low risk return % as base case

[yxd0018]

I keep hearing the S&P annual return is 8%. But value of all assets went up in last several years, I wonder where the base return % for regular joe is. Thanks.

[DalioGold10]

Hi,

A ballpark figure is 4.9% sourced as current S&P earnings (let us take the Dec-19 of 140) divided by current level of S&P 500 of 2850.
Please consider this as a base case scenario to materialize over the long run, i.e. more than 10 years.
On a short run basis, a negative surprise on earnings (i.e. worse than the ones expected by market than are "baked in" the current S&P 500 price ) will lead to market drop and hence even lower returns.

Hope this helps.

[MustacheAndaHalf]

A ballpark figure is 4.9% sourced as current S&P earnings (let us take the Dec-19 of 140) divided by current level of S&P 500 of 2850.
Please consider this as a base case scenario to materialize over the long run, i.e. more than 10 years.

You're providing a false precision of "4.9%" for something that is only 0.4 correlated with future returns.  Vanguard studied P/E and CAPE10 (among other factors) to determine if any predicted future returns.
http://fairwaywealth.com/wp-content/uploads/Vanguard-Research-11-30-2014.pdf#page=7

[DalioGold10]

A ballpark figure is 4.9% sourced as current S&P earnings (let us take the Dec-19 of 140) divided by current level of S&P 500 of 2850.
Please consider this as a base case scenario to materialize over the long run, i.e. more than 10 years.

You're providing a false precision of "4.9%" for something that is only 0.4 correlated with future returns.  Vanguard studied P/E and CAPE10 (among other factors) to determine if any predicted future returns.
http://fairwaywealth.com/wp-content/uploads/Vanguard-Research-11-30-2014.pdf#page=7

I am not trying to debate.
It is only a rough expectation.
Based on Schiller CAPE ratio the expected nominal returns over the next 15 years of S&P 500 ranges between negative 1-2% to positive 12%, with 75% of results falling within the range of 5-6% max.

Happy times ahead.
Mean reversion is not a nice lady :)

[Buffaloski Boris]

A ballpark figure is 4.9% sourced as current S&P earnings (let us take the Dec-19 of 140) divided by current level of S&P 500 of 2850.
Please consider this as a base case scenario to materialize over the long run, i.e. more than 10 years.

You're providing a false precision of "4.9%" for something that is only 0.4 correlated with future returns.  Vanguard studied P/E and CAPE10 (among other factors) to determine if any predicted future returns.
http://fairwaywealth.com/wp-content/uploads/Vanguard-Research-11-30-2014.pdf#page=7

I am not trying to debate.
It is only a rough expectation.
Based on Schiller CAPE ratio the expected nominal returns over the next 15 years of S&P 500 ranges between negative 1-2% to positive 12%, with 75% of results falling within the range of 5-6% max.

Happy times ahead.
Mean reversion is not a nice lady :)

How did you come up with the range?  The CAPE yield for the SP 5+495 on Friday was (1/27.78) - .66%= 2.9%.  I come to the same conclusion; mean revision is an evil witch, but curious as to how you got there.

[MustacheAndaHalf]

A ballpark figure is 4.9% sourced as current S&P earnings (let us take the Dec-19 of 140) divided by current level of S&P 500 of 2850.

You're providing a false precision of "4.9%" for something that is only 0.4 correlated with future returns.

It is only a rough expectation.
Based on Schiller CAPE ratio the expected nominal returns over the next 15 years of S&P 500 ranges between negative 1-2% to positive 12%, with 75% of results falling within the range of 5-6% max.

You're trying to have it both ways: "a rough expectation" while listing "4.9%" which has 0.1% precision.

I cited a Vanguard white paper showing Schiller CAPE is only 0.4 correlated with 10-20 year returns.  For those who think CAPE can be used to time the market, the news is also bad in the short term:
https://www.brandes.com/docs/default-source/brandes-institute/2018/the-cape-ratio-and-future-returns-a-note-on-market-timing.pdf#page=7

[waltworks]

I think it's hard for people who like the world to make sense (I have engineer friends who are like this) to deal with markets sometimes. These folks figure if they dig deep enough, there is a formula or a recipe somewhere in the data that will let them make sense of it. The problem is that there's not, of course.

Markets don't do what any metrics or numbers you can find tell them to. They are very very random over the short term and still pretty random in the medium term.

All that said, OP, I usually assume 4% real returns as my base worst case over the longer (20+ years) term. Things could certainly be much better than that (UBI/Star Trek future where we're all FI) or much worse (Covid25 kills everyone, meteor, etc).

This is for the world, which I attempt to invest in about equally weighted with US stocks.

-W

[Buffaloski Boris]

I think it's hard for people who like the world to make sense (I have engineer friends who are like this) to deal with markets sometimes. These folks figure if they dig deep enough, there is a formula or a recipe somewhere in the data that will let them make sense of it. The problem is that there's not, of course.

Markets don't do what any metrics or numbers you can find tell them to. They are very very random over the short term and still pretty random in the medium term.

All that said, OP, I usually assume 4% real returns as my base worst case over the longer (20+ years) term. Things could certainly be much better than that (UBI/Star Trek future where we're all FI) or much worse (Covid25 kills everyone, meteor, etc).

This is for the world, which I attempt to invest in about equally weighted with US stocks.

-W

Market analysis was invented to make astrologers look good. It would be nice to have a range, though. As the returns get lower, other savings look much better by comparison.

Said another way; paying off my mortgage offers a low single digit savings for very low risk. If equities are offering low single digit returns for moderate to high risk, then why would a prudent person take on added risk?

[JAYSLOL]

I think it's hard for people who like the world to make sense (I have engineer friends who are like this) to deal with markets sometimes. These folks figure if they dig deep enough, there is a formula or a recipe somewhere in the data that will let them make sense of it. The problem is that there's not, of course.

Markets don't do what any metrics or numbers you can find tell them to. They are very very random over the short term and still pretty random in the medium term.

All that said, OP, I usually assume 4% real returns as my base worst case over the longer (20+ years) term. Things could certainly be much better than that (UBI/Star Trek future where we're all FI) or much worse (Covid25 kills everyone, meteor, etc).

This is for the world, which I attempt to invest in about equally weighted with US stocks.

-W

Market analysis was invented to make astrologers look good. It would be nice to have a range, though. As the returns get lower, other savings look much better by comparison.

Said another way; paying off my mortgage offers a low single digit savings for very low risk. If equities are offering low single digit returns for moderate to high risk, then why would a prudent person take on added risk?

Because there’s a very good chance the expected return is wrong.  It could still be low, or even lower, hence the risk, also could be higher hence the reward that may be worth the risk.

[maizefolk]

Market analysis was invented to make astrologers look good. It would be nice to have a range, though. As the returns get lower, other savings look much better by comparison.

Said another way; paying off my mortgage offers a low single digit savings for very low risk. If equities are offering low single digit returns for moderate to high risk, then why would a prudent person take on added risk?

Are those ranges in nominal or real dollars? If they are in real dollars even having a reasonably accurate range wouldn't help with the decision you are trying to make.

If the stock market has an inflation adjusted CGAR of 3% over the next 20 years, paying down a mortgage at 4.25% might be the right call if we see little to no inflation over that time span, and definitely the wrong call if we experience 4-5% annual inflation over the same time frame.

[waltworks]

BB, I don't see it as "risky", just volatile. I'll take a volatile real 4% over a "safe" nomimal ~3.5% (my current mortgage rate) every day.

And again, I just assume that to be conservative. I'm almost certainly wrong.

-W