Bogle Projects 'Nominal To Zero' Real Returns Over The Next Decade

[StashDaddy]

Interesting:

His math is elegantly simple: the current dividend yield of about 2.0 percent plus projected earnings growth of around 5.0 percent produces  a 7.0 percent return.

Bogle sees potential for the market’s price to earnings ratio (P/E), which is currently around 20, to revert to as low as 15 in coming years. That 25 percent drop equates to about a 3.0 percent annual negative speculative return.

When this negative return is subtracted from the 7.0 percent dividend and earnings return, it yields a projected overall return of about 4.0 percent.

http://www.benzinga.com/analyst-ratings/analyst-color/15/06/5579993/exclusive-vanguard-founder-john-bogle-projects-nominal-t

[YoungInvestor]

Isn't that the guy people quote when talking about not timing the market and buying index funds?

I just don't see a P/E of 15 back with such low yield on bonds, so unless the interest rates were to creep back up to average levels, I don't see a PE of 15 happening.

[qwerty8675309]

Isn't that the guy people quote when talking about not timing the market and buying index funds?

Yup, but he also believes in reversion to the mean.

[matchewed]

Isn't that the guy people quote when talking about not timing the market and buying index funds?

Yup, but he also believes in reversion to the mean.

Also just stating that ignores all the reasons why he advocates not market timing and buying index funds; those reasons have little or nothing to do with making a prediction.

[hodedofome]

Us humans can't stop ourselves from making predictions, even when we believe they are less than worthless.

Not to mention, financial news media lives and dies on predictions. So they probably ask him and he gives it, but doesn't act on his opinions.

Remember, an opinion is not a position.

[StressLess]

Question:

For people still in early accumulation phase less than average returns is usually good when building your nest egg right?

Understanding no one can accurately predict the returns, just wondering when in your life you want the best returns...

[matchewed]

Question:

For people still in early accumulation phase less than average returns is usually good when building your nest egg right?

Understanding no one can accurately predict the returns, just wondering when in your life you want the best returns...

Frankly a downturn is an accumulator's best friend, not flat returns. You want to buy on the cheap, not on the slowly getting expensive.

[Aphalite]

This ignores reinvestment of the 2% back into the total return of 7%, at the 15x price, as well the effect that DCA would have as you are buying "underpriced" assets. I think Bogle's comments are more related to the "if you invested $10k today and did nothing..." scenario

[brooklynguy]

I think Bogle's comments are more related to the "if you invested $10k today and did nothing..." scenario

Yeah, well, that's exactly the situation someone who retires today will be in (except the retiree is doing worse than nothing - he or she is actively drawing down on the portfolio).  Subpar market returns are necessarily good for accumulators (except to the extent they are correlated with other events that are bad for accumulators, like job layoffs), and necessarily bad for retiree-withdrawers.

[frugalnacho]

Question:

For people still in early accumulation phase less than average returns is usually good when building your nest egg right?

Understanding no one can accurately predict the returns, just wondering when in your life you want the best returns...

Frankly a downturn is an accumulator's best friend, not flat returns. You want to buy on the cheap, not on the slowly getting expensive.

But it is still better than having your accumulation phase during a long bull market.  It would be nice if I could continue buying at today's prices for the next 10 years, then have a raging bull market right as I retire.

Bear > flat > bull for accumulation.

[matchewed]

Question:

For people still in early accumulation phase less than average returns is usually good when building your nest egg right?

Understanding no one can accurately predict the returns, just wondering when in your life you want the best returns...

Frankly a downturn is an accumulator's best friend, not flat returns. You want to buy on the cheap, not on the slowly getting expensive.

But it is still better than having your accumulation phase during a long bull market.  It would be nice if I could continue buying at today's prices for the next 10 years, then have a raging bull market right as I retire.

Bear > flat > bull for accumulation.

I don't disagree at all w/ that. But these are things I don't worry about while in the accumulation. As I near my number I'll evaluate the environment around me and crunch some (conservative) numbers for future projections. What happened during my accumulation phase is outside of my control and therefore is only useful in a pure academic sense. It has no practical application for my actions in my life.

[frugalnacho]

Question:

For people still in early accumulation phase less than average returns is usually good when building your nest egg right?

Understanding no one can accurately predict the returns, just wondering when in your life you want the best returns...

Frankly a downturn is an accumulator's best friend, not flat returns. You want to buy on the cheap, not on the slowly getting expensive.

But it is still better than having your accumulation phase during a long bull market.  It would be nice if I could continue buying at today's prices for the next 10 years, then have a raging bull market right as I retire.

Bear > flat > bull for accumulation.

I don't disagree at all w/ that. But these are things I don't worry about while in the accumulation. As I near my number I'll evaluate the environment around me and crunch some (conservative) numbers for future projections. What happened during my accumulation phase is outside of my control and therefore is only useful in a pure academic sense. It has no practical application for my actions in my life.

I don't worry about them either I was just addressing the original question you quoted.

[foobar]

Question:

For people still in early accumulation phase less than average returns is usually good when building your nest egg right?

Understanding no one can accurately predict the returns, just wondering when in your life you want the best returns...

Frankly a downturn is an accumulator's best friend, not flat returns. You want to buy on the cheap, not on the slowly getting expensive.

So the accumulators in Japan must be loving it. They have had a down turn/flat returns for 20 years now.  People make the assumption that if you have low returns now that you will get higher ones in the future. That may or may not turn out to be true.  The downturn might be a result in a fundamental change in the system that will last for a good chunk of your lifetime.

For fun lets look at 2 time periods
1985-1999. 15 years of high growth
2000-2014 15 years where you had 10 years of flat growth and 5 years of good growth

How much money does the person who is investing 20k/yr end up with?

1985: 1.7 million
2000: 752k

I know which number I prefer:) Now obviously 15 years is a blink of an eye in investment terms and we are comparing the best 15 year period to one of the worst.

The thing to remember is that a stock price going up is not the same as it getting expensive.  They are to some extent unrelated.  If the stock price is going up due to PE expansion, you might consider that getting more expensive. If the stock price is going up due to profit increases, it might be viewed as getting cheaper.

[matchewed]

Question:

For people still in early accumulation phase less than average returns is usually good when building your nest egg right?

Understanding no one can accurately predict the returns, just wondering when in your life you want the best returns...

Frankly a downturn is an accumulator's best friend, not flat returns. You want to buy on the cheap, not on the slowly getting expensive.

But it is still better than having your accumulation phase during a long bull market.  It would be nice if I could continue buying at today's prices for the next 10 years, then have a raging bull market right as I retire.

Bear > flat > bull for accumulation.

I don't disagree at all w/ that. But these are things I don't worry about while in the accumulation. As I near my number I'll evaluate the environment around me and crunch some (conservative) numbers for future projections. What happened during my accumulation phase is outside of my control and therefore is only useful in a pure academic sense. It has no practical application for my actions in my life.

I don't worry about them either I was just addressing the original question you quoted.

Fair enough :)

[brooklynguy]

So the accumulators in Japan must be loving it.

For as long as they choose to remain accumulators, they should be.  The problem is that, as you alluded to, at some point every accumulator wants to stop being an accumulator and start being a withdrawer.  But it's still true that, for as long someone does choose to remain an accumulator, low prices are necessarily better than high prices.

Your comparison of the two historical time periods is really illustrating a different (but related) point--namely, that you want prices to be high when you're ready to stop being an accumulator (and, again, the problem is that, if you're waiting for your portfolio to cross a predetermined threshold value as your trigger for transitioning from accumulator into non-accumulator, as most of us are indeed doing, then poor returns are a problem in the sense that they could delay that transition point (i.e., delay your retirement)).  But if you're going to retire on date X, and on that date the market is going to have a value of Y, then the longer and the farther the market remains below Y between now and date X (i.e., the period during which you're doing your accumulating), the better.

[foobar]

So the accumulators in Japan must be loving it.

For as long as they choose to remain accumulators, they should be.  The problem is that, as you alluded to, at some point every accumulator wants to stop being an accumulator and start being a withdrawer.  But it's still true that, for as long someone does choose to remain an accumulator, low prices are necessarily better than high prices.

Your comparison of the two historical time periods is really illustrating a different (but related) point--namely, that you want prices to be high when you're ready to stop being an accumulator (and, again, the problem is that, if you're waiting for your portfolio to cross a predetermined threshold value as your trigger for transitioning from accumulator into non-accumulator, as most of us are indeed doing, then poor returns are a problem in the sense that they could delay that transition point (i.e., delay your retirement)).  But if you're going to retire on date X, and on that date the market is going to have a value of Y, then the longer and the farther the market remains below Y between now and date X (i.e., the period during which you're doing your accumulating), the better.

Actually comparision just shows how much luck rules:) The assumption that 5 years of 0% return will result in higher returns in the future is borderline at best.  Buying off dips (things like 2000-2002, 2008-2009) when the market over reacts is one thing but prolonged periods of no growth often are driven by some underlying economic problems. Instead of getting delayed growth, you can end up with just lost growth.  Think about it like the underemployed college graduated. Those 3 years spent waiting instead of working on the career don't result in higher earnings later in life. They just result in lost opportunity cause.

In reality you can't time any of this. You have to play the game with the hand your dealt. A decade of 0% returns so soon after 2000-2010 would set us up for one of the worst 30 year periods in US history. Could happen. But it seems pretty unlikely to me. On the other hand contining the pace of the last 5 years also seems unlikely.

[brooklynguy]

In reality you can't time any of this. You have to play the game with the hand your dealt.

Yep.  If you're going to dream about best case scenarios, might as well wish for the market to fall to near zero during accumulation and shoot to infinity upon retirement, but since it's all beyond our control there's not really any point in indulging our hopes and desires about future returns.

A decade of 0% returns so soon after 2000-2010 would set us up for one of the worst 30 year periods in US history. Could happen.

If I'm being honest with myself, it scares me that a not insignificant number of very smart people whose opinions I generally trust are predicting exactly that.  But I try to remind myself that long term economic forecasting is pretty much a fool's errand, no matter how many very smart people are willing to engage in it.

[rmendpara]

That's a solid and simple prediction on what might happen to returns on a fixed term (a specific 10 yr period), since reversion to the mean is at least loosely something to keep in mind.

I think many have said that stocks today are not expensive as the market currently stands. However, if interest rates rise, and do so materially, then stocks will certainly be more expensive in relation to the higher return in another asset class. Valuations would need to compress a bit in order to justify the risk in equities.

No one really knows accurately how that will play out, but I suppose we'll see. In the interim, I'm still adding full steam ahead. I'd love valuations to compress.. whether prices go up or down, we just need earnings to increase relatively faster or decrease relatively slower to prices and we could see that.

[MoneyCat]

I predict that gumdrops are going to rain from the sky and I'm going to get my own unicorn to ride to work everyday.  Now give me all your money to invest for you.

[tooqk4u22]

Adjusted for current risk free rates, stocks are pretty fairly valued (maybe even slightly undervalued) even at these P/Es, which is really the crux of bogles opinion.  If interest rates rise however it would have to require an adjustment in valuations absent growing faster than we currently are. This is the basis of the Fed - lower rates to inflate asset prices => make everyone feel good => borrower money to invest/build stuff/hire people => raise rates to normalize/slow things.

But there are two ways to revert to the mean:
1.  stocks fall when rates rise
2.  stocks stay flat and earnings grow into the lower PE.

There may be some mix of the two, but it will inevitably happen, which is ok.  A P/E of 20 is a 5% return, which if invested in the broad market should move in step with inflationary aspects of the economy and thus it will be a real 5% return - 2% of the 5% will be paid to you via dividend. This ignores any economies of scale/growing market share/etc, which is included in bogels 5% earnings growth estimate.

[DavidAnnArbor]

And to me this underscores why I'm glad I have some international stock exposure, because the Vanguard International Index is doing better than the domestic market.

[milesdividendmd]

Bogle has a wonderful mind. But he's wrong an awful lot.

He advises against international diversification.

He discounts proven factors associated with increased returns (momentum, value, size).

He is anti ETF, despite the fact that they are often cheaper than their equivalent mutual funds.

He is right about the most important take home message though: costs matter. And for that I will forever be grateful.

[innerscorecard]

I do not know whether or not it will happen, but I am confident that if it does happen, a lot of the current bravado displayed around here and elsewhere will disappear.

[StressLess]

I do not know whether or not it will happen, but I am confident that if it does happen, a lot of the current bravado displayed around here and elsewhere will disappear.

As someone who has never been invested during a bear market, risk tolerance is one of my big unknowns...

I don't quite yet have the resolve to be ready to stare at paper losses of 30 - 50 %, so i will be revisiting my equity allocation every couple of years as time moves on.

[brooklynguy]

I don't quite yet have the resolve to be ready to stare at paper losses of 30 - 50 %, so i will be revisiting my equity allocation every couple of years as time moves on.

The tendency to focus exclusively on the risk of a sharp and sudden market crash is a form of recency bias, which has become so prevalent that it is the scenario some people envision even in the context of a discussion centered on the possibility of 10 years of flat returns.  The behavior of the market over the past decade is not necessarily indicative of its performance in the coming decade.  Historically, the greater long-term threat to portfolios was not quick and extreme market drops but extended periods of high inflation coupled with subpar returns, but that's still not to say that the greatest threat facing retirees today will follow any pattern that can be observed by looking backwards at history.  This thread had some great discussion on those types of issues:  http://forum.mrmoneymustache.com/investor-alley/what-will-the-next-10-correction-look-like/

[TheOldestYoungMan]

Question:

For people still in early accumulation phase less than average returns is usually good when building your nest egg right?

Understanding no one can accurately predict the returns, just wondering when in your life you want the best returns...

Frankly a downturn is an accumulator's best friend, not flat returns. You want to buy on the cheap, not on the slowly getting expensive.

So the accumulators in Japan must be loving it. They have had a down turn/flat returns for 20 years now. 

Where's that graph of the Japan market showing actual portfolio growth assuming reinvested dividends?

Quick google search showed this:

http://indexes.nikkei.co.jp/en/nkave/index/profile?cid=7&idx=nk225tr

It looks similar (goes up till late '07, then the dark times until '12, and then takin' off again) to a bunch of other graphs of that time period.

When evaluating how particular strategies worked, looking at just the historical price is going to be misleading.  Taxes and distributions are important factors.

[milesdividendmd]

I don't quite yet have the resolve to be ready to stare at paper losses of 30 - 50 %, so i will be revisiting my equity allocation every couple of years as time moves on.

The tendency to focus exclusively on the risk of a sharp and sudden market crash is a form of recency bias, which has become so prevalent that it is the scenario some people envision even in the context of a discussion centered on the possibility of 10 years of flat returns.  The behavior of the market over the past decade is not necessarily indicative of its performance in the coming decade.  Historically, the greater long-term threat to portfolios was not quick and extreme market drops but extended periods of high inflation coupled with subpar returns, but that's still not to say that the greatest threat facing retirees today will follow any pattern that can be observed by looking backwards at history.  This thread had some great discussion on those types of issues:  http://forum.mrmoneymustache.com/investor-alley/what-will-the-next-10-correction-look-like/

Yes and no Brooklyn.

I would argue that the greatest risk facing any investor is behavioral, and it is the risk of abandoning your strategy in light of recent negative results.

This is much more likely in the context of a big dramatic loss of market value as in the Great depression or the financial crisis.

So considering these dramatic recession/depression scenarios is actually pretty smart, regardless of what the next bear market actually looks like.

[brooklynguy]

This is much more likely in the context of a big dramatic loss of market value as in the Great depression or the financial crisis.

Maybe, though (as discussed at length in the linked thread's fun explorations into hypothetical investors' psychological mindsets) a long, drawn-out period of poor market returns may arguably be an even harder psychological hurdle than a sharp correction that quickly reverses itself -- the confident investor who witnesses her portfolio shrink in half only to redouble again all in the space of five years in a Great Recession style market meltdown may be able to stay the course (and emerge on the other side patting herself on the back for her smart financial decision) more easily than the confident investor who witnesses her portfolio slowly erode over the course of a decade in a '70's style stagflation environment and finally loses her nerve and throws in the towel on this "stay the course" bullshit that failed to deliver its promised benefits after ten excruciating years of unrewarded patience.

[Sid Hoffman]

For a mustachian, I still don't see this as a major problem.  It still means that your money is safe (i.e. not decreasing in real value) and ultimately for an extreme MMMer, our early retirement is made possible by our high savings rate, not by our high investment return.  I am only counting on 4% real rate of return, but even if I drop it to 2% I'm still able to retire just a few years later because my total savings will be so high compared to my expenses and life expectancy and the fact I'll be even closer to Social Security payouts by delaying retirement a few more years.

Honestly, if anything, low real returns simply make the case for a higher rate of savings as a percentage of your total income in order for everything to still balance out just fine.

[nobodyspecial]

For a mustachian, I still don't see this as a major problem.

It's certainly better for a MMM than sombody hoping for a company pension paying 90% of their regular salary.
But if you only get a 2% SWR rather than a 4% then you need twice the stash - which isn't exactly minor

[Sid Hoffman]

But if you only get a 2% SWR rather than a 4% then you need twice the stash - which isn't exactly minor

Nothing lasts forever.  No bull, bear, nor sideways market.  If we're in for 10 years of sideways trade, then chances are after 10 years there will be a disruptive event and investments will take off again, as has happened in the past when there's been extended periods of bear/sideways trading.  Starting off with a few extra years of work to build the 'stache should be enough that it all works out in the end, similar to how starting retirement in the worst year of cFIREsim still results in good returns after that period of poor returns is over.

[Bob W]

Just for fun --  Let's say the US market is at a peak and that for the next 15 years it goes down and average of 3% per year.   (yes, it does happen in markets all the time)

I wonder how many so called buy and hold long term fund holders could stomach that?   I'm guessing less than 2% of you could.   Remember the best investors are the dead and those who forgot they had an account. 

So what to do?

[milesdividendmd]

This is much more likely in the context of a big dramatic loss of market value as in the Great depression or the financial crisis.

Maybe, though (as discussed at length in the linked thread's fun explorations into hypothetical investors' psychological mindsets) a long, drawn-out period of poor market returns may arguably be an even harder psychological hurdle than a sharp correction that quickly reverses itself -- the confident investor who witnesses her portfolio shrink in half only to redouble again all in the space of five years in a Great Recession style market meltdown may be able to stay the course (and emerge on the other side patting herself on the back for her smart financial decision) more easily than the confident investor who witnesses her portfolio slowly erode over the course of a decade in a '70's style stagflation environment and finally loses her nerve and throws in the towel on this "stay the course" bullshit that failed to deliver its promised benefits after ten excruciating years of unrewarded patience.

Behaviorally a slow loss over time is barely perceptible. This is why people happily stay the course with their money in savings accounts and safes.

Logically the damage of slow loss is identical to volatile rapid and intermittent loss, but the perceived damage is totally different.

So the risk of not staying the course is orders of magnitude greater for a buy and holder with large rapid drawdowns.

Coming to terms with this fact is a worthwhile exercise.

[Bob W]

You nailed it with the behavioral aspect to investing.  The perception factor is huge as well.   

For our purposes here, to be conservative, I would suggest that one assume that their investments will accrue an average loss of 3% over a long term period. (not including inflation)  For planning purposes that is prudent.   Yes,  I know that people don't want to hear that and it may be a bit pessimistic.   So the formula might be something like  -- "how much do I need invested at an annual loss of 7% to last 50 years?"

It messes up the 4% rule totally and would require another decade or more of work and savings in many cases.   The assumption that the US market will continue to go up is just an assumption.   

This makes focusing on the spending and expenses side of the equation all that more important.   A person living on 5K per year with a paid off house is in pretty good shape regardless of market turns or inflation headwinds.  Especially if they have 1 million plus in investments. 

A possible future budget one might adopt could look like this -

Home ins/taxes --  1,400 annual
Utilities ---  1,500
Phone --- 240
Food -- 1,200
Bike -  100
Misc -- 1,000

[The Beacon]

Just for fun --  Let's say the US market is at a peak and that for the next 15 years it goes down and average of 3% per year.   (yes, it does happen in markets all the time)
So what to do?

My strategy is to have a side gig that will compensate for a possible gap in the downturn. When I FIRE, 40000 is all we need for a life style we are comfortable with.  I will just need to withdraw 3% and cover the rest with my side gig, which should be very easy. I could be a Walmart Greeter..  Hello sir, how are you?  Good by Sir... that is all it takes. No stress..

[Indexer]

I'm just going to copy my reply from the other thread on this topic.

Well first he isn't really making a prediction.  He is saying that if valuations return to their historic norms we would have low to zero returns.  Shiller is also projecting low to zero returns if that happens. 

Shiller & Bogle's math are almost identical.  Both say that 0% returns are possible if valuations returned to their historic averages.  CAPE and PE are both high.  If they return to historic norms and if growth continues at this fairly slow pace then we would have no returns over the next 10 years.

Note that is a HUGE 'if.'  CAPE and PE have both stayed above their historic averages for most of the past 2 1/2 decades.  It coincides almost perfectly with the time frame in which 401ks and discount brokers have become more popular.  More people are investing than at any point in history.  So you could build a pretty good argument that PE and CAPE ratios 10 years from now will likely still be above the historic averages.  I try not to make predictions.  I'm just pointing out you could argue it either way.

Now Vanguard and other investment firms have warned that with valuations being on the high end(but not bubble territory) returns over the next 10 years might be closer to the 5-8% range rather than the 10% historic average.
http://vanguard.com/pdf/ISGVEMO.pdf

[waltworks]

Yeah, a hypothetical is great, but the bottom line is that you can bet on humanity solving problems and coming up with new and awesome stuff, or not. If you really believe not, stock up on fertile land/ammo/etc. Otherwise just stop reading the financial news and stick to your AA.

-W

[milesdividendmd]

Yeah, a hypothetical is great, but the bottom line is that you can bet on humanity solving problems and coming up with new and awesome stuff, or not. If you really believe not, stock up on fertile land/ammo/etc. Otherwise just stop reading the financial news and stick to your AA.

-W

You can both believe in the ingenuity of mankind, not believe in a coming collapse of society, and believe that real returns are likely to be poor for the coming 10-20 years. These beliefs are in no way mutually exclusive.

I think Bogle's real myopia here is that he sees the world economy as equivalent to the S&P 500. There are plenty of stock markets in the world with low to average valuations. Why then he would advocate against international diversification at the same time that he argues that high valuations are predictive of lower future returns?

 Either you believe in reversion to the mean or you don't.

[JinBoston]

Wouldn't the hypothetical investor seeing 1970's -1980's stock market performance ALSO see the historically low valuations of the S&P 500 and feel comfortable that they were in good shape?  Or see the historically high federal bond rate and put some money into that?

I think index investing is great, but I also think it is a good idea to take a look at what you are buying and have an idea of what the future will hold eventually.

[a1smith]

The assumption that the US market will continue to go up is just an assumption.

Yeah, I seem to recall an assumption about housing prices never decreasing and it was actually built into models.  That didn't end very well.

[theoverlook]

The assumption that the US market will continue to go up is just an assumption.

Yeah, I seem to recall an assumption about housing prices never decreasing and it was actually built into models.  That didn't end very well.

"didn't end well" if you count the end as a short period over 2-3 years.  At least around here housing prices have more than recovered.  I think that's true across much of the US.

[milesdividendmd]

The assumption that the US market will continue to go up is just an assumption.

Yeah, I seem to recall an assumption about housing prices never decreasing and it was actually built into models.  That didn't end very well.

"didn't end well" if you count the end as a short period over 2-3 years.  At least around here housing prices have more than recovered.  I think that's true across much of the US.

So the financial collapse worked out well?

Tell that to the long term unemployed. There's more to life than asset prices.

[Kaspian]

There was one article which came out at the same time (probably from the same interview?) where he sort of settles around 4% returns.  But we all know his long-term advice would stay the same: "Just keep doing what you're doing and forget about it."

[theoverlook]

The assumption that the US market will continue to go up is just an assumption.

Yeah, I seem to recall an assumption about housing prices never decreasing and it was actually built into models.  That didn't end very well.

"didn't end well" if you count the end as a short period over 2-3 years.  At least around here housing prices have more than recovered.  I think that's true across much of the US.

So the financial collapse worked out well?

Tell that to the long term unemployed. There's more to life than asset prices.

Interesting interpretation about a comment on housing prices.  I think you're reading a little too much into three short sentences.

[brooklynguy]

"Just keep doing what you're doing and forget about it."

This is good advice for people in the accumulation phase, but not for most early retirees.  Anecdotally, the early retirement rate seems to be hitting an inflection point (at least among members of this forum), and it is no doubt not a coincidence that we've also been experiencing a huge market run-up.  If it does turn out to be true that the market produces zero returns over the next decade, then today's crop of retirees better not "keep doing what they're doing and forget about it" if they want their retirements to be successful (unless they've grossly oversaved to deal with that exact type of contingency).  But if they keep their finger on the pulse of the market and adapt their plans accordingly, they should be fine even if that scenario did come to pass.

[milesdividendmd]

The original contention was that the assumption that housing prices only went up "didn't end well."

You argued that this was not the case since housing prices recovered eventually. (Although they still have not recovered to their precrisis levels even before inflation adjustment).

My point was that the original comment was correct, and that your argument was fatally flawed. I stand by that.

[a1smith]

The assumption that the US market will continue to go up is just an assumption.

Yeah, I seem to recall an assumption about housing prices never decreasing and it was actually built into models.  That didn't end very well.

"didn't end well" if you count the end as a short period over 2-3 years.  At least around here housing prices have more than recovered.  I think that's true across much of the US.

As milesdividendmd surmised, I was thinking more about the root cause of 2008, Lehman Bros, AIG, etc. and all the attendant pain that followed.

Lehman Bros was leveraged 31:1 in real estate investments in 2007.  So, just on the back of an envelope, a decrease in real estate prices of about 3.2% makes their investment vaporize.  It seems that they never thought real estate prices would go down.

I still wonder if some manager told his quants to add a rate limiting block in their Simulink models of the housing market so that the results would come out the way he needed it.  Hey, boss!  My simulation is diverging!  I'm getting price decreases!  Ah, don't worry about it.  Just throw in a rate limiting block right there.  See there, all fixed!  That's why they pay me the big bucks!  :-D

[DarinC]

Isn't that the guy people quote when talking about not timing the market and buying index funds?

I just don't see a P/E of 15 back with such low yield on bonds, so unless the interest rates were to creep back up to average levels, I don't see a PE of 15 happening.

I don't think the idea of interest rates inching up is too far fetched. They've been a historically low levels for a while and the Fed made it clear they're going to raise rates barring unexpected economic weakness.

[Kaspian]

"Just keep doing what you're doing and forget about it."

This is good advice for people in the accumulation phase, but not for most early retirees.  Anecdotally, the early retirement rate seems to be hitting an inflection point (at least among members of this forum), and it is no doubt not a coincidence that we've also been experiencing a huge market run-up.  If it does turn out to be true that the market produces zero returns over the next decade, then today's crop of retirees better not "keep doing what they're doing and forget about it" if they want their retirements to be successful (unless they've grossly oversaved to deal with that exact type of contingency).  But if they keep their finger on the pulse of the market and adapt their plans accordingly, they should be fine even if that scenario did come to pass.

That's a good point, however, also the primary reason that 90% (or something) of investors have failed to match the indexes.  ...Because they change tracks mid-course based on a supposition.  "Adapting" investing plans to changing markets has proved fatal to most people who attempted it.  (e.g., "market's goin' down, better move some of money into gold/real estate/bitcoin/etc." )  I think a diversified index portfolio with a decent chunk of bonds is really the only game in town for the small investor.  (With the exception of maybe dividend investing--a plan which also seems to work out half-decently in the long-run.)  So, given that the majority of us suck at "stock picking" what are the adaptation alternatives as you see them?

[brooklynguy]

So, given that the majority of us suck at "stock picking" what are the adaptation alternatives as you see them?

I didn't mean to suggest that anyone should engage in market timing, which is a fool's errand for accumulators and retirees alike.  I was just pointing out that the "keep doing what you're doing and forget about it" advice is targeted at accumulators (who would be well served by plowing cash into their investments according to their investment policy statement and totally ignoring what the market is doing), not people in the drawdown phase, who generally do need to keep an eye on market performance -- not because it should necessarily alter their investment strategy, but to monitor for signs that their retirement might not be on a successful trajectory.  The "adaptation alternatives" one could take include cutting expenses, seeking out alternative income sources, etc., which would probably be a good idea for someone retiring today on a 4% SWR retirement plan if the next decade witnesses 0% market returns.