Negative real returns ahead?

[gcgang]

https://www.gmo.com/docs/default-sou...).pdf?sfvrsn=4

Above is a link to GMO's (Jeremy Grantham's co) March 2016 forecast for asset class return the next seven years. They publish this quarterly, I think, and their past record has been pretty accurate.

ALL asset classes are projected to have well below average return potential, with only Emerging Markets related making even 2-4% real (2.2% is their inflation assumption), and US Large Cap expected to LOSE 2.1% per year.

Makes sense to me, with the 0% to negative yields around the world. I'm hanging on to my appreciated taxable equity, but keeping the rest much more defensive than usual, both because of valuation and my shortened retired time horizon.

If they're right, expect more pension shortfalls, as most large ones still assume 6-8% on a 60/40 allocation.

[Gone4Good]

Quote:

Originally Posted by gcgang https://www.gmo.com/docs/default-sou...).pdf?sfvrsn=4 Above is a link to GMO's (Jeremy Grantham's co) March 2016 forecast for asset class return the next seven years. They publish this quarterly, I think, and their past record has been pretty accurate. ALL asset classes are projected to have well below average return potential, with only Emerging Markets related making even 2-4% real (2.2% is their inflation assumption), and US Large Cap expected to LOSE 2.1% per year. Makes sense to me, with the 0% to negative yields around the world. I'm hanging on to my appreciated taxable equity, but keeping the rest much more defensive than usual, both because of valuation and my shortened retired time horizon. If they're right, expect more pension shortfalls, as most large ones still assume 6-8% on a 60/40 allocation.

Makes sense to me.

We've entered a world of return free risk.

[Whisper66]

Can't get to the article, behind a registration wall. Would be curious for a brief summary of what general things were driving them to the below average return conclusion.

[gcgang]

Grantham has long railed against the policies of the worlds central banks. He feels their policies have artificially driven equity valuations to high levels, concluding if S&P gets to 2300, we will have entered 2 sigma bubble territory.

As for bond returns, how are you going to get 4-6% when 30 year bonds yield 2.5%?

The experience of Japan, with 20 years of near 0% rates, and negative equity returns, may be a more relevant comparison for our current market than US historical returns.

This is my article recall summary. Sorry you can't access the article. I thought it was a public site with no restrictions.

[DrRoy]

Anyone's prediction of future returns is just a guess, even if an educated one. I can believe that future equity and bond returns will be low, given high valuations, also high corporate profits as a % of the economy, slower productivity growth, and slower population growth. I do not think it is a guarantee of long term negative returns, but it is not ridiculous to be more defensive than usual.

[Dash man]

With world wide debt, government, commercial and personal at all time highs and governments not having any idea where they are leading us, I've been somewhat conservative for a while. I keep several years of living expenses in cash/CDs and my equities are in companies that pay dividends and have strong balance sheets and are mainly in companies that provide things customers need to live and strong brands. I avoid bonds completely. I do have investment real estate and strong REITs are part of my stock portfolio in retirement accounts. I also have a $16k pension that I have mostly withheld for taxes so we don't bother with quarterly tax filings on our dividends and interest and rental income. I do keep some equities in growth ETFs/funds because no one can predict what will happen for certain. I sleep well at night because we're also debt free.


Sent from my iPhone using Early Retirement Forum

[Gone4Good]

Quote:

Originally Posted by DrRoy Anyone's prediction of future returns is just a guess, even if an educated one. I can believe that future equity and bond returns will be low, given high valuations, also high corporate profits as a % of the economy, slower productivity growth, and slower population growth. I do not think it is a guarantee of long term negative returns, but it is not ridiculous to be more defensive than usual.

Putting an exact number on future returns is indeed a guess. But in a single sentence you lay out a pretty compelling case for why we should expect future returns to fall far short of historic norms.

At least during the tech bubble I could hide out in 6%-7% 30 year treasuries. Now? 2% 5 year CDs.

[haha]

Quote:

Originally Posted by gcgang Grantham has long railed against the policies of the worlds central banks. He feels their policies have artificially driven equity valuations to high levels, concluding if S&P gets to 2300, we will have entered 2 sigma bubble territory. As for bond returns, how are you going to get 4-6% when 30 year bonds yield 2.5%? The experience of Japan, with 20 years of near 0% rates, and negative equity returns, may be a more relevant comparison for our current market than US historical returns. This is my article recall summary. Sorry you can't access the article. I thought it was a public site with no restrictions.

All that is required is a simple registration.

And as to "anybody's etc is just a guess etc", for sure some people are very good guessers. Another very good guesser speaks in today's WSJ, Sam Zell. He is also sees trouble ahead, in his case as falling real estate prices. He's been right before, way more than he has been wrong. And he backs his statements with his bets.

But hey, it's all good all the time, right?

Ha

[Whisper66]

Quote:

Originally Posted by gcgang ......This is my article recall summary. Sorry you can't access the article. I thought it was a public site with no restrictions.

Thanks for the summary. Like the article and some of the voices here, I have also been concerned and have moved assets to more conservative position. Set up to be ok through possible market drop + poor returns for several years.

PS: after going back, looks like the site is public but the link provided took me to a resgistration page that assumed I was already registered. Since I hadn't registered previously it wouldn't let me in to see report.

[nash031]

Quote:

Originally Posted by haha All that is required is a simple registration. And as to "anybody's etc is just a guess etc", for sure some people are very good guessers. Another very good guesser speaks in today's WSJ, Sam Zell. He is also sees trouble ahead, in his case as falling real estate prices. He's been right before, way more than he has been wrong. And he backs his statements with his bets. But hey, it's all good all the time, right? Ha

I don't think anyone said "all good all the time." Rather, I think the point is that someone predicting the future is as likely right as he is wrong, thus attempting to do so is an exercise in futility.

Here's my prediction (seriously): real returns will be negative for some portion of the next five years, but real returns will be positive in the next five years as well. I don't know when either will happen, nor do I care to guess.

[haha]

Quote:

Originally Posted by nash031 I don't think anyone said "all good all the time." Rather, I think the point is that someone predicting the future is as likely right as he is wrong, thus attempting to do so is an exercise in futility. Here's my prediction (seriously): real returns will be negative for some portion of the next five years, but real returns will be positive in the next five years as well. I don't know when either will happen, nor do I care to guess.

Well, you are certainly entitled to this opinion, and it is a commonly held one. I believe it is false, but I have no interest in trying to convince anyone else.

Ha

[nash031]

Quote:

Originally Posted by haha Well, you are certainly entitled to this opinion, and it is a commonly held one. I believe it is false, but I have no interest in trying to convince anyone else.

Just so we're clear, the part you think is false is my opinion that one can't accurately predict the future? Because the other opinions in there are essentially "market will go up and market will go down over the next five years." Just want clarity, that's all.

[foxfirev5]

Quote:

Originally Posted by haha Well, you are certainly entitled to this opinion, and it is a commonly held one. I believe it is false, but I have no interest in trying to convince anyone else. Ha

How true. Convincing someone of your opinion will not change the outcome. Personally I plan for the worst and anything else is a bonus.

[haha]

Quote:

Originally Posted by nash031 Just so we're clear, the part you think is false is my opinion that one can't accurately predict the future? Because the other opinions in there are essentially "market will go up and market will go down over the next five years." Just want clarity, that's all.

Sorry. It is that i think that very good investors have a reasonable chance in a stochastic sense of being well above chance in situations where they a re willing to make bets. Grantham has a real time public record going back many years. Sam Zell who I mentioned sold Equity Office Properties in 2007, and has a long record, again public, of highly profitable real estate operations.

Just because some academic can't do it, and wants to sell the idea that it cannot be done, in no way makes this correct. It is the dominant idea among FAs, and believers in unvarying AA. Though looking at all the market timing threads on this site makes me wonder what really is the dominant idea here.

What these successful practitioners seem to have in common is that they don't mess with average conditions. When things get seriously out of whack, high or low, they see a possibility to act successfully.

Ha

[MasterBlaster]

While I agree that nobody can predict markets, it does seem to me that markets will revert to their long term patterns (mean reversion) eventually. Based on mean reversion it does seem like returns over the next decade or two will be small.

I do recognize that markets can stay out-of-whack for very long periods before they revert. But they eventually will.

The real question is... Where should my assets be now considering that almost everything is ZIRP-inflated and knowing cash (or equivalent) pays negative real returns.

[eta2020]

Most long term predictions for US equities are in 6-7% range. Given historically low inflation and slow population growth that 6-7% is within long term paterns.

[nash031]

Quote:

Originally Posted by haha Sorry. It is that i think that very good investors have a reasonable chance in a stochastic sense of being well above chance in situations where they a re willing to make bets. Grantham has a real time public record going back many years. Sam Zell who I mentioned sold Equity Office Properties in 2007, and has a long record, again public, of highly profitable real estate operations. Just because some academic can't do it, and wants to sell the idea that it cannot be done, in no way makes this correct. It is the dominant idea among FAs, and believers in unvarying AA. Though looking at all the market timing threads on this site makes me wonder what really is the dominant idea here. What these successful practitioners seem to have in common is that they don't mess with average conditions. When things get seriously out of whack, high or low, they see a possibility to act successfully. Ha

No disagreement here. I do not think that I can do this at this point, but as work settles down in the future, I believe I will dabble with some part of our stash as an individual value stock investor. I agree with the poster above who says that the market gets out of whack and usually reverts. At present, I count on those reversions as I have neither the time nor the inclination to perform my own forecasting.

[Gone4Good]

Quote:

Originally Posted by MasterBlaster The real question is... Where should my assets be now considering that almost everything is ZIRP-inflated and knowing cash (or equivalent) pays negative real returns.

For me the answer to that question is to simply accept that we're in a return free world right now. You're just not going to earn meaningfully positive returns holding any asset class. Taking more risk isn't going to significantly change that.

So I can get below average returns taking a lot of risk or below average returns taking limited risk. That's the hand I've been dealt. That's the hand I'm playing.