Is a 7% return unlikely without a complex approach?

[CrankAddict]

I'm 8 years away from my target retirement date (55) and I have this increasingly sinking feeling that this upcoming period is not going to get me where I want to be.  After years of feeling like I was getting nowhere with a string of professional advisors, I switched everything to Vanguard in 2015.  I have a very simple 65/35 total-stock/total-bond portfolio.  I'm not looking to make crazy returns by any stretch, but when I read things like this (which admittedly I have not been able to fully digest) it makes me think that such a simple approach is going to, at least potentially, come up short even targeting a relatively modest 7% return:

https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/institutional/insights/portfolio-insights/portfolio-strategy/PI-Reaching-for-Seven.pdf

I'm curious to hear your thoughts, do you all tend to agree with the JP analysis that old tricks are not going to be as effective in the upcoming period?

Thanks!

[JLee]

Nobody knows the future, and anyone who tells you otherwise is a liar ;)

[EvenSteven]

I'm 8 years away from my target retirement date (55) and I have this increasingly sinking feeling that this upcoming period is not going to get me where I want to be.  After years of feeling like I was getting nowhere with a string of professional advisors, I switched everything to Vanguard in 2015.  I have a very simple 65/35 total-stock/total-bond portfolio.  I'm not looking to make crazy returns by any stretch, but when I read things like this (which admittedly I have not been able to fully digest) it makes me think that such a simple approach is going to, at least potentially, come up short even targeting a relatively modest 7% return:

https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/institutional/insights/portfolio-insights/portfolio-strategy/PI-Reaching-for-Seven.pdf

I'm curious to hear your thoughts, do you all tend to agree with the JP analysis that old tricks are not going to be as effective in the upcoming period?

Thanks!

The bad news is that nobody knows what the market returns will be for the next 8 years. That includes JPMorgan.

The good news is that you don't need any tricks at all, either old or new, to get those market returns. And those market returns will probably be better than paying JPMorgan a bunch of money for any new fancy tricks.

[CrankAddict]

I get that nobody knows the future.  And to be clear I'm not thinking about moving all my money to JP Morgan.  I'm just trying to get a general sense of what you all think about where we are headed in this next decade.  To me, this quote from their analysis resonated:

But absenting a wholesale reset of what investors accept as reasonable valuation ranges, we believe that average equity returns over the full cycle will be lower than in the recent past.

[EvenSteven]

I get that nobody knows the future.  And to be clear I'm not thinking about moving all my money to JP Morgan.  I'm just trying to get a general sense of what you all think about where we are headed in this next decade.  To me, this quote from their analysis resonated:

But absenting a wholesale reset of what investors accept as reasonable valuation ranges, we believe that average equity returns over the full cycle will be lower than in the recent past.

I think it's probably true, but US stock market returns have been exceptional in the recent past. If we do end up getting lower returns than the recent past, and you only get, say, 13% CAGR, will that really spike your plans?

[reeshau]

Even if JP Morgan is correct, understand that the implied timeframe of their prediction is 10-15 years.  Do you expect to pass away by 65?  70?  If not, then your timeframe is much longer than theirs.  And market performance tends to flatten out with a longer amount of time, like any average.

And, they revise this 10-15 year projection *every year*, so even they don't believe they will be correct, this time.

If anything, take this sort of information to mean that sequence of return risk is real, and if the current inflation then leads into high interest rates (to tame it) that type of scenario is what occurred to set the 4% rule.  So study up on SORR, and perhaps enter retirement with a cash cushion, going part-time instead of quitting fully, or any number of measures to get you started.

But that period, in the late 60's leading into the 1970's, was double-digit inflation, with high unemployment.  So, the words are the same, but it's kind of like a magnitude 3.2 earthquake:  scary if you've never felt one, but barely noticeable if you have experienced a *real* one.  If people are paying 18% for their mortgages, then we might need to really get worried.

[chemistk]

I typically stay away from investing advice, as I'm not quite at the point in my life where I can swing meaningful amounts of capital into anything beyond standard retirement vehicles, but I skimmed the article until i found what I was looking for:

To clear the 7% hurdle, additional levels of active decisionmaking need to be applied across the widened opportunity set. This does not require a wholesale leap into bottom-up active stock-picking but, rather, looks to a plan’s investment staff to consider where they have demonstrable or achievable skill in manager or strategy selection. The ability to consistently select upper-quartile managers in private assets, real assets, GTAA and so forth can boost returns meaningfully, which in turn suggests that developing such expertise within an investment team is a
central consideration in hitting a 7% target.

Yeah, no thanks. The rest of the article is full of unnecessary complexity to stoke fear that the market is going to return far less in the near future. All of that, to make you believe that their team of "upper quartile managers" can supplement your existing approach to get to 7% returns.

Also this gem:

The benefits of active management are widely understood, although investors hold varying views about how durable manager-level alpha can be within different market sectors.
Regardless, the scope for realizing the benefits of an active manager’s investment skill is typically limited to a single market sector and a single market benchmark.

Red flags all over the place in that piece.

[Metalcat]

Active management/stock picking rarely beats passive, so when the market drops, what mechanism do you think active management/stock picking would outperform even a lower passive approach??

If the markets aren't doing well, the opportunities to beat the market are limited, and passive might help moderate your losses compared to active management/stock picking, which can really drive you into a hole in bad times.

[CrankAddict]

I think it's probably true, but US stock market returns have been exceptional in the recent past. If we do end up getting lower returns than the recent past, and you only get, say, 13% CAGR, will that really spike your plans?

I'd be dancing in the streets at 13%... even 10% would seem like a win.  Their prediction is for 3.6%, and they subsequently suggest various strategies to try and eek out 7%.  Where are you coming up with 13% as an example of things not going well?

[YttriumNitrate]

I'm not looking to make crazy returns by any stretch, but when I read things like this (which admittedly I have not been able to fully digest) it makes me think that such a simple approach is going to, at least potentially, come up short even targeting a relatively modest 7% return:
https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/institutional/insights/portfolio-insights/portfolio-strategy/PI-Reaching-for-Seven.pdf

Even if returns of a simple portfolio are going to be less than 7%, you and I probably lack the skills to consistently select complex portfolios that will return more than 7%.

[EvenSteven]

I think it's probably true, but US stock market returns have been exceptional in the recent past. If we do end up getting lower returns than the recent past, and you only get, say, 13% CAGR, will that really spike your plans?

I'd be dancing in the streets at 13%... even 10% would seem like a win.  Their prediction is for 3.6%, and they subsequently suggest various strategies to try and eek out 7%.  Where are you coming up with 13% as an example of things not going well?

I wasn't using it as an example of "things not going well," I was using it as an example of returns "lower than the recent past," which is the part you quoted. Look at their error bars they put on their 3.6% estimate. If they didn't put any one there, that should be a huge red flag for their predictions.

Investment returns aren't something in your circle of control; you can't goose your returns by paying extra money for active management. If we end up with lower returns than you need, you will need to be flexible with your spending, or work longer.

[CrankAddict]

Even if returns of a simple portfolio are going to be less than 7%, you and I probably lack the skills to consistently select complex portfolios that will return more than 7%.

Exactly, hence my sinking feeling :)

It seems the backlash on this thread is against the idea of active management and that's not what I'm trying to pivot to.  But do none of you believe the US market is currently over-valued, combined with some significant domestic monetary concerns?  It seems entirely plausible to me (a guy on the sidelines who is not spending hours a day digesting information on markets) that we could have a decade of very little or no growth even if we completely circumvent a sharp correction.  Again - I know that nobody really knows.  But surely you all have inclinations.  You can't just be equally bullish every year independent of current events, right?

[JLee]

Even if returns of a simple portfolio are going to be less than 7%, you and I probably lack the skills to consistently select complex portfolios that will return more than 7%.

Exactly, hence my sinking feeling :)

It seems the backlash on this thread is against the idea of active management and that's not what I'm trying to pivot to.  But do none of you believe the US market is currently over-valued, combined with some significant domestic monetary concerns?  It seems entirely plausible to me (a guy on the sidelines who is not spending hours a day digesting information on markets) that we could have a decade of very little or no growth even if we completely circumvent a sharp correction.  Again - I know that nobody really knows.  But surely you all have inclinations.  You can't just be equally bullish every year independent of current events, right?

I don't worry about it because there is nothing I can do to affect the outcome.  People have been saying the top is in for years.

[EvenSteven]

Even if returns of a simple portfolio are going to be less than 7%, you and I probably lack the skills to consistently select complex portfolios that will return more than 7%.

Exactly, hence my sinking feeling :)

It seems the backlash on this thread is against the idea of active management and that's not what I'm trying to pivot to.  But do none of you believe the US market is currently over-valued, combined with some significant domestic monetary concerns?  It seems entirely plausible to me (a guy on the sidelines who is not spending hours a day digesting information on markets) that we could have a decade of very little or no growth even if we completely circumvent a sharp correction.  Again - I know that nobody really knows.  But surely you all have inclinations.  You can't just be equally bullish every year independent of current events, right?

I agree that is a very real possibility. We could even have a decade with negative real returns, its happened before. That is why a safe withdrawal rate was derived from historical data, to take into account the worst times we've seen so far. I handle this by planning on no greater than 4% withdrawal and a little slack in my budget where I can reduce my spending if we hit a bad sequence of returns.

I also handle this by not reading advertising from investment firms. This strategy helps me keep my sunny disposition and youthful glow.

[Metalcat]

Even if returns of a simple portfolio are going to be less than 7%, you and I probably lack the skills to consistently select complex portfolios that will return more than 7%.

Exactly, hence my sinking feeling :)

It seems the backlash on this thread is against the idea of active management and that's not what I'm trying to pivot to.  But do none of you believe the US market is currently over-valued, combined with some significant domestic monetary concerns?  It seems entirely plausible to me (a guy on the sidelines who is not spending hours a day digesting information on markets) that we could have a decade of very little or no growth even if we completely circumvent a sharp correction.  Again - I know that nobody really knows.  But surely you all have inclinations.  You can't just be equally bullish every year independent of current events, right?

It's not backlash.

We're not questioning that the markets might be bad, we're questioning that you can propose an alternative investment strategy that would consistently beat the market while the market is bad.

Sometimes the market is bad, that's part of buy and hold investing. It's actually probably easier to beat the index when times are good than when times are bad, because the more diversified you are, such as with an index fund, when times are bad, the more your losses are minimized. The more creative you get with down time stock picking, the more risk you run of any given investment bottoming out completely, and with active management you get chewed up with fees.

That said, I am very cognizant of the state of the markets right now as I have 6 figures in cash to invest. Hence why I'm looking to diversify a quarter or half of it into a solid real estate market I've recently found with 1-1.5% rental properties in a booming, under developed area. If markets looked better moving forward, I might just stick to index funds, but a little diversification is nice. I'll still be putting 6 figures into index funds, just not everything, but only because the alternative is an EXCELLENT investment, not a gamble out of fear.

[Telecaster]

I'm 8 years away from my target retirement date (55) and I have this increasingly sinking feeling that this upcoming period is not going to get me where I want to be.  After years of feeling like I was getting nowhere with a string of professional advisors, I switched everything to Vanguard in 2015.  I have a very simple 65/35 total-stock/total-bond portfolio.  I'm not looking to make crazy returns by any stretch, but when I read things like this (which admittedly I have not been able to fully digest) it makes me think that such a simple approach is going to, at least potentially, come up short even targeting a relatively modest 7% return:

https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/institutional/insights/portfolio-insights/portfolio-strategy/PI-Reaching-for-Seven.pdf

I'm curious to hear your thoughts, do you all tend to agree with the JP analysis that old tricks are not going to be as effective in the upcoming period?

Thanks!

I didn't read the analysis, but it kind of doesn't matter.  The market will return what it does.   For planning purposes, I assume a 3% annual growth rate.  Why 3%?  No good reason.   But it is unlikely returns will be less than that over any reasonable period of time.  If they are more than that, then I'll be happy.

You do have a high bond allocation.   Most bonds right now have a negative real rate of return.   Keep that in mind. 

[simonsez]

Even if returns of a simple portfolio are going to be less than 7%, you and I probably lack the skills to consistently select complex portfolios that will return more than 7%.

Exactly, hence my sinking feeling :)

It seems the backlash on this thread is against the idea of active management and that's not what I'm trying to pivot to.  But do none of you believe the US market is currently over-valued, combined with some significant domestic monetary concerns?  It seems entirely plausible to me (a guy on the sidelines who is not spending hours a day digesting information on markets) that we could have a decade of very little or no growth even if we completely circumvent a sharp correction.  Again - I know that nobody really knows.  But surely you all have inclinations.  You can't just be equally bullish every year independent of current events, right?

It'll be higher at some point in the future than it is now and I'm too lazy/stupid to worry about it - if you feel more comfortable having a person with a career in finance manage that aspect of life for you, do whatever works.  Life is too short for me to worry about things outside of my control.  Having money broadly invested long-term is better than not having money broadly invested long-term - I don't see how that could change and if it did, we have bigger problems and JP Morgan won't have the answers.  If this concerns you, pick an allocation that allows you to sleep at night.  Maybe invest more in annuities and other fixed income instruments, real estate, a higher bond allocation, higher % of investments in sectors that aren't correlated, etc.  Do you have an IPS?  If so, do you agree with it and is it relevant to your current situation?

I CAN control learning about gardening, apiculture, DIY on electric/hvac/vehicles/plumbing/etc., sustainable energy, hunting/fishing/gathering, canning/preserving, sewing/mending, cooking, etc. which in turn help me out if the market happens to take a dump at an unfortunate time for any extended period of time.  We don't have to be experts in everything but reducing our dependence on other* people and institutions* is why I think the I in FIRE is the most important letter.  That is, if we're dependent on a system (e.g. financial markets) and that system fails us in some way, we need to be prepared to shore up gaps and have plans that minimize disruption to our luxurious lives.  YMMV

* I mean people and institutions that you don't have a close relationship with.  If you have a reliable friend or family member that is good at something that you are not and you can get discounted or free help at times then you're more covered than you would be if you had to pay full freight when money is tight or you had to do it yourself.

[RobertFromTX]

edit: nm

[secondcor521]

But do none of you believe the US market is currently over-valued, combined with some significant domestic monetary concerns?  It seems entirely plausible to me (a guy on the sidelines who is not spending hours a day digesting information on markets) that we could have a decade of very little or no growth even if we completely circumvent a sharp correction.  Again - I know that nobody really knows.  But surely you all have inclinations.  You can't just be equally bullish every year independent of current events, right?

I don't believe it is overvalued currently.  And even if it were, I believe that the "cure" offered by JPM is worse than the "disease" of a potential period of lower market growth.

I am equally bullish every year independent of current events.  I keep abreast of current news, but I consider almost all of it to be noise in the broader view of history.  Having a broad understanding of history and being skeptical of the message of the news media that what they have to say is Very Important leads me to conclude that things now are really very good and are likely to persist if not get even better in the near and longer term.

[CrankAddict]

To those saying there's nothing we can do about it, or it's out of our control, obviously that is the case in terms of how the market performs.  But it is not at all the case in terms of how our personal portfolio performs.  That's the whole point of a forum like this.  Not to change the market, but to make sure we are in the right parts of it.  My final 8-10 years of full time work will see me contributing the greatest amount to retirement of my entire career.  I literally cannot afford to be pointed in the wrong direction during that time.

You do have a high bond allocation.   Most bonds right now have a negative real rate of return.   Keep that in mind.

Interesting.  I thought this was a fairly standard % for being less than 10 years from retirement.  What seems like a good number to you?

[Metalcat]

To those saying there's nothing we can do about it, or it's out of our control, obviously that is the case in terms of how the market performs.  But it is not at all the case in terms of how our personal portfolio performs.  That's the whole point of a forum like this.  Not to change the market, but to make sure we are in the right parts of it.  My final 8-10 years of full time work will see me contributing the greatest amount to retirement of my entire career.  I literally cannot afford to be pointed in the wrong direction during that time.

You do have a high bond allocation.   Most bonds right now have a negative real rate of return.   Keep that in mind.

Interesting.  I thought this was a fairly standard % for being less than 10 years from retirement.  What seems like a good number to you?

So you're saying that you can consistently beat the index? Even in a down market?

Cool, then you should be able to sell that skill and become very, very rich.

[CrankAddict]

To those saying there's nothing we can do about it, or it's out of our control, obviously that is the case in terms of how the market performs.  But it is not at all the case in terms of how our personal portfolio performs.  That's the whole point of a forum like this.  Not to change the market, but to make sure we are in the right parts of it.  My final 8-10 years of full time work will see me contributing the greatest amount to retirement of my entire career.  I literally cannot afford to be pointed in the wrong direction during that time.

You do have a high bond allocation.   Most bonds right now have a negative real rate of return.   Keep that in mind.

Interesting.  I thought this was a fairly standard % for being less than 10 years from retirement.  What seems like a good number to you?

So you're saying that you can consistently beat the index? Even in a down market?

Cool, then you should be able to sell that skill and become very, very rich.

Are you trolling or what?  Who said anything about beating indices?  It is your hypothesis that a portfolio made up of 100% BND will perform the same as one made up of 100% VTI?  My point is that the specific funds we pick, and the allocations we assign to them, are hugely important decisions.  So I simply do not understand the "there's nothing I can do about it" remarks.

[simonsez]

To those saying there's nothing we can do about it, or it's out of our control, obviously that is the case in terms of how the market performs.  But it is not at all the case in terms of how our personal portfolio performs.  That's the whole point of a forum like this.  Not to change the market, but to make sure we are in the right parts of it.  My final 8-10 years of full time work will see me contributing the greatest amount to retirement of my entire career.  I literally cannot afford to be pointed in the wrong direction during that time.

Pick an allocation that works for YOU and stick with it and be confident that you're exposing yourself the right way. :-)  It may or may not be that complex.  Squirming around trying to pick a perfect portfolio seems like a waste of time when you don't need to be perfect for the plan to work (plus no one can predict the future anyway).  Be broadly invested and diversified as you see fit and you'll catch enough of the rising tide over the course of many years (including those post-retirement) to suit your preferences that it won't matter if your personal CAGR could've been a couple tenths of a percent higher if you woulda/coulda/shoulda years earlier.  There is a ton of free reading and portfolio tools you can experiment with until you are comfortable about your direction.  Don't let perfect be the enemy of good.

[4tify]

Vanguard also predicts lower returns over the next decade. But adding a chunk of international should help (IF they are correct).

https://advisors.vanguard.com/insights/article/marketperspectivesoctober2021

It seems to me if you are near your number, all you “need” is a 4% return to outlive your portfolio SORR not withstanding, but you’ve got plenty in bonds to cover that. You could also presumably earn some income to cover whatever gap you’re worried about in RE.

[Metalcat]

To those saying there's nothing we can do about it, or it's out of our control, obviously that is the case in terms of how the market performs.  But it is not at all the case in terms of how our personal portfolio performs.  That's the whole point of a forum like this.  Not to change the market, but to make sure we are in the right parts of it.  My final 8-10 years of full time work will see me contributing the greatest amount to retirement of my entire career.  I literally cannot afford to be pointed in the wrong direction during that time.

You do have a high bond allocation.   Most bonds right now have a negative real rate of return.   Keep that in mind.

Interesting.  I thought this was a fairly standard % for being less than 10 years from retirement.  What seems like a good number to you?

So you're saying that you can consistently beat the index? Even in a down market?

Cool, then you should be able to sell that skill and become very, very rich.

Are you trolling or what?  Who said anything about beating indices?  It is your hypothesis that a portfolio made up of 100% BND will perform the same as one made up of 100% VTI?  My point is that the specific funds we pick, and the allocations we assign to them, are hugely important decisions.  So I simply do not understand the "there's nothing I can do about it" remarks.

I'm not being an asshole, I'm genuinely not understanding your point, along with a lot of other responders I assume.

You either think you can beat the index or you don't. What are these "hugely important decisions" if not to try and beat the index over the next severl years of projected poor returns?

Honestly, I feel like I just can't understand what you are getting at. Not being an asshole, just legitimately not understanding what you are actually proposing to do, and how you expect it to perform better than just sticking with index funds.

A lot of us are pretty die hard passive index fund investors because we legitimately think that it will produce the best long term results, not because we are throwing our hands up because we don't know what to do, this *is* what we are doing.

So in all seriousness, what alternative are you proposing and why do you think it's superior to index funds? What are the hugely important decisions you feel need to be made?

I'm obviously not against the idea of other investments since I already said I'm actively diversifying into rental properties because I feel I can get better returns than index funds, although that's largely due to leverage, but I can't safely leverage as much into index funds, so that matters.

So yeah, I'm definitely not being an asshole, I shared my strategy for fortifying my returns for my current 6 figure lump sum, what's your proposal?

[Steeze]

Have an allocation that you are not tempted to change when the market is up, down, sideways, overvalued, or undervalued. That is how you win long term. If your allocation is changing it should be for mechanical reasons such as age to retirement, not based on any of the above mentioned factors.

Simply, the best position at any time is the one where you are ok doing nothing. That can be different for different people for a variety of reasons.

[PDXTabs]

To those saying there's nothing we can do about it, or it's out of our control, obviously that is the case in terms of how the market performs.  But it is not at all the case in terms of how our personal portfolio performs.  That's the whole point of a forum like this.  Not to change the market, but to make sure we are in the right parts of it.  My final 8-10 years of full time work will see me contributing the greatest amount to retirement of my entire career.  I literally cannot afford to be pointed in the wrong direction during that time.

You do have a high bond allocation.   Most bonds right now have a negative real rate of return.   Keep that in mind.

Interesting.  I thought this was a fairly standard % for being less than 10 years from retirement.  What seems like a good number to you?

So you're saying that you can consistently beat the index? Even in a down market?

Cool, then you should be able to sell that skill and become very, very rich.

Are you trolling or what?  Who said anything about beating indices?  It is your hypothesis that a portfolio made up of 100% BND will perform the same as one made up of 100% VTI?  My point is that the specific funds we pick, and the allocations we assign to them, are hugely important decisions.  So I simply do not understand the "there's nothing I can do about it" remarks.

I'm not being an asshole, I'm genuinely not understanding your point, along with a lot of other responders I assume.

You either think you can beat the index or you don't. What are these "hugely important decisions" if not to try and beat the index over the next severl years of projected poor returns?

But the OP isn't asking how to beat the index.

What is this "the index" that you write about?

[PDXTabs]

You do have a high bond allocation.   Most bonds right now have a negative real rate of return.   Keep that in mind.

Interesting.  I thought this was a fairly standard % for being less than 10 years from retirement.  What seems like a good number to you?

It is "standard" but those standards were set when bonds had positive real yields. If I'm lucky I'm ~8 years away from retirement and I'm 100% equities. I strongly suggest reading The Simple Path to Wealth by J L Collins for a more in-depth analysis of why perhaps the "standard" recommendation is wrong, especially if you plan to retire early.

[Metalcat]

To those saying there's nothing we can do about it, or it's out of our control, obviously that is the case in terms of how the market performs.  But it is not at all the case in terms of how our personal portfolio performs.  That's the whole point of a forum like this.  Not to change the market, but to make sure we are in the right parts of it.  My final 8-10 years of full time work will see me contributing the greatest amount to retirement of my entire career.  I literally cannot afford to be pointed in the wrong direction during that time.

You do have a high bond allocation.   Most bonds right now have a negative real rate of return.   Keep that in mind.

Interesting.  I thought this was a fairly standard % for being less than 10 years from retirement.  What seems like a good number to you?

So you're saying that you can consistently beat the index? Even in a down market?

Cool, then you should be able to sell that skill and become very, very rich.

Are you trolling or what?  Who said anything about beating indices?  It is your hypothesis that a portfolio made up of 100% BND will perform the same as one made up of 100% VTI?  My point is that the specific funds we pick, and the allocations we assign to them, are hugely important decisions.  So I simply do not understand the "there's nothing I can do about it" remarks.

I'm not being an asshole, I'm genuinely not understanding your point, along with a lot of other responders I assume.

You either think you can beat the index or you don't. What are these "hugely important decisions" if not to try and beat the index over the next severl years of projected poor returns?

But the OP isn't asking how to beat the index.

What is this "the index" that you write about?

Yes, I'm being lazy with my terminology. How does OP plan to outperform the most common index funds that mustachians and bogleheads typically invest in?

[PDXTabs]

I'm 8 years away from my target retirement date (55) and I have this increasingly sinking feeling that this upcoming period is not going to get me where I want to be.  After years of feeling like I was getting nowhere with a string of professional advisors, I switched everything to Vanguard in 2015.  I have a very simple 65/35 total-stock/total-bond portfolio.  I'm not looking to make crazy returns by any stretch, but when I read things like this (which admittedly I have not been able to fully digest) it makes me think that such a simple approach is going to, at least potentially, come up short even targeting a relatively modest 7% return:
...
I'm curious to hear your thoughts, do you all tend to agree with the JP analysis that old tricks are not going to be as effective in the upcoming period?

I think that there is a very real possibility that we don't see 7% real returns over the next eight years. Like you I would like to stop working in eight years if possible. I focus on things that I can control instead of worrying about it. I keep working, keep saving, and know that at some point in time I can Coast FIRE even if I can't Fat FIRE.

My portfolio happens to be 99% VT and VT equivalents which gives me more international equity and less bond exposure than yours. As a slight aside I do recommend reading Global equity investing: The benefits of diversification and sizing your allocation even though it contradicts some of the J L Collins advice that I just suggested.

[Travis]

The benefits of active management are widely understood, although investors hold varying views about how durable manager-level alpha can be within different market sectors.
Regardless, the scope for realizing the benefits of an active manager’s investment skill is typically limited to a single market sector and a single market benchmark.

Red flags all over the place in that piece.

It's strangely honest. Cut away the buzzwords and vague language, and they're saying "Investors don't trust us at an increasing rate, but you should pay us 1-2% AUM because one of our managers might get lucky in the next decade in a tiny corner of the market."

[secondcor521]

Something else to throw in the mix for consideration is that people have been predicting lower returns going forward for at least the past 5, possibly the past 10 years.  And in fact the market has gone up at I think better than 7% during those time frames.

So two things to note:

1.  They've been consistently wrong recently.

2.  Their predictions would lead a person to perhaps become nervous and save more and give them money to manage.  Which aligns with their objective of maximizing their profit.

[lutorm]

There's no free lunch. In general, there's a tradeoff between expected returns and volatility. If you desire a higher return, are you willing to accept higher volatility along with it? Because of sequence of return risk, start of retirement is exactly when volatility can hurt you the most.

[CrankAddict]

Yes, I'm being lazy with my terminology. How does OP plan to outperform the most common index funds that mustachians and bogleheads typically invest in?

I feel like maybe you are being a bit lazy with your reading too?

I think I am rather clearly indicating that I am questioning my super-simple 2-fund portfolio in terms of components and allocations.  I am not proposing starting my own fund, nor my own brokerage :)

You keep saying "how are you going to beat the index!?" but it's not like we've all been assigned a fixed asset allocation by the government.  You and I could both build a portfolio entirely made up of Vanguard "index funds", contribute the exact same amount for an identical number of years, yet you might retire rich and happy and I might be barely scraping by.  Which funds and which allocations are what I'm getting at.  My current portfolio turns out to be the literal poster child of the "this isn't going to work well over the next decade" document from JP Morgan, so that's why I was trying to get some others to weigh in on a very simple question.  One more time, here we go...

"Do you guys *think* (we know there are no guarantees) 7% is achievable over the next decade with a simple 2-fund (total stock, total bond) portfolio?"

[Psychstache]

"Do you guys *think* (we know there are no guarantees) 7% is achievable over the next decade with a simple 2-fund (total stock, total bond) portfolio?"

Yes

[CrankAddict]

You do have a high bond allocation.   Most bonds right now have a negative real rate of return.   Keep that in mind.

Interesting.  I thought this was a fairly standard % for being less than 10 years from retirement.  What seems like a good number to you?

It is "standard" but those standards were set when bonds had positive real yields. If I'm lucky I'm ~8 years away from retirement and I'm 100% equities. I strongly suggest reading The Simple Path to Wealth by J L Collins for a more in-depth analysis of why perhaps the "standard" recommendation is wrong, especially if you plan to retire early.

I will, thanks for that recommendation.

Sent from my SM-G960U1 using Tapatalk

[Metalcat]

Yes, I'm being lazy with my terminology. How does OP plan to outperform the most common index funds that mustachians and bogleheads typically invest in?

I feel like maybe you are being a bit lazy with your reading too?

I think I am rather clearly indicating that I am questioning my super-simple 2-fund portfolio in terms of components and allocations.  I am not proposing starting my own fund, nor my own brokerage :)

You keep saying "how are you going to beat the index!?" but it's not like we've all been assigned a fixed asset allocation by the government.  You and I could both build a portfolio entirely made up of Vanguard "index funds", contribute the exact same amount for an identical number of years, yet you might retire rich and happy and I might be barely scraping by.  Which funds and which allocations are what I'm getting at.  My current portfolio turns out to be the literal poster child of the "this isn't going to work well over the next decade" document from JP Morgan, so that's why I was trying to get some others to weigh in on a very simple question.  One more time, here we go...

"Do you guys *think* (we know there are no guarantees) 7% is achievable over the next decade with a simple 2-fund (total stock, total bond) portfolio?"

I give up. I still have absolutely no idea what you are proposing to do.

Good luck with your investments.

[secondcor521]

"Do you guys *think* (we know there are no guarantees) 7% is achievable over the next decade with a simple 2-fund (total stock, total bond) portfolio?"

Yes

Yes, as long as the allocation to the stock portion is high enough.  I'm 98/2 total stock/total bond and I expect more than 7% over the next decade.

As long as we're seeking clarity, though, you should probably clarify if you mean 7% nominal or 7% real.

[Paper Chaser]

"Do you guys *think* (we know there are no guarantees) 7% is achievable over the next decade with a simple 2-fund (total stock, total bond) portfolio?"

It's not about the simplicity or complexity of a portfolio for me. Simple portfolios aren't automatically going to have different returns than complex portfolios. It's more about asset allocation. Bonds aren't really worth anything to me. For how small the returns are these days, you might as well be holding cash as a hedge against SORR. Anything in an investment account goes toward stocks.

A "simple" 2 fund portfolio with a fairly large percentage of bonds that aren't going to return anything meaningful may struggle to get to 7% overall returns. Tweaking the asset allocation of the same "simple" 2 fund portfolio to decrease the bond holdings and increase equities has a better chance of hitting 7%. It all comes down to risk/reward. There's no easy way you can reduce the volatility and increase returns simultaneously (which kind of sounds like what you're looking for). You're going to have to choose the proper asset allocation for YOU based on your risk tolerance and situation.

[Mr. Green]

Historically, the market has returned 7% real (adjusted for inflation) on average. But you're only 2/3 in the market. So your bond position will drag on your performance. If the historical average continues you will not see 7% because of your asset allocation. That's the only thing anyone can concretely tell you. Everything else is wizardry and guessing.

[ixtap]

Why would complexity be the solution to better returns?

I think Malcat and I are asking the same question...nice to be in good company...

[boarder42]

if you want to diversify your equity portion outside of the SP500 which is essentially all VTI is then i'd look to something like Paul Merriman's options for weighting by asset class instead of market cap he has everything from 2 funds to 4 funds to 10 funds.  There is a long history of data that adding just a small amount of a small value tilt will decrease drawdown times and increase returns on your equity portion. 

https://paulmerriman.com/90-years-of-evidence-shows-investor-patience-leads-to-better-returns/

i would disagree that its wizardy and guessing when we have the same history of data on small and value that we have on large growth. 

the 10 fund strategy is more complex and has better returns for those saying complexity isnt an answer.  It is base on data. My personal approach is more simplistic but will lead to some agonizing underperformance.

[Metalcat]

Why would complexity be the solution to better returns?

I think Malcat and I are asking the same question...nice to be in good company...

As in we can both be morons with "reading comprehension" issues together? Lol.

[Retire-Canada]

You do have a high bond allocation.   Most bonds right now have a negative real rate of return.   Keep that in mind.

Interesting.  I thought this was a fairly standard % for being less than 10 years from retirement.  What seems like a good number to you?

I was 100% stocks right up until I pulled the trigger on FIRE. At that point I decided on setting aside a few years of spending in cash/bonds.

I have no idea what the future holds. I have a simple stock heavy globally diversified portfolio. No plans to change that.

FWIW - I didn't read the link in your OP. I don't care what JPM says. I don't read any other financial analysis articles either. I think a low information diet is the best use of my time when it comes to the financial media.

[ixtap]

Why would complexity be the solution to better returns?

I think Malcat and I are asking the same question...nice to be in good company...

As in we can both be morons with "reading comprehension" issues together? Lol.

Mmmmhmmmm. I get called stupid a lot. Not by people whose intelligence I respect, but that's family for you...

[vand]

if someone could gaurantee me a 7% real return over the next decade I would not just bite their hands off, but probably their whole arms.

OP, unfortunately there are no guarantees. The market doesn't owe you any returns, nor does the world either, for that matter. The only defence you have for the vagaries on the market is to be flexible in your timeline. You will get there eventually whatever the market does, just don't be so keen to put a deadline on it, otherwise could well be disappointed.

[CrankAddict]

"Do you guys *think* (we know there are no guarantees) 7% is achievable over the next decade with a simple 2-fund (total stock, total bond) portfolio?"

It's not about the simplicity or complexity of a portfolio for me. Simple portfolios aren't automatically going to have different returns than complex portfolios. It's more about asset allocation. Bonds aren't really worth anything to me. For how small the returns are these days, you might as well be holding cash as a hedge against SORR. Anything in an investment account goes toward stocks.

A "simple" 2 fund portfolio with a fairly large percentage of bonds that aren't going to return anything meaningful may struggle to get to 7% overall returns. Tweaking the asset allocation of the same "simple" 2 fund portfolio to decrease the bond holdings and increase equities has a better chance of hitting 7%. It all comes down to risk/reward. There's no easy way you can reduce the volatility and increase returns simultaneously (which kind of sounds like what you're looking for). You're going to have to choose the proper asset allocation for YOU based on your risk tolerance and situation.

There's been a few mentions of SORR in this thread, but that's more a concept for after I retire, right?  I may have completely misunderstood what SORR is but I thought it mainly applied when you start pulling the money out.

I do understand that it is unreasonable to target lower risk AND higher returns.  My belief was that 7% returns were a pretty mild target that could co-exist with moderate/low risk.  If I were targeting 10+% I would not feel the same.  But maybe those preconceptions are arbitrary and wrong?


My main takeaway from this discussion is that I need to swap a good chunk of the bonds for more stocks...  and, since my current stocks are 100% US (VTI), I should probably target an international fund (VXUS).  The portfolio backtester suggests that during my investing career (1998 till now) a 100% VTI portfolio would have been better than one which added any amount of international stock or bonds.  Nevertheless, adding in some diversity still feels less risky to me going forward.

[Retire-Canada]

There's been a few mentions of SORR in this thread, but that's more a concept for after I retire, right?  I may have completely misunderstood what SORR is but I thought it mainly applied when you start pulling the money out.

SORR matters as soon as your FIRE plans are firm. If you really want to retire in say 2 years and can't extend that date for one reason or another you are at the mercy of negative market events so you'll want to plan for SORR mitigation.

OTOH if your preferred FIRE date is 2 years from now, but you are happy to work 1-4 more years as market returns dictate then there is no need to worry about SORR until you lock in a FIRE date by giving notice for example.

[Paper Chaser]

"Do you guys *think* (we know there are no guarantees) 7% is achievable over the next decade with a simple 2-fund (total stock, total bond) portfolio?"

It's not about the simplicity or complexity of a portfolio for me. Simple portfolios aren't automatically going to have different returns than complex portfolios. It's more about asset allocation. Bonds aren't really worth anything to me. For how small the returns are these days, you might as well be holding cash as a hedge against SORR. Anything in an investment account goes toward stocks.

A "simple" 2 fund portfolio with a fairly large percentage of bonds that aren't going to return anything meaningful may struggle to get to 7% overall returns. Tweaking the asset allocation of the same "simple" 2 fund portfolio to decrease the bond holdings and increase equities has a better chance of hitting 7%. It all comes down to risk/reward. There's no easy way you can reduce the volatility and increase returns simultaneously (which kind of sounds like what you're looking for). You're going to have to choose the proper asset allocation for YOU based on your risk tolerance and situation.

There's been a few mentions of SORR in this thread, but that's more a concept for after I retire, right?  I may have completely misunderstood what SORR is but I thought it mainly applied when you start pulling the money out.

You're correct, but it takes planning ahead to mitigate SORR. I don't stress over it too much personally because I'm not likely to do a super lean FIRE, but the concept as I understand it is that you need some stable, non-volatile resources to tide you over. For me, that might as well just be cash over bonds these days since bond returns are so low and I'd rather maximize my tax deferred space on higher returning asset classes.

My main takeaway from this discussion is that I need to swap a good chunk of the bonds for more stocks...  and, since my current stocks are 100% US (VTI), I should probably target an international fund (VXUS).  The portfolio backtester suggests that during my investing career (1998 till now) a 100% VTI portfolio would have been better than one which added any amount of international stock or bonds.  Nevertheless, adding in some diversity still feels less risky to me going forward.

Yes, I think this is a good takeaway....so long as your risk tolerance aligns with that. Mr Green probably said it best though. Stocks have historically returned about 7%, not necessarily a stock/bond split. If you only have 2/3 of your portfolio in stocks, and they hit their historical average, then only the portion of your portfolio that's in stocks will see that gain, while any bonds will be a drag on portfolio performance.

[Telecaster]

You do have a high bond allocation.   Most bonds right now have a negative real rate of return.   Keep that in mind.

Interesting.  I thought this was a fairly standard % for being less than 10 years from retirement.  What seems like a good number to you?

My personal bond allocations is currently zero.   Let me explain.  If the real rate of return on a bond is negative on the day of purchase, then you are essentially paying someone to use your money, guaranteeing a loss.  Now, any given bond might be owned by a string of people between now and its maturity date,  and some people might make money but over all the bond will lose money.   If interest rates go up, and they can't go down much farther, that makes it even worse. Bond funds are even riskier in that regard.  We're in secular period where bonds have been incredibly expensive for years now.   

Remember how much you paid for this advice.