More Gloom and Doom? Long-term real returns of 2.1%

[samclem]

Thus, over that time period, real GDP grew at ( 1920 / 506.6 ) ^ 0.02 = 1.027 , or 2.7% per year, compounded

Certainly corporate earnings have grown as fast, if not faster than real GDP

This would get us to an expected 4.7% real return on stocks

From 1950-2000, the same calculation yields a real GDP of 3.2%, which would imply an expected real return on stocks of 5.2%

I'm just trying to follow along: How did you derive the 4.7% return on stocks from the 2.7% pa GDP growth? (perhaps: there was an unstated 2% pa increase in stock price, which was added to the estimated 2.7% earmings to get 4.7%)

One factor to consider: In 1920, the total tax burden (federal, state, local) was approx 20% of GDP. Today it is approximately 40%. Would this off-the-top deduction from GDP not decrease corporate earnings?

 

[haha]

Certainly corporate earnings have grown as fast, if not faster than real GDP

If by corporate earnings you mean earnings of publically owned companies, this is in conflict with the data put forth by Dimson et al in Triumph of the Optimists. The reason given, as I remember, is that much growth is contributed by early stage private companies which cannot contribute to the returns of outside investors.

Ha

 

[RonBoyd]

The Dark Art of Statistical Deception

It’s using numbers to prove what you know in your heart is true, even when you know it’s not. Numbers have a particular ability to fool us. It’s using that ability to turn nonsense into something that is believable with numbers.

 

[FIRE'd@51]

I'm just trying to follow along: How did you derive the 4.7% return on stocks from the 2.7% pa GDP growth? (perhaps: there was an unstated 2% pa increase in stock price, which was added to the estimated 2.7% earmings to get 4.7%)

One factor to consider: In 1920, the total tax burden (federal, state, local) was approx 20% of GDP. Today it is approximately 40%. Would this off-the-top deduction from GDP not decrease corporate earnings?

I made an addition mistake. My number should have been 4.9% since my growth rate of 2.7% was 1.7% more than theirs (1%). So 3.2% + 1.7% = 4.9%. My second number (using 1950-2000 GDP data) should have been 5.4% (not 5.2%).

Essentially, Arnott is saying that the expected real return on stocks = current dividend yield + expected real dividend growth. This is the steady-state Gordon-Shapiro model. He then takes the current yield on the S&P 500 of 2.2% and adds a projected 1% real growth rate to get 3.2%. If you believe the long-term (and long-term here theoretically means forever for the model Arnott is using) real growth of corporate earnings (and dividends) will only be 1%, then you pretty much have to agree with Arnott. So, as I see it, the question reduces to how much you believe the 1% growth number.

 

[audreyh1]

I'm waiting for the RV community to publish a peer-reviewed vagabonder's analysis of e-readers vs cheap bookstores/libraries...

That's easy. Books on e-readers aren't nearly as cheap! no contest.

 

[keegs]

As was suggested by a few of you already, we're in a global economy. Higher returns will likely require a larger concentration of US based multi-nationals as well as foreign based investments and currencies in our portfolios.

 

[Midpack]

It's not out of the question by any means, but if I could be guaranteed a 2.1% real return for the rest of my life, I'd take it. I am assuming 0-2% real return in the decades ahead, but I'm pretty conservative given a 30-40 year "retirement."

 

[MichaelB]

This is the most clear-headed post I have read all week.

Thanks!

Audrey

Thanks!

 

[FIRE'd@51]

If by corporate earnings you mean earnings of publically owned companies, this is in conflict with the data put forth by Dimson et al in Triumph of the Optimists. The reason given, as I remember, is that much growth is contributed by early stage private companies which cannot contribute to the returns of outside investors.

This table gives S&P 500 earnings and dividend data. From 1960-2009 nominal GDP grew at 6.9% annually (from the BEA table linked in post #15), while nominal S&P 500 earnings grew at 6.2%. Clearly, my assumption that S&P 500 earnings kept pace with GDP was incorrect, probably for the reason you suggest.

Using my inflation factor from post #15 of 0.136 on the earnings data from the NYU table gives a real earnings growth for the S&P 500 of about 2% over the last half century, double that used by Arnott and West in their projection.

 

[Gone4Good]

You'd be surprised about how flexible things can be at libraries.

Also - there are great used bookstores across the country (if you can find them) where you can exchange books for very cheap.

Yup. Just walked into one with a bunch of books we'd already read. Left with two "new" books and $8 more in our pockets than when we started. Book swaps are even better deals.

 

[Gone4Good]

This table gives S&P 500 earnings and dividend data. From 1960-2009 nominal GDP grew at 6.9% annually (from the BEA table linked in post #15), while nominal S&P 500 earnings grew at 6.2%. Clearly, my assumption that S&P 500 earnings kept pace with GDP was incorrect, probably for the reason you suggest.

Using my inflation factor from post #15 of 0.136 on the earnings data from the NYU table gives a real earnings growth for the S&P 500 of about 2% over the last half century, double that used by Arnott and West in their projection.

Shiller's data yields similar conclusions. His 10-year average S&P earnings grew in real, compounded terms, by 1.7% from 1959 to 2010.

A complicating factor is that these earnings are on a "per-share" basis. Have shares increased or decreased over the past 50 years? I suspect they've increased and that, as a result, underlying earnings growth has been greater, but I don't have actual data on this.

 

[DblDoc]

That's easy. Books on e-readers aren't nearly as cheap! no contest.

They are free if you check them out of your library...

DD

 

[obgyn65]

I have similar plans but not in New Mexico - in Central America instead...

And if it gets too tough, I will just take off in my little motor home, and get myself an annual camping pass for $225 in New Mexico. Party on!

 

[audreyh1]

They are free if you check them out of your library...

DD

You can check out ebooks from the library? Download to your own personal reader? Restrictions on ebook sharing are pretty severe.

Of course there is quite a bit of public domain available for next to nothing or free on e-readers.

Audrey

 

[harley]

You can check out ebooks from the library? Download to your own personal reader? Restrictions on ebook sharing are pretty severe.

Of course there is quite a bit of public domain available for next to nothing or free on e-readers.

Audrey

Here's the info from one of my local library systems.

About this Resource - NetLibrary eBooks : Libraries : Arlington, Virginia

 

[Spanky]

Are the returns cited in the article also applicable for alternative investments such as natural resources, commodities, precious metals, timber, real estate?

 

[samclem]

Are the returns cited in the article also applicable for alternative investments such as natural resources, commodities, precious metals, timber, real estate?

They discuss it very briefly in the underlying newsletter article (link--it's free, no registration req.) on which the WSJ article is based. In part:

Alternatives—Many investors, keenly aware
that returns will be lower than the past 30 years,
have turned to alternative categories like hedge
funds, private equity, infrastructure, emerging
markets, timberland, and so forth, in a quest for
equity-like returns and diversification of risk.
This eclectic group has a relatively short history,
dubious data (i.e. survivorship bias), and a
heavy reliance on the most difficult metric of all
to forecast—manager alpha.

But, they don't include a chart or any substantive analysis of these. I'm sure it will be possible to make huge returns by making sector bets--but which ones?

 

[audreyh1]

Here's the info from one of my local library systems.

About this Resource - NetLibrary eBooks : Libraries : Arlington, Virginia

Those are available to read on-line using your web browser - not an e-reader. So it's not like you can download them and take them with you on a trip where you have no internet access.

There are at least that many titles public domain free (or virtually so) to download to an e-reader without needing to log in to a library.

Audrey

 

[DblDoc]

You can check out ebooks from the library? Download to your own personal reader? Restrictions on ebook sharing are pretty severe.

Of course there is quite a bit of public domain available for next to nothing or free on e-readers.

Audrey

Yes. The restrictions are that the library has a finite, small number available to check out and they expire after some predetermined time (2 weeks?).

DD

 

[Spanky]

They discuss it very briefly in the underlying newsletter article (link--it's free, no registration req.) on which the WSJ article is based. In part:


But, they don't include a chart or any substantive analysis of these. I'm sure it will be possible to make huge returns by making sector bets--but which ones?

Thanks for the link. Since no one can accurately predict the future, the permanent portfolio approach is very appealing.

 

[harley]

Those are available to read on-line using your web browser - not an e-reader. So it's not like you can download them and take them with you on a trip where you have no internet access.

There are at least that many titles public domain free (or virtually so) to download to an e-reader without needing to log in to a library.

Audrey

You're right, I linked to the ones you can read on your PC, but they have hundreds available that you can download to an e-reader too. As DblDoc says, they are set to expire after a couple of weeks. But they are relatively current books, not the Mark Twain and Charles Dickens stories you get off Gutenburg.org. Not that there's anything wrong with those, but it's nice to read stuff written in this centurey. I just looked at Loudoun County's list (another system I belong too), and they have books like Ken Follett's Fall of the Giants, I, Alex Cross by James Patterson, Deep Shadow by Randy Wayne White, all books published in 2010. It's a great resource, and all you need is a reader that can have Adobe Digital Editions installed on it. My Sony eReader does, and I know a number of others can too. I don't think the Kindle handles it yet, though.

I just checked and it looks like the iPad doesn't support Digital Editions either.

 

[lovinglife1]

I just returned from a two year assignment in India. While there I purchased consecutive fixed income securities paying 10.5% and 11% annually. It was a killing and, when you live and work there, you realize it is just as it appears....easy money.

 

[traineeinvestor]

I just returned from a two year assignment in India. While there I purchased consecutive fixed income securities paying 10.5% and 11% annually. It was a killing and, when you live and work there, you realize it is just as it appears....easy money.

Sounds impressive. If you don't mind my asking:

1. what was the credit quality/rating(s) of the issuer(s)?

2. what were the tax rates?

3. what was the prevailing inflation rate?

4. what was the term(s)?

I'm assuming that they were denominated in rupees?

 

[Gone4Good]

I just returned from a two year assignment in India. While there I purchased consecutive fixed income securities paying 10.5% and 11% annually. It was a killing and, when you live and work there, you realize it is just as it appears....easy money.

"Easy money" seems a little strong. Inflation in India is running 8.5% currently and was as high as 11% six months ago.

 

[DesiGirl]

Indian Inflation Index is a little outdated so does not really represent ground reality for middle+ class consumption. Having said that Food inflation is crazy (may be as high as 15-20%) , Education, Eat-outs are high but services, power, water, appliances, internet/TV/Phone etc. are quite stable and may even be slidind down a little so Personal Inflation for people would vary according to consumption. (My budget for last 4 years has almost remained stable other than Education - 30% increase in 4 years). Now I have upped groceries by 20%. Currently best rates are 9.5% tax-free guaranteed by Gov of India (but for Indian residents only
General CD rates are 8-8.5% about to increase though.