Rethinking my asset allocation.

[FREE866]

Morningstar, Schwab, Fidelity and Vanguard are all forecasting much lower than historical average nominal returns for equities for the next decade... 4.7-6.7% annual returns vs 10% historical average.

This right here is one reason I think we might even have better than average returns going forward. The crowd is rarely right.What were their forecasts the preceding 10,20, 30 years?



regardless, IF they are all right in their extremely bearish forecast I will still be fine.



I also think decade long forecasts are silly as so many variables can change things, but they make for good headlines.

 

[pb4uski]

^^^ Yeah, I'm sure that you know better than the apparent consensus of Morningstar, Fidelity, Vanguard and Schwab.

 

[OldShooter]

^^^ Yeah, I'm sure that you know better than the apparent consensus of Morningstar, Fidelity, Vanguard and Schwab.

To quote the esteemed @pb4uskI, "Nobody knows nothin'"

I am surprised that you even pay attention to this stuff.

 

[FREE866]

^^^ Yeah, I'm sure that you know better than the apparent consensus of Morningstar, Fidelity, Vanguard and Schwab.

Not saying I do, but history is a pretty good guide.And them forecasting basically 50% of what markets have done over the last century is a pretty draconian, borderline panicky call



show me what these "experts" were saying in 1980, 1990, 2000, 2010 and if they were correct it might demonstrate some credibility

 

[FREE866]

To quote the esteemed @pb4uskI, "Nobody knows nothin'"

I am surprised that you even pay attention to this stuff.

I know right


These firms get their forecasts from economists who are well known for being awful at predicting. They then pass this information down to "strategists" and "analysts" that crunch those numbers into formulas to make even more predictions. Info then is baked into marketable language dispersed with graphs in a colorful Powerpoint presentation given to prospects and clients. It's comical.

 

[OldShooter]

Not saying I do, but history is a pretty good guide.And them forecasting basically 50% of what markets have done over the last century is a pretty draconian, borderline panicky call. show me what these "experts" were saying in 1980, 1990, 2000, 2010 and if they were correct it might demonstrate some credibility

I have recommended Nate Silver's "the signal and the noise" here before, particfularly the chapter on economic forecasting titled "How to drown in 3 feet of water." The whole book is a worthwhile read but if you're not interested in baseball you can skip the first half.

The reason no one publishes forecasting history and results is that this data does not increase their credibility.

"The only function of economic forecasting is to make astrology look respectable.” Often attributed to John Kenneth Galbraith but apparently actually from Ezra Solomon, a member of the Council of Economic Advisors during the Nixon administration.

 

[FREE866]

I have recommended Nate Silver's "the signal and the noise" here before, particfularly the chapter on economic forecasting titled "How to drown in 3 feet of water." The whole book is a worthwhile read but if you're not interested in baseball you can skip the first half.

The reason no one publishes forecasting history and results is that this data does not increase their credibility.

"The only function of economic forecasting is to make astrology look respectable.” Often attributed to John Kenneth Galbraith but apparently actually from Ezra Solomon, a member of the Council of Economic Advisors during the Nixon administration.

I have read excerpts from Nate Silver and thought it was spot on.



And you're so right about "The reason no one publishes forecasting history and results is that this data does not increase their credibility."


Those firms making really bearish predictions is ALL about them attracting business. Don't let it fool you PB. The bearish case ALWAYS sounds smarter , which attracts customers because the market inherently scares people which creates the "well if things are going to be bad what should I do" so a NEED for an advisor is the next logical step.

 

[pb4uski]

We'll see, but I went back and looked at Vanguard's 2013 forecast compared to actual results for 2013-2022 and it was reasonably close. The actual results in each case were not in their most likely range of returns but in the adjacent most likely range of returns.

So bearish predictions attract business, eh? That's certainly counterintuitive. I would think that bearish predictions have people gravitate more to safety like bank and credit union CDs, Treasuries, etc.

I did note that in the graph above that Blackrock and JPM had significantly more bullish returns for equities and for bonds they were closer to the others.. I suspect that the bullish equity projections are because they want to attract investments in equities.

 

[FREE866]

We'll see, but I went back and looked at Vanguard's 2013 forecast compared to actual results for 2013-2022 and it was reasonably close. The actual results in each case were not in their most likely range of returns but in the adjacent most likely range of returns.

So bearish predictions attract business, eh? That's certainly counterintuitive.

Well yeah , definitely. Think about it. If the message is “ markets going down you have to be careful “ then the next thought from a scared public ( which is very easy to do , just watch the news!) would be “ I need help”. Enter investment advisor.

On the other side if the message was “ markets going up things look good” the public becomes confident that they can “ do it on their own” And no need for an advisor.

Granted, I’m oversimplifying but hopefully you see my point.

 

[pb4uski]

I see your point, I just don't buy what you're selling. These reports are not usually going to be read by the novice investor, but more by experienced investors who are more into the weeds and more DIY.

 

[tulak]

If your WR is less than 1%, it doesn’t matter what you do.

I’d stick with what you’ve been doing. It’s worked for you so far, right?

You can look at getting more creative with treasuries, maybe build a 5-10 years rolling treasury ladder. I’ve bought treasuries at Vanguard and it’s easy. The only downside is there’s no automatic reinvestment (rolling) feature, so you’ll have to occasionally put in a buy order.

 

[Midpack]

You probably already know this, but if your spending is $70k a year and your SS is $60k a year and since you have substantial assets then you can your AA wherever you want... 0/100 or 100/0 would both be successful. There are two schools of thought. One, you have "won the game" and no longer need to play and could just put the whole shootin match in a rolling CD ladder and withdraw money as you need to. Alternatively, you can shoot for the moon and go to 100/0 and live off of dividends and proceeds from equity sales. Or anything in between.

That's kinda how we ended up with our AA. We don't need to take much if any risk, but I am not risk averse - never lost a nights sleep in 1987, 2000 or 2008 when I was 100%, 75% and 60% equities respectively. So I keep our toes half in the market...see sig line.

The only big change I made was I dumped all our bond funds in Spring 2022, and it's all been in Treasuries ever since - 40%+ of our AA. I also reduced our cash allocation, that went into Treasuries also. That positiion will continue for quite a while.

 

[Singletrack]

My personal situation: 66 years old, my wife started SS early; I'll probably wait until age 70. I don't need the SS income.

I've been through all of the major market drawdowns over the last few decades, and I don't want to deal with another one.

I have about a 10-12 percent equity allocation, a 65-70% cash position (yielding > 5%), and some private equity investments (real estate, secondary PE fund, etc.). With interest rates elevated, here is what I have done - with more to do in the future:

- One year CD ladder with Fidelity with quarterly maturities (set on "auto roll" for now).
- A Treasury ladder with durations from one to almost five years. Keeping it on the short end; I believe long rates have some room to move.
- Some government agency bonds (mine are state tax exempt)
- I will likely deploy most of my remaining cash position into high-grade corporates as the yield curve normalizes, long rates ease upward, and call protection gets stretched out further (many corporates are callable in 2024, with some call protection out three to five years)

This sounds complicated, but it's all pretty simple using Fidelity, Schwab, etc. The corporate bonds are the most complicated, but there are some good tools out there to help with fundamentals. I'm not a fan of bond funds, but with rates approaching highs (maybe...crystal ball needed), bond funds might be attractive now after the recent and dismal past. I'm trying to build a steady and safe passive income stream that allows me to sleep at night without a 20-30% downdraft in equities. My target is a long-term yield in the 5-6% range, but we'll see where long rates go over the next few months...

 

[watchman3135]

I began listening to Bob Brinker and his show Money Talk in 1989 and he always recommended a 50/50 AA in retirement. I early retired in 2019 at 53 and the same applies. When officially retired, you're no longer in the growth phase and now living off the nest egg. Since I will be turning 58 in two months, I have been exclusively living off interest from a five year 250k bank CD, and cover call distributions from JEPQ, JEPI and DIVO along with a few other dividend stocks however they represent a small portion of my portfolio. In a year and half I can tap my dividend and capital gains on Wellington, Wellesley and Total Stock Market in my IRA however I am collecting $2,600 a month currently and when the IRA's become available it will add another $2,400 per month My wife has chosen to work until 55 so when she retires, I will balance her AA to 50/50 as well. In my opinion, Bob's, and Jack Bogle's recommendation of a 50/50 AA is the best course for those in retirement. Yielding 4.5% - 5% from a CD would not makes sense for a younger working person in the accumulation phase however, it makes complete sense when in the retirement phase because preservation over growth becomes more important though some growth is still needed.

 

[WhenIsItTime]

My thinking is if the money is for the kids I'm assuming they have 10+ year time horizons so your AA of 93/7 makes sense.

At this point, for you, its just dealing mentally with the optics of the volatility that is a feature of having a high equity allocation.

My view is similar. I have a comfortable ~2% WD rate. Large portion of funds not needed for years, keep them working in equities.

I began listening to Bob Brinker and his show Money Talk in 1989 and he always recommended a 50/50 AA in retirement. I early retired in 2019 at 53 and the same applies. When officially retired, you're no longer in the growth phase and now living off the nest egg. Since I will be turning 58 in two months, I have been exclusively living off interest from a five year 250k bank CD, and cover call distributions from JEPQ, JEPI and DIVO along with a few other dividend stocks however they represent a small portion of my portfolio. In a year and half I can tap my dividend and capital gains on Wellington, Wellesley and Total Stock Market in my IRA however I am collecting $2,600 a month currently and when the IRA's become available it will add another $2,400 per month My wife has chosen to work until 55 so when she retires, I will balance her AA to 50/50 as well. In my opinion, Bob's, and Jack Bogle's recommendation of a 50/50 AA is the best course for those in retirement. Yielding 4.5% - 5% from a CD would not makes sense for a younger working person in the accumulation phase however, it makes complete sense when in the retirement phase because preservation over growth becomes more important though some growth is still needed.

Did they consider retirement a 10, 20, 30 or 40 year activity?

I think it also depends on your goals for end of life. I hope to spend amply for many years, but also happy to pass on a lot. I did RE, but see no reason to stop accumulation phase as I hope to live 40 more years. Maybe move as conservative as 70E/30 other over time.

 

[explanade]

My AA isn't as high as the OP but it's pretty high, 77/21.

I went back and about 10 years ago, it was 59/25.

Going on tenth year of retirement.

Have a couple of tech stocks which are near their all-time highs. Selling them would be a good way to shave a few points off the equity percentage.


I also take care of my mother's portfolio, which would go to my sisters and me. There the AA is close to 50/50 but I've poured a lot of money into CDs the past year, because I didn't want to pour too much into equities at once. Been doing some DCA into funds but obviously not as much as putting them into CDs because it's like 45% cash.

 

[24601NoMore]

One thing that I have noticed since I have retired (2015) is a change in my risk tolerance. Before retirement, my asset allocation was 90/10 and I slept like a baby during the financial crisis knowing that I had a reliable income. Today, I sit at about 50/50 and I agonize every news headline. I am considering even more bonds and cash. In my mind, I have won the game. With todays high yielding treasury market, why should I chase returns in the equities market. Overall returns may be historically better but certainly not guaranteed. There are many things that we are now facing that we have not seen before. I am now more interested in return of capital verses return on capital.

100% agree. If you've "won the game", why not reduce risk? Just saw an interview where Marc Faber made a compelling case for "4'ish" percent equity returns over the next decade. He also emphasized that the past 40 year or so period (from early 80s to early 2020s) was definitely not normal.

I'm over 50% cash (CDs, Annuities), 25% or so equities and 25% bonds. And that's all the equity exposure we ever will want. In fact, I'm looking to reduce it to 10-15% if we get to SPX 4,900 or higher. Because there is no "need" to take risk if your plan supports even the worst case through end of life..unless you're just looking to juice the total $$ you give kids, charity or something. But since that's not my #1 focus, we're only gonna take risk we "need" to remain diversified.

 

[FREE866]

100% agree. If you've "won the game", why not reduce risk? Just saw an interview where Marc Faber made a compelling case for "4'ish" percent equity returns over the next decade. He also emphasized that the past 40 year or so period (from early 80s to early 2020s) was definitely not normal.

.

Hmmm. Did he provide data that supports the 40 year claim?
When I look at s and p returns the prior 40 before 1980 they are very similar to 1980-2020.

 

[gcgang]

We have $1.8M in a mix … Of that, about $300k is in high yield MM accounts…
.

Later, 93% Equity, 7% Cash.

I don’t understand how you can have 300k/1.8mm in cash, but have 93% equity.

If your goal is to maximize assets to heirs, most likely 100% equity will get you there with your 1% withdrawal rate.

 

[Time2]

Later, 93% Equity, 7% Cash.

I don’t understand how you can have 300k/1.8mm in cash, but have 93% equity.

I don't either! I must have fat fingered, I recalculated and it is 83%.

 

[DrRoy]

From a few years before RE to a few years after, I reduced our AA from 8a+% equities to 55%. Still plenty of exposure but made rough markets easier to wait out.

 

[pb4uski]

... Just saw an interview where Marc Faber made a compelling case for "4'ish" percent equity returns over the next decade. He also emphasized that the past 40 year or so period (from early 80s to early 2020s) was definitely not normal. ...

Hmmm. Did he provide data that supports the 40 year claim?
When I look at s and p returns the prior 40 before 1980 they are very similar to 1980-2020.

According to Bard:

The total return of the S&P 500 from 1920 to 1982 was 25,094%, or an average annual return of 7.81%. This includes both price appreciation and reinvested dividends. ...

The total return of the S&P 500 from 1983 to 2023 (as of November 13, 2023) is 3,752%, or an average annual return of 12.25%. This includes both price appreciation and reinvested dividends. ...

The total return of the S&P 500 from 1920 to 2023 (as of November 10, 2023) is 311,730%, or an average annual return of 9.06%. This includes both price appreciation and reinvested dividends.

So last 40 years have been 135% of the average for last 103 years.

 

[FREE866]

According to Bard:







So last 40 years have been 135% of the average for last 103 years.

And if I cherry pick 1982 to 2022 the s and p did 11.6 %
And if I cherry pick 1942 to 1982 the s and p did 11.7%


I'm using this calculator:
https://www.officialdata.org/us/stocks/s-p-500/1942?amount=1000000&endYear=1982


Look, dystopian headlines/podcasts always sound smarter and garner more attention than do utopian headlines.

Betting that averages are going to do half of what they have done over history is incredibly misguided in my view , but you have your money I have mine. We make our choices.

 

[PatrickA5]

I was aware of Vanguard was predicting lower yields, but not Fidelity.

I did find an interesting Jan 2023 article on brokerage houses 10-year return forecasts by Morningstar at https://www.morningstar.com/portfolios/experts-forecast-stock-bond-returns-2023-edition

For Fidelity they write:

Fidelity’s capital markets assumptions employ a 20-year horizon (2022-42) and therefore can’t be stacked up neatly against the 10-year returns from other firms in our survey. In addition, the firm states its capital markets assumptions in real (inflation-adjusted) terms; its base-case inflation rate over the 20-year horizon is 2.5%. Finally, the firm’s assumptions are based on data as of April 2022, so they don’t factor in the equity price declines and higher bond yields that came to pass later last year.

The firm is forecasting a 3.0% real return for U.S. equities over the next 20 years, less than half their 6.6% average return from 2001-21. Fidelity cites elevated equity valuations (again, as of April 2022) and reduced earnings potential as constraints on U.S. equity gains. On the fixed-income side, the firm was forecasting 1.9% 20-year real returns for the Bloomberg U.S. Aggregate Bond Index as of April 2022. Like all of the firms in our survey, Fidelity’s research accords a higher return assumption for non-U.S. equities for the next two decades: 3.3% real returns for developed non-U.S. equities and 5.1% for emerging-markets stocks.
​

So that would put Fidelity at 5.5% nominal returns for domestic equities (vs 9.1% historical average) and 4.4% nominal return for bonds over the next 20-years rather than the next 10-years, but still much lower than historical averages

The Morningstar article includes an interesting chart of 10-year forecast asset class returns:

Morningstar, Schwab, Fidelity and Vanguard are all forecasting much lower than historical average nominal returns for equities for the next decade... 4.7-6.7% annual returns vs 10% historical average. For bonds, they are forecasting 4.1%-5.1%. I personally think they're probably right and the premium for investing in stocks isn't commensurate with the increased risk/volatility so while I'm still open to dabbling in equities when conditions warrant, I'm quite comfortable being out of equities right now.

Based on this chart, I need to go 100% International stock. Looks like a no-brainer to me.

 

[DangerDad]

There was no S&P 500 prior to 1957.
Looks like the S&P 90 was used to track equity markets from 1926-1957.
Prior to 1926..? I’m not sure—I found conflicting info.

So when someone talks about the total return of the S&P 500 from 1920 to 2023, it’s fair to ask: what exactly are you using to represent stock market returns from 1920 to 1957?