Author Topic: McKinsey study: prepare for lower real returns  (Read 36564 times)

Seppia

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McKinsey study: prepare for lower real returns
« on: April 28, 2016, 05:18:29 AM »
http://www.bloomberg.com/news/articles/2016-04-27/be-afraid-be-very-afraid-if-you-re-investing-for-the-long-run

The headline is very stupid, and many things seem plain weird (why would emerging countries push margins down? There have always been "emerging countries"), but the general idea that today's investments might yield a lower return than they did in the past seems to have some logic.

Just to make an example, measuring the USA stock market by both the Shiller PE and the Price to Book ratio (that historically have a very high correlation with the next 10-20 year returns) we should expect lower returns.

Another example might be bonds: it looks like their valuations have very little upside left and a big downside.

The earth's economy has proven a lot of doomsayers wrong during the decades, but the general idea of planning with a slightly larger margin of safety kinda makes sense to me.
Thoughts?

ender

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Re: McKinsey study: prepare for lower real returns
« Reply #1 on: April 28, 2016, 06:55:29 AM »
I'm always skeptical of people using historical periods to predict the future in this way. I understand you want to use something, but... there are a lot of things that have changed from 1950 or 1920 or even 1990 and now that affect how Shiller PE works.

I have yet to see an exhaustive comparison of companies with similar revenue and expenses in different periods and showing me that a PE ratio of 20 in 2016 is a similar company valuation as it would have been in 1920. Or 1940. Etc.

Seppia

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Re: McKinsey study: prepare for lower real returns
« Reply #2 on: April 28, 2016, 07:04:50 AM »
I agree to a certain extent.
Things were also different between the 50s and the 70s or 90s
Yet the Shiller PE valuation correlation with returns still held.

There is also some basic math involved at the extremes

To exaggerate/simplify: if you have a Shiller PE of 50, you have to assume returns around 2% unless you have reasonable expectation that earnings are going to increase exponentially (and stay at the higher level) in the future.

This said, I don't know what's going to happen next, but I do agree that there seem to be a number of indicators that could suggest (could) a logic behind a lower expected return

AdrianC

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Re: McKinsey study: prepare for lower real returns
« Reply #3 on: April 28, 2016, 08:07:59 PM »
4% real from stocks is a reasonable expectation, but folks don't want to hear it.
- Should support a very safe 3.5% withdrawal rate assuming a couple of years expenses in cash. That's not bad.
- Not a big concern for accumulators where investment return is just icing on the cake. As MMM demonstrates, you get to FIRE by saving like a fiend, not from average market returns.

0% to 2% real from bonds is also a reasonable expectation.

steveo

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Re: McKinsey study: prepare for lower real returns
« Reply #4 on: April 28, 2016, 11:35:01 PM »
4% real from stocks is a reasonable expectation, but folks don't want to hear it.
- Should support a very safe 3.5% withdrawal rate assuming a couple of years expenses in cash. That's not bad.
- Not a big concern for accumulators where investment return is just icing on the cake. As MMM demonstrates, you get to FIRE by saving like a fiend, not from average market returns.

0% to 2% real from bonds is also a reasonable expectation.

I'm not sold on this plus it is a big issue. Instead of saving to 25 times expenses you are stating that you need 28.5 times expenses + a couple of years expenses in cash. So basically a 3% WR.

I think the 4% WR is still safe and has plenty of buffer built into it. The 4% WR is actually 95% safe over 30 year periods and there have been plenty of tough periods. There have been wars/recessions/global shocks and a depression.

I'm looking at retiring on a 5% WR. If someone can provide me evidence that the future will be significantly less safe than the past than I would consider changing my retirement parameters.

Seppia

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Re: McKinsey study: prepare for lower real returns
« Reply #5 on: April 29, 2016, 01:51:14 AM »
There is obviously no evidence available for the future, but some indicators might suggest lower returns as stated above (Shiller PE, bonds).
I'm still inclined to think the 4% rule will most probably be safe enough, but one thing doesn't exclude the other.

steveo

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Re: McKinsey study: prepare for lower real returns
« Reply #6 on: April 29, 2016, 02:16:16 AM »
There is obviously no evidence available for the future, but some indicators might suggest lower returns as stated above (Shiller PE, bonds).
I'm still inclined to think the 4% rule will most probably be safe enough, but one thing doesn't exclude the other.

There may be lower returns for the next 20 years but that doesn't mean that it will be as low as previous 20 year periods. The 4% rule takes into account a lot of bad years.

frugal_c

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Re: McKinsey study: prepare for lower real returns
« Reply #7 on: April 29, 2016, 07:32:39 PM »
4% real from stocks is a reasonable expectation, but folks don't want to hear it.
- Should support a very safe 3.5% withdrawal rate assuming a couple of years expenses in cash. That's not bad.
- Not a big concern for accumulators where investment return is just icing on the cake. As MMM demonstrates, you get to FIRE by saving like a fiend, not from average market returns.

0% to 2% real from bonds is also a reasonable expectation.

I agree with you.   Better to be conservative.   I think there is a real issue with the 90% success rate that gets thrown around.   People are comparing to periods with generally much lower starting valuations which does play a role in future returns.

zz_marcello

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Re: McKinsey study: prepare for lower real returns
« Reply #8 on: April 29, 2016, 08:25:06 PM »
A fixed 4% withdrawal rate with 80% pure VTSAX + 20% US Bonds in this CAPE10= 26 + 10 year Bonds @1.85% environment will likely run out of money in <=30years.

People compare 2016 with 120 years of stock market and arrive at a 90%+ success rate but you have to compare the current environment with Shiller CAPE >20 years. (1902, 1929, 1965, 1966, 1998, 1999,  2000).
All those instances had only 25-50% of the initial money left after 15 years of retirement and 4% withdrawal. Not very encouraging. And the rescuing factor in all those years beside the mid-sixties where very well performing bonds with solid yields and rising bond valuations. Currently, 10 year US bonds return ~0-0,5% real and they in an all-time low yield bubble.

With mostly US stocks/bonds I would not go beyond 3% withdrawal rate for a 30+ year planning. I would not even think about it.

But there is a solution:
Invest part of your precious net worth into growing and stable countries with lower valuations and no dependency on commodity prices.

Shiller CAPE10 for different markets:
Singapore= 12
Great Britain+Korea= 13
China= 13
Hong Kong= 15

There are also:
Lendingclub Consumer credit: ~7% without work; 9-10% with some tested scanning parameters.
Some US REIT's with ~7% yield
10+ different Fundrise investments ~13% gross yield
Some US limited partnerships
Some preferred stocks

Spread the wealth ;-)  and live happily with 4%
 zz_marcello
« Last Edit: April 29, 2016, 09:15:11 PM by zz_marcello »

mrpercentage

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Re: McKinsey study: prepare for lower real returns
« Reply #9 on: April 29, 2016, 09:09:15 PM »
Nah, thats why I pick stocks. Even if they cut dividends I have over 4% yield. I would be around 7 % if they didn't. Too aggressive, I know, hence the cuts. I heavily buzzed by the way. Red wine [insert Bob Marley here]. I have to go to bed in a hour. WTF over. Peace out, and dueces... End of Report

steveo

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Re: McKinsey study: prepare for lower real returns
« Reply #10 on: April 29, 2016, 09:29:06 PM »
Nah, thats why I pick stocks. Even if they cut dividends I have over 4% yield. I would be around 7 % if they didn't. Too aggressive, I know, hence the cuts. I heavily buzzed by the way. Red wine [insert Bob Marley here]. I have to go to bed in a hour. WTF over. Peace out, and dueces... End of Report

I hope you realize that there is no guarantee that you will pick stocks that will outperform the market or that dividends will always stay above 4%.

EscapeVelocity2020

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Re: McKinsey study: prepare for lower real returns
« Reply #11 on: April 29, 2016, 09:31:48 PM »
Seems like an interesting thread.  We are just living our lives, but sometimes I wonder how bad it might get for other people.

mrpercentage

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Re: McKinsey study: prepare for lower real returns
« Reply #12 on: April 29, 2016, 09:49:01 PM »
Nah, thats why I pick stocks. Even if they cut dividends I have over 4% yield. I would be around 7 % if they didn't. Too aggressive, I know, hence the cuts. I heavily buzzed by the way. Red wine [insert Bob Marley here]. I have to go to bed in a hour. WTF over. Peace out, and dueces... End of Report

I hope you realize that there is no guarantee that you will pick stocks that will outperform the market or that dividends will always stay above 4%.

Yes I realize and three out of six raised dividends. 2,3, and 5% respectively and will most likely continue to do so next year-- good night (◣ _ ◢)┌∩┐

steveo

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Re: McKinsey study: prepare for lower real returns
« Reply #13 on: April 29, 2016, 11:03:55 PM »
Nah, thats why I pick stocks. Even if they cut dividends I have over 4% yield. I would be around 7 % if they didn't. Too aggressive, I know, hence the cuts. I heavily buzzed by the way. Red wine [insert Bob Marley here]. I have to go to bed in a hour. WTF over. Peace out, and dueces... End of Report

I hope you realize that there is no guarantee that you will pick stocks that will outperform the market or that dividends will always stay above 4%.

Yes I realize and three out of six raised dividends. 2,3, and 5% respectively and will most likely continue to do so next year-- good night (◣ _ ◢)┌∩┐

Just so we are on the same page I expect you understand that dividends can be cut as well. I also expect you understand that over 20-50 years a lot of changes can occur with regards to dividends and the price of stocks. You might beat the market and dividends may increase over the next 5 years. The story might be different though past that 5 year point.

Good night.

Seppia

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Re: McKinsey study: prepare for lower real returns
« Reply #14 on: April 30, 2016, 01:30:42 AM »
I hope this thread does not become another "so how do I beat the market"/"no you cannot beat the market" thread.

I know I have to "stop worrying about the 4% rule" but

1- in Italy where I live you get taxed 0.2% per year on all your investments
2- vanguard funds here in Europe have slightly higher expense ratios (0.12% for the lowest, 0.25 say for emerging markets)
3- valuations of both USA stocks and bonds in general are high. Now this might be somewhat debatable for someone, but I don't think it is. I mean especially bonds, how can they possibly yield anything more than 2% real per year? It seems mathematically impossible.
4- many very respectable people are saying we should expect lower returns in the future: Jack Bogle, William McNabb (current vanguard Ceo), this McKinsey study... Not the typical doomsayers/ morons "we are all DOOMEEEDD111!1!1!1!!!!!ONE

steveo

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Re: McKinsey study: prepare for lower real returns
« Reply #15 on: April 30, 2016, 01:48:19 AM »
I hope this thread does not become another "so how do I beat the market"/"no you cannot beat the market" thread.

I think that is part of the discussion. mrpercentage believes he can beat the market. That is his solution to the point made below.

People compare 2016 with 120 years of stock market and arrive at a 90%+ success rate but you have to compare the current environment with Shiller CAPE >20 years. (1902, 1929, 1965, 1966, 1998, 1999,  2000).

1- in Italy where I live you get taxed 0.2% per year on all your investments
2- vanguard funds here in Europe have slightly higher expense ratios (0.12% for the lowest, 0.25 say for emerging markets)
3- valuations of both USA stocks and bonds in general are high. Now this might be somewhat debatable for someone, but I don't think it is. I mean especially bonds, how can they possibly yield anything more than 2% real per year? It seems mathematically impossible.
4- many very respectable people are saying we should expect lower returns in the future: Jack Bogle, William McNabb (current vanguard Ceo), this McKinsey study... Not the typical doomsayers/ morons "we are all DOOMEEEDD111!1!1!1!!!!!ONE

You may need a higher rate of return but I'm not sure. I believe (I'm not sure) that 4% rule took into account about a 1% fee on funds.

zz_marcello similiar to mrpercentage also believes that your portfolio can be tilted which again is about beating the market so again the solution is to beat the market.

I think that there are two parts to this discussion:-

1. Is the 4% WR still valid ? This is really covered in this thread:- http://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/
2. Can you beat the market. This is discussed in multiple threads.

My personal opinion is that you can't beat the market. Maybe a better way to put it is that it is statistically extremely unlikely over time. I also believe that the 4% rule is safe and if you read that thread you will see why I think that. Basically the 4% rule has a bunch of simplifying assumptions that I personally believe are quite strict and will not be the way that I manage my portfolio and withdrawals within retirement.

Cycling Stache

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Re: McKinsey study: prepare for lower real returns
« Reply #16 on: April 30, 2016, 07:10:08 AM »
Story totally unrelated to market goes up/market goes down, but perhaps insightful.

When I was a second year at Harvard Law School, my buddy got a summer job at McKinsey.  He was torn because he also had an incredible offer to a plaintiff's firm that rarely hires, but he had a business background as well, and McKinsey was his dream job.

So he went to McKinsey.  I asked him afterwards how it went.  Terrible.

He said he was in his office doing some research, and a partner walked in and asked him what he was doing.  Reading some of these reports.  Partner's response: "No.  Just make some charts.  And make them insightful."  Yes, that's why I'm reading the reports.  "No.  Just make charts.  And make them insightful."

He didn't go there after law school.  That's the company that apparently brought you the study that OP cited.  I have no idea how well McKinsey does with studies, and maybe they're excellent.  But I saw a number of people hired from law school to places like McKinsey and Goldman based on the idea that they were smart people who would figure it out.  They were smart people, but I'm not sure whether it was more important for them to appear that they were smartest people in the room, or whether they actually then learned information that made them smarter than everyone else in whatever industry it was.  I'm skeptical that it was the latter, especially when it comes to predicting the market.

Seppia

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Re: McKinsey study: prepare for lower real returns
« Reply #17 on: April 30, 2016, 08:05:41 AM »
McKinsey is probably the number 1 strategic consulting company on the planet, and are not in the hedge fund business so no conflict of interest.
Not sure they are correct, but it's not exactly a bunch of nobodies :)

Retire-Canada

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Re: McKinsey study: prepare for lower real returns
« Reply #18 on: April 30, 2016, 09:08:08 AM »
The earth's economy has proven a lot of doomsayers wrong during the decades, but the general idea of planning with a slightly larger margin of safety kinda makes sense to me.
Thoughts?

I'd advise a low information diet. If you read enough gloom and doom BS you might start believing it.

To your point of more safety margin I'd reply as long as you are not conflating safety with simply accumulating more money I can agree.

Being flexible with your spending to adjust to poor return years does wonders for your portfolio's longterm health and doesn't have to hurt a ton as long as you aren't planning for a beans and rice retirement in the first place.

Add in some limited part-time work options if you need to limit your withdrawals for a while and you've got a pretty powerful safety net that doesn't requires years more of your precious life to accumulate money and only need to come into play if the gloom and doom stuff comes true. Having a part-time work option or a 25% reduced budget option does not mean you'll ever need to use it. It's just an insurance policy and one you don't need to pre-pay.

OTOH if you are only looking at more money as your safety plan I think that's a poor choice.

 http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

- assuming your want $40K/yr in retirement and start from zero with a net $80K salary and a 50% savings rate
- Good old Mr. MM's chart tells you that you'll need to work 17yrs to accumulate $1M for a 4% SWR
- now say you figure I better actually to save for a 3% WR just to be safe
- at 5% return after inflation that's an extra ~3.5yrs to get the extra safety margin
- if you are even more conservative than that and want a 2% WR that's an extra ~9yrs

To me the opportunity cost of working an extra 3.5 - 9yrs full-time during the prime of my life is not a sensible trade off for dealing with the potential that the already quite conservative 4% SWR fails. Especially when you consider there are many ways for your FIRE to fail that do not involve money.

If your health or the health of a family member suddenly takes a turn for the worse a 2% WR is not going to be of much use to you. OTOH having an extra 3.5 - 9yrs of free time to spend with them before that happens is priceless.

I know these non-cost factors get overlooked on MMM because there is no Excel function for quality time with loved ones, but personally that risk is a far bigger concern to me then the 4% SWR failing and my not having any way to respond to the problem.

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« Last Edit: April 30, 2016, 12:14:28 PM by Retire-Canada »

VanTran

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Re: McKinsey study: prepare for lower real returns
« Reply #19 on: April 30, 2016, 01:53:59 PM »
Nah, thats why I pick stocks. Even if they cut dividends I have over 4% yield. I would be around 7 % if they didn't. Too aggressive, I know, hence the cuts. I heavily buzzed by the way. Red wine [insert Bob Marley here]. I have to go to bed in a hour. WTF over. Peace out, and dueces... End of Report

I hope you realize that there is no guarantee that you will pick stocks that will outperform the market or that dividends will always stay above 4%.

So what? At least you could select securities for value and have more flexibility to optimize your portfolio vs an index fund. The market averages are likely to face very low returns for decades.

Aphalite

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Re: McKinsey study: prepare for lower real returns
« Reply #20 on: April 30, 2016, 02:26:54 PM »
There is also some basic math involved at the extremes

To exaggerate/simplify: if you have a Shiller PE of 50, you have to assume returns around 2% unless you have reasonable expectation that earnings are going to increase exponentially (and stay at the higher level) in the future.

This isn't right for investor returns

It is the formula for if you owned the entire asset and earnings did not grow any further.

Investor returns is growth rate + dividend as a percentage of capital + percentage change in valuation (what Bogle calls speculative element)

The growth rate might be lower in the future (maybe 2-4%, tho buybacks will boost it more than what some observers are expecting), and dividends are around 2% if you are looking at a total market index, but the reason most people are screaming about a low return environment is high valuation (i.e., your example of Schiller pe). But Schiller pe is overstating how expensive the stock market is because interest rates have never been this low. The opportunity cost of a 2% treasury bond is the lowest it's ever been, pushing intrinsic security prices way up from what you can see in a portfolio visualizer (and security earning power grows over the ten year treasury holding period)

Your examples of history mostly points to a decreasing interest rate environment for the last 40 some odd years, and most people's assumption is that rate will start increasing again, which should drive down valuation due to opportunity cost. Well, now you're speculating on interest rate movement, and people have been expecting inflation to take off for five years now. I think stocks are probably on the higher side of its fair value range but I don't think it's overvalued to the point that real eternal in the future will be 2% less than historical amount of 6%. Just my 2 cents



steveo

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Re: McKinsey study: prepare for lower real returns
« Reply #21 on: April 30, 2016, 05:15:21 PM »
Nah, thats why I pick stocks. Even if they cut dividends I have over 4% yield. I would be around 7 % if they didn't. Too aggressive, I know, hence the cuts. I heavily buzzed by the way. Red wine [insert Bob Marley here]. I have to go to bed in a hour. WTF over. Peace out, and dueces... End of Report

I hope you realize that there is no guarantee that you will pick stocks that will outperform the market or that dividends will always stay above 4%.

So what? At least you could select securities for value and have more flexibility to optimize your portfolio vs an index fund. The market averages are likely to face very low returns for decades.

This sounds great in theory but you have just increased your risk that you have picked a dud. If the market averages are poor it's just as likely that your specific stock returns are poor. You just believe that you can somehow optimise your portfolio. Most people can't do that. What makes you special ?

yoda34

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Re: McKinsey study: prepare for lower real returns
« Reply #22 on: April 30, 2016, 06:40:22 PM »
The Shiller PE has been shifted upwards due to changes in accounting rules specifically with treatment of Intangible Assets, making the current value compared to historical values suspect

http://www.philosophicaleconomics.com/2013/12/shiller/

ender

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Re: McKinsey study: prepare for lower real returns
« Reply #23 on: April 30, 2016, 07:33:39 PM »
The Shiller PE has been shifted upwards due to changes in accounting rules specifically with treatment of Intangible Assets, making the current value compared to historical values suspect

http://www.philosophicaleconomics.com/2013/12/shiller/

I don't know how true this article is but it basically articulates exactly why I think that the "overvalued!" stuff misses a lot of context.

Stache-O-Lantern

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Re: McKinsey study: prepare for lower real returns
« Reply #24 on: May 01, 2016, 10:45:52 AM »
The Shiller PE has been shifted upwards due to changes in accounting rules specifically with treatment of Intangible Assets, making the current value compared to historical values suspect

http://www.philosophicaleconomics.com/2013/12/shiller/

I just read the article through beginning to end.  Absolutely excellent.  I have no accounting training and was still able to follow the technical parts.  I was aware of accounting changes causing inconsistencies with the Shiller PE, but this article really explained it well.

Thank you for sharing.

nobodyspecial

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Re: McKinsey study: prepare for lower real returns
« Reply #25 on: May 01, 2016, 07:06:00 PM »
Is it true though?
Companies have always overpaid when buying other companies. In the past they could hide this in the value of  goodwill, now they hide it in the value of the IP portfolio or customer base.

Has it really made any difference to actual earnings? 

Seppia

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Re: McKinsey study: prepare for lower real returns
« Reply #26 on: May 01, 2016, 11:14:11 PM »
I personally don't know the answer, but what about P/B then? That's another metric that has shown strong correlation to future returns.
And by this metric also the USA market seems on the high side.
Additional thought: unless Europe and emerging markets use a wildly different accounting, they currently show a Shiller PE of (respectively) approx 15-16 and 16-17 if I'm not mistaken, versus a 26 for the USA.

As I said multiple times I obviously have no crystal ball, but let's say that in doubt it seems like a good time to add international diversification

Aphalite

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Re: McKinsey study: prepare for lower real returns
« Reply #27 on: May 02, 2016, 06:41:28 AM »
I personally don't know the answer, but what about P/B then? That's another metric that has shown strong correlation to future returns.
And by this metric also the USA market seems on the high side.
Additional thought: unless Europe and emerging markets use a wildly different accounting, they currently show a Shiller PE of (respectively) approx 15-16 and 16-17 if I'm not mistaken, versus a 26 for the USA.

As I said multiple times I obviously have no crystal ball, but let's say that in doubt it seems like a good time to add international diversification

That's tricky - P/B would work for most of the non-tech and non-pharm businesses, since those businesses rely a lot on existing capex to generate its earnings. Technology and pharmaceuticals mostly generate their earnings from IP/research, which is expensed as R&D instead of being put on the books. If you look at the top 20 market cap companies: 8 of the twenty are tech or pharm (including 6 of top 7) - Apple, Alphabet, Microsoft, Facebook, Amazon (although the main business is retail, they earn more than half of their earnings from AWS), Johnson/Johnson, Pfizer, Ali Baba

As far as using relative valuation metrics to determine International vs Domestic, I think even that isn't quite as simple as it may seem. International equities are at a lower valuation right now because of the condition of the home economies. You have deflation/decreased purchasing power taking place almost everywhere in Europe and Japan, and this can even be seen at some of the multinationals like Colgate Palmolive (~80% of sales are international, where sales went up 3% but after adjusting for currency/deflation effects it went down net 12%) or Coke. If you're looking at the PEG, US companies seem to be much better valued (assuming growth rates are correct)

For me, I think sticking to the three sectors that have historically proven to be superior - consumer staples, healthcare, and energy, is probably the best solution (consumer staples is overvalued, healthcare and energy are okay, tho both could drop a little bit in the short term), if you're not up for security selection. You might even add tech or REITs to the mix, although tech always has more wipeout/obsolescence risk than the three main industries (and the valuation is insane right now, Alphabet is okay but Amazon, Facebook, and Netflix are just crazy)

Aphalite

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Re: McKinsey study: prepare for lower real returns
« Reply #28 on: May 02, 2016, 06:46:02 AM »
Is it true though?
Companies have always overpaid when buying other companies. In the past they could hide this in the value of  goodwill, now they hide it in the value of the IP portfolio or customer base.

Has it really made any difference to actual earnings?

It's still goodwill now, it's just treated differently on the expense side. Before, you had a steady amortization over the years. I think the article's point can be distilled to "we had two recessions which resulted in acceleration of the writedowns in good will versus old accounting methods and that has affected the "E" in PE10"

So if you had $150 of goodwill, normally you amortized $10 a year over 15 years (or whatever the period was before)
In 2009, you took the entire $150 goodwill writedown because the expected value disappeared (so over the ten year period, you accelerated anywhere from $20 to $100 of amortization, depending on when you bought it) - when the economy came back, you didn't get to put it back on the books (and book a profit because of it) because GAAP accounting doesn't allow it

AdrianC

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Re: McKinsey study: prepare for lower real returns
« Reply #29 on: May 02, 2016, 08:09:04 AM »
4% real from stocks is a reasonable expectation, but folks don't want to hear it.
- Should support a very safe 3.5% withdrawal rate assuming a couple of years expenses in cash. That's not bad.
- Not a big concern for accumulators where investment return is just icing on the cake. As MMM demonstrates, you get to FIRE by saving like a fiend, not from average market returns.

0% to 2% real from bonds is also a reasonable expectation.

I'm not sold on this plus it is a big issue. Instead of saving to 25 times expenses you are stating that you need 28.5 times expenses + a couple of years expenses in cash. So basically a 3% WR.

No. Say you have $1M and need $35k/year, a 3.5% WR. You have 2 years in cash to ride through the bad times, and have 930k invested, making an average of 4%, or $37k/year. You are safe.

I think the 4% WR is still safe and has plenty of buffer built into it. The 4% WR is actually 95% safe over 30 year periods and there have been plenty of tough periods. There have been wars/recessions/global shocks and a depression.

I'm looking at retiring on a 5% WR. If someone can provide me evidence that the future will be significantly less safe than the past than I would consider changing my retirement parameters.

Depends when you're looking at retiring. Right now on 5%? I think that's risky. After a bear market and you've saved a bunch more? That may well be safe.

nobodyspecial

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Re: McKinsey study: prepare for lower real returns
« Reply #30 on: May 02, 2016, 09:41:51 PM »

It's still goodwill now, it's just treated differently on the expense side. Before, you had a steady amortization over the years. I think the article's point can be distilled to "we had two recessions which resulted in acceleration of the writedowns in good will versus old accounting methods and that has affected the "E" in PE10"
That was my objection to the articles argument.
Their claim was that companies used to be able to amortize the losses in buying a competitor, now that they can't spread "goodwill" they show the loss as an immediate loss, so the earnings are lower, so the P/E looks higher
But if they are simply using different accounting tricks to hide the difference between what they paid and what the acquisition generated  - by writing it off as IP assets - then the earnings are the same as before, and the P/E is really worse.

Don't know if that is true, just a healthy skepticism about "this time it's different"