And the market tends to alternate between these extremes.

Most recently, we had wonderful years from 1990 to 2000, followed by the Lost Decade of 2000-2009, then wonderful return again from 2009 till now. So, what is likely to happen in the next 10 years?

It makes more of a difference to retirees, who have to live off their stash. They want to sell high for food and for travel. People who are still accumulating can just keep on buying stocks, the cheaper the better. Different situations here.

 

[jjuneau]

I use mostly mutual funds

The future is unpredictable, but there are quite a few mutual funds that have provided double digit returns over 5, 10, and even 20 years.

 

[Navigator]

Am I the only one that thinks many folks % returns are excessively (perhaps conservatively) low? My research has always shown long term nominal returns (not accounting for inflation) of close to 10% for the market, with real returns being closer to 7% (net of inflation). But I'm certainly no pro

I typically use 7% (net of inflation) in my calculations, under the assumption that if I have $XYZ today and contribute $ABC per year for 10 years earning 7% annually, I will have $ZZZ 10 years from today, in today's dollars (not the dollars of 2029). In reality, my stash will be larger but by using a real return, it lets me know what I will be able to spend 10 years from now, in today's dollars.

Or are my assumptions totally whack??

Your real market return seems high, but that depends on your asset allocation. In reality, you are unlikely to get 7 % return every year, but will have a range of returns. The low interest rates and high market valuations of today suggest that returns will be below average for the next ten years. A good way to get an idea of the range of possible ten year returns is to use both a Monte Carlo simulator and a calculator based on historical return sequences. They will not agree, but both give useful information.

 

[OldShooter]

The future is unpredictable, but there are quite a few mutual funds that have provided double digit returns over 5, 10, and even 20 years.

Yes. There are people who have won the lottery, too. But they are impossible to identify ahead of time.

 

[Rianne]

I'm glad FIRE calc uses the depression data in it's calculations.

 

[Dtail]

I'm glad FIRE calc uses the depression data in it's calculations.

Agree, although I think that the 1966 retiree was considered the worst off in a 30 year retirement from a historical sequential concept.
Not 100% sure though.

 

[Navigator]

Well, as I tried to point out in post #11, I don't think using one's highest accuracy estimate for future planning is wise and if I understand you, that sounds like what you are doing.

The reason is that the consequences of a "miss" are asymmetric. Underestimating is not really a problem, but overestimating returns could result in running out of money. Stirring inflation into the pot (not that it isn't important) is the same -- consequences of an error are assymetric.

So IMO we can play with these numbers, consult crystal balls, fortune tellers, and astrologers, but in the end we had better be conservative with our planning numbers. "Excessive conservatism" is probably judged only in the eye of the beholder.

I know a lot of people believe this, but I think it misses an important point: there are two parts to the retirement equation, time and money. If you are overly conservative with money then you are throwing away time to enjoy life. To me, the goal is to have the best possible life. As someone who has performed modeling their whole career, I would suggest the best way to balance both time and money is to perform an analysis with a best guess of likely market returns and look at the range of possibilities around this. Using this, I would develop strategies that minimize the likelihood of bad outcomes, both in terms of running out of money and in not having enough free time to do the things in life I want.

 

[Running_Man]

Yes. There are people who have won the lottery, too. But they are impossible to identify ahead of time.

Well you could increase your odds of identifying if you look at those that buy lottery tickets versus those that don't.

 

[OldShooter]

I know a lot of people believe this, but I think it misses an important point: there are two parts to the retirement equation, time and money. If you are overly conservative with money then you are throwing away time to enjoy life. To me, the goal is to have the best possible life. As someone who has performed modeling their whole career, I would suggest the best way to balance both time and money is to perform an analysis with a best guess of likely market returns and look at the range of possibilities around this. Using this, I would develop strategies that minimize the likelihood of bad outcomes, both in terms of running out of money and in not having enough free time to do the things in life I want.

I'm not sure we really disagree on this. One does not necessarily need to go nuts either being optimistic or pessimistic. Another factor that gets overlooked a lot is that withdrawal rates are probably never constant and can almost always be managed. So manage for happiness early on with the understanding that a cutback may be necessary in the future.

All we really need is enough. Recounted in a couple of Bogle's books:

At a party given by a billionaire on Shelter Island, the late Kurt Vonnegut informs his pal, author Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel, Catch-22, over its whole history. Heller responds, “Yes, but I have something he will never have – enough.”
​

https://awealthofcommonsense.com/2013/12/enough/

Well you could increase your odds of identifying if you look at those that buy lottery tickets versus those that don't.

Actually, when our state put in a lottery the local public radio station interviewed a statistics professor from UC Berkeley. His comment was: "Well, your odds of winning are about the same whether you buy a ticket or not."

 

[Ed_The_Gypsy]

I'm not sure we really disagree on this. One does not necessarily need to go nuts either being optimistic or pessimistic. Another factor that gets overlooked a lot is that withdrawal rates are probably never constant and can almost always be managed. So manage for happiness early on with the understanding that a cutback may be necessary in the future.

All we really need is enough. Recounted in a couple of Bogle's books:

At a party given by a billionaire on Shelter Island, the late Kurt Vonnegut informs his pal, author Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel, Catch-22, over its whole history. Heller responds, “Yes, but I have something he will never have – enough.”
​

https://awealthofcommonsense.com/2013/12/enough/

Actually, when our state put in a lottery the local public radio station interviewed a statistics professor from UC Berkeley. His comment was: "Well, your odds of winning are about the same whether you buy a ticket or not."

I/we have 'enough'.

I have oft repeated the quote, "your chances are about the same wether you buy a ticket or not".

Even so, I buy Hit 5 ticket from time to time. One chance in about 574,000.

Otherwise, I buy a coffee at McDonalds--$1 with free refills--and I drink a lot of coffee. (Actually, pretty good coffee as well.)

 

[Rianne]

Our portfolio with VG (90% of our net worth, does not include home) over 10 years is 5.2%. We've been invested in the boring 60/40 category since early 2000's. Made a few adjustments, nothing major. We have not WD and gains are slow and steady. We re-invest all dividends and capital gains.

 

[NW-Bound]

I/we have 'enough'.

I also have "enough" (but of course being greedy I always enjoy having more).

Having made it to the SS eligibility age and being able to draw it any time I need it, I am also just a couple of years from Medicare. Ah, finally something good coming out of getting old. Darn, I need to remind myself of some silver linings. Yesterday, in the middle of the night when I turned in bed, I felt pain in my left shoulder. It was bad, but not a sharp pain as I had with the right shoulder last year (which slowly went away over the next several months).

Back on market returns, with SS and Medicare, plus my spending going down all the time I am not worried about SORR. There's some advantage to working till your mid 50s, compared to youngsters who ER in their 40s. These also did not work that long to have much SS either.

At this point, I can see my WR going down below 2% and I still have the same lifestyle. I still like to be in the market and try to make money. It's something to do, and challenging.

 

[romans2]

I have averaged 5.8% over past 30 years at 65% stocks. After retirement I am at 50% stocks and use a 4.5% estimate for future earnings.

Hi is that 5.8% net of inflation or a straight 5.8% which would seeM low for 65% AA .. just interested for my own FIRE planning.