Rate of Return estimate (dividend reinvestment) question

[jason142]

Hi guys,

Any help here in very much appreciated. I'm trying to estimate a real and conservative return for my 401k investments (70% stocks / 20% bonds / 10% cash) over the next 20 year period. I understand i am asking a crystal ball question here but have to use something for the plan right. Anyway, I have read a lot of the opinions of the experts and i wanted to know whether the estimates provided by the Bogles of the world include dividend reinvestments? I presume their numbers do but as i've never heard any of them actually say as much i was wondering if this is the case? Also, as i've said above i'm interested in what guys would use as a real and conservative number for the following 20 year period. Thanks in advance for any help here.

[SlowMustachian]

Yes, typically when measuring performance of equities or bonds the “total return” is used and that includes returns from capital gains and dividends. Reinvestment is then assumed via compounding the periodic returns.

For example, assuming an investment grows from $100k to $105k, and $4k is due capital gains and $1k is due to dividends, the total return is 5% ($105k - $100k)/$100k. If in the next period the return is 1%, it won’t matter if $104k or $105k was invested (if the dividend was paid out or not).  If $104k was invested, it means the $1k was withdrawn from the account and then the $104k grew by $1040. If the $105k was invested, it means nothing was withdrawn and there’s more money in the portfolio to grow so it will grow by $1050, instead of $1040.  But either way the portfolio return in the second period is 1%. 

The total return over period 1 and 2 will be calculated as [(1.05)*(1.01)]-1=6.05%. In other words, returns ignore the dollars invested and enables you to compare growth regardless of the amount invested. But it also assumes compounding, or reinvestment.

[SlowMustachian]

Oh and here are some publicly available industry LT capital market expectations for your second question.

https://admainnew.morningstar.com/webhelp/dialog_boxes/cs_db_editassumptions.htm

[KungfuRabbit]

Average return?  No idea.

Will it be steady?  Hell no.

Last week the DOW crashed 10%, which is just a sign of volatility / fear / chaos.

I personally think the next decade is going to see another crash and more stagnation.

Politics has always been "us vs them", but it's never been this bad or cut throat or extreme. That means we are going to see more big laws passed with little notice (like a tax plan which was public ally available for like a day before it became law), which will cause volatility and uncertainty.

So 20 years from now you may have averaged 6% return, but I'd be willing to bet the bunpyness makes the previous 20 years look dull.