How to determine projected annual real growth of capital?

[Dude]

Hi all,
Forgive my basic questions.....

How do I come up with a reasonable assumption for the projected annual real growth of my retirement portfolio?

For simplicity assume my portfolio is 100% Vanguard Target Retirement 2035 fund (VTTHX) and is valued at $400k and is equally split between Roth IRAs and 401(k) (if that makes a difference).

I have a book by one of our esteemed members here that states a reasonable assumption would be that earnings in a diversified portfolio would grow by 8% a year, or 5% per year in real terms (after subtracting 3% average inflation).

I'd like to understand the basis for this assumption so I can put together a "total savings worksheet" like the one in the book. How do you determine projected growth for your portfolio? Are there any tools available that can help me? Thanks.

Dude

 

[LOL!]

First, I resign myself to the fact that I cannot predict the future. Second, there is no reason that the future average returns for a given asset class will have anything to do with the past average returns for the same asset class. Third, I track what we have done with our portfolio for the last couple of decades. It pretty much matches what Merriman's web site www.fundadvice.com has reported for our asset allocation.
So I look in the table provided by Merriman's web site at this link: http://www.fundadvice.com/articles/buy-hold/fine-tuning-your-asset-allocation.html, ignore all the caveats I just made and I use that as an average total return going forward for our asset mix.

 

[LOL!]

Another possibility is to simply use the tools at the Vanguard web site. If you have $250,000 invested with them, you can use their "Portfolio Watch" tab after entering ALL your assets. I do not believe it will put a higher average return than about 10% though. A simpler tool called "Portfolio Analysis" may be available to folks with less than $250K invested at Vanguard.

 

[Dude]

Thanks LOL, that's a very good and useful article and table that will help me come to a decision. We're about $50k away from Voyager service at Vanguard, but I'll look at the tools available to me now there.

 

[rmark]

Most research indicates that bond returns have no memory, and stock returns very little, so your future expectations are just todays current valuations. No valuation method is very accurate, so I just use the simplistic earnings yield for stocks and real yield for bonds.

Stock and reits expected real returns while saving = (1/pe) – costs
Bond and bills expected real returns while saving = yields – inflation – costs

 

[Scarab Dave]

rmark, is that 1/price-earnings multiple? I've never heard that before but like the simplicity.

Dave

 

[rmark]

1/pe ratio is all it is.

 

[Dude]

Thanks rmark

 

[Scarab Dave]

rmark.... thinking out loud here.....so essentially annual earnings/price is what the idea is. Which is how many times the price goes into the earnings. So for one of my personal investments:

3.65/29 = 12.6% annual return. Which is good. Where I get stumped is if the price goes up, annual returns would go down. Say the price of this stock went to 35 but earning remained the same;

3.65/35 = 10.4%.

I think I get it. I'll add this thought to my research routine, thanks.

Dave