Author Topic: Future long term returns of S and P lower then 10%?  (Read 12913 times)

andysandp

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Future long term returns of S and P lower then 10%?
« on: May 07, 2017, 06:45:59 AM »
It seems a lot of experts like Vanguard or Bogle are saying that we shouldn't expect long term future returns of S and P to be 10%.  Those days are long gone.

They are saying 6-7% for the long term returns?  Josh Peters saids "6-7% nominal (4-5% real) returns for the S&P 500 over the next few decades (December 2015)."

http://news.morningstar.com/articlenet/article.aspx?id=736083

I'm not interested in 10 years, but wondering about 30 year returns.  I always assumed 10% long term.

Any thoughts about this?



« Last Edit: May 07, 2017, 07:57:34 AM by andysandp »

AZryan

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Re: Future long term returns of S and P lower then 10%?
« Reply #1 on: May 07, 2017, 08:17:54 AM »
No one knows. No one.

Just predicting the next decade, you can find guesses from every major name that makes guesses saying anything from 'slightly lower than avg.' to 'essentially zero' returns. I don't hear anyone saying 'Avg.' or 'above avg.' returns, but since NO ONE KNOWS, that might happen, too.

Going beyond a decade, and you can find predictions of the entire auto industry turned upside-down. Not just by Tesla selling e-cars, but by AI negating the need for anyone to own cars at all. Millennials already aren't that into cars. That prediction calls for 80% less cars on the road as today, but everyone being able to call a ride on demand for a fraction of the cost of owing a car.

Energy will obviously keep getting greener/renewable. But will fusion finally hit the mark and give Earth unlimited, dead cheap energy forever ending all debate and argument over the issue? Several companies are saying they're very, very close.

Will water resources grow scarce and cause giant problems, or can mass desalinization simply negate that issue entirely?

Will we be moving to a robotics/AI workplace dominated world where humans rapidly lose their jobs and need a universal basic minimum wage/negative tax? Will that be a huge, scary mess before everyone sees it's essentially a Star Trekian paradise?

Will this mean that massive amounts of companies rapidly fail because their entire purpose disappears? Or will many companies flourish, and the market skyrockets even as billions miss out on the gains while losing their jobs?

Maybe the whole market collapses, but we largely don't care because of true abundance of resources and free time? Or do we flub the transition and create bloody havoc as a vast majority go insane with fear?

We don't know. No one knows.

sol

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Re: Future long term returns of S and P lower then 10%?
« Reply #2 on: May 07, 2017, 08:39:36 AM »
I think we're better positioned for above average long term returns than at most other times in our history.

Look at the things the market has survived while generating roughly 10% returns.  Pandemics, global wars, depressions, stagflation, terrorist attacks, massive corporate fraud, resource scarcity, financial panics, inept political leadership, natural disasters, the threat of nuclear annihilation, and whole sectors of the economy going belly up all at once.  Still 10% per year.  How many of those are going to continue to be in our future?  Are those things going to be worse in the future than they were in the past?  Maybe!  But I think it is less likely.

The world is more stable than it has ever been.  America is stronger than it has ever been.  People are healthier and better educated than they have ever been.  Things are looking pretty good right now, though I'm sure we'll have forecasts of doom and gloom when the next crisis inevitable comes.  And then goes.

maizefolk

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Re: Future long term returns of S and P lower then 10%?
« Reply #3 on: May 07, 2017, 08:50:09 AM »
So there are at least 2.5 arguments for why stock returns are likely to be lower in the next decade or two.

0.5: Lower inflation. You're quoting nominal stock market returns, which include both real changes in price and responses to inflation. From 1946 to 2016 (70 years), the CAGR of the stock market in nominal terms with dividends reinvested was 10.8%. After adjusting for inflation it drops to 6.8%, so 4% of the growth was just inflation and didn't actually influence purchasing power.* However, many commentators assume the fed cannot let the inflation rate get much over 2% going forward, so instead of inflation adding 4% to the long run real CAGR of the stock market, it only adds 2%.

1. Lower P/E ratios. P/E and Shiller P/E ratios are at the relatively high end of historical distributions. How high depends on a bunch of arguments about whether earnings data from between the 1990s is still comparable to earnings data today (after a lot of accounting rules changed). But putting that aside. At a PE ratio of 20, the company is earning 5% of its market cap each year in profits. At a PE ratio of 25, the same company is only earning 4% of its market cap each year in profits. All things being equal, the second company's share price will rise more slowly than the first going forward.

2. Competition from bonds (or lack thereof). Many commentators will bring up the concept of an "equity risk premium." This is essentially the idea that people demand approximately X% higher return to be invested in stocks rather than bonds. Let's say this premium is 4%.** Historically US government bonds had returns of ~5% (nominal). Adding on a 4% risk premium for stocks puts us as 9%, which is not to different from the long term CAGR of the stock market (again in nominal terms). Today interest rates on 10 year government bonds are ~2% (barely equal to inflation). So applying the same risk premium to stocks puts us at 6% nominal returns going forward (only 4% real returns after adjusting for inflation).

But as AZryan did a great job of summarizing, no one actually knows what the stock market will do going forward. And no one knows what the world will be like in 10 years time (but probably a lot more different than most are expecting). I'm just trying to summarize the types of data that are making people think stock market returns may be lower, not arguing whether or not the data is actually good evidence for lower future returns.

*I intentionally chose this window to illustrate the effects of inflation. Prior to the great depression, inflation wasn't really a thing (and sometimes deflation was), so nominal stock market returns were lower, but real returns were pretty much the same.

**Countless papers have been published arguing whether or not the concept makes sense, or, if it does, what the premium actually is, this is for illustration purposes only. 

LAGuy

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Re: Future long term returns of S and P lower then 10%?
« Reply #4 on: May 07, 2017, 08:17:14 PM »
I have a lot of respect for guys like Bogle and Buffett. But with due respect to them they're getting on, and a lot of the way they think markets work are based on a time when much of the biggest companies on the markets were steel manufacturers and cigarette companies. I'm not saying "it's different this time" but what I am saying is that the future won't be like the past...it never is. Take a company like Amazon for instance. Their P/E ratio is something like 180? But it isn't this high because investors are bidding the price sky high. It's just because their earnings are so low because they CHOOSE to do so. In the past, you didn't really have companies that worked like this; they either threw off a bunch of cash, or they lost money on their way to bankruptcy...and Buffett himself has admitted he doesn't really understand how they make money. But Amazon showed us how in the last recession. They can basically turn themselves into a cash cow on command.

I also don't know what the future will bring, but I too am optimistic. I think we'll see good returns going forward from here. The only worry I really see in the current economy is from the low productivity numbers. Personally I think that's because traditionally corporate employment is becoming too inefficient. At some point I think productivity starts to return as more and more employees join (or are forced) in the "gig/freelance" economy. To me, one of the coolest things of the current economy are the "digital nomads". These are people that have essentially out-sourced themselves. Hopefully we'll see more of this in the future as well as more laws worldwide that allow for an easier movement of these people, although for now at least we're seeing a bit of a worldwide political backlash to this sort of thing I think it's inevitably the way the world is moving.

ChpBstrd

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Re: Future long term returns of S and P lower then 10%?
« Reply #5 on: May 10, 2017, 02:56:06 PM »
The thing that concerns me is the lack of R&D spending. Tax changes and investors' short-term focus have incentivized dividends and buybacks over good old fashioned R&D. Tesla and SpaceX may be semi-shams as investments, but they stand out as about the only companies spending what they should on disruptive new products.

talltexan

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Re: Future long term returns of S and P lower then 10%?
« Reply #6 on: May 11, 2017, 09:06:11 AM »
Apple is one of the big gainers right now. How much do they spend on R&D? About $10 billion (source: https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwib5dGqjujTAhUL0IMKHSx9DzAQFggmMAA&url=http%3A%2F%2Ftime.com%2F4339940%2Fapple-rd-research-development%2F&usg=AFQjCNFirJXT288Cyt3pnYFcnM4iJkrP4g)

This is actually a much higher number than I expected when I started typing this reply, but it is still less than 5% of Apple's revenue.

andysandp

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Re: Future long term returns of S and P lower then 10%?
« Reply #7 on: May 11, 2017, 12:12:24 PM »
So how many of you vote for 10% or close to 10% for the next 30 years?

How many vote for 6-7% for the next 30 years?

Any other articles saying 10% for the next 30 years?

Gunny

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Re: Future long term returns of S and P lower then 10%?
« Reply #8 on: May 11, 2017, 12:31:03 PM »
I use 6%, 4% real for planning.  I don't think we will see lower than that in market yields or higher than annual 2% inflation, unless the economy really starts humming then we would most likely see higher yields and inflatin.  If the market returns more than 4% real, then yay me!

Mr. Green

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Re: Future long term returns of S and P lower then 10%?
« Reply #9 on: May 11, 2017, 12:37:41 PM »
I don't really understand what the point of getting people's votes about weather the future will match the past or not. None of us can predict the market so our opinions have just as much chance of being right as a random dice roll. I definitely wouldn't place much value, if any at all, on the results of said vote. Not trying to be a dick or anything, I just hope no one is planning to make any decisions based on the predictions of MMM forum members.
« Last Edit: May 11, 2017, 01:22:05 PM by Mr. Green »

maizefolk

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Re: Future long term returns of S and P lower then 10%?
« Reply #10 on: May 11, 2017, 01:25:54 PM »
Real or nominal returns? Average or CAGR? With or without dividends reinvested? S&P500, or total US stock market, or total work market?

Left

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Re: Future long term returns of S and P lower then 10%?
« Reply #11 on: May 11, 2017, 01:53:02 PM »
The world is more stable than it has ever been.  America is stronger than it has ever been.  People are healthier and better educated than they have ever been.  Things are looking pretty good right now, though I'm sure we'll have forecasts of doom and gloom when the next crisis inevitable comes.  And then goes.
I feel the other way, more stable = more diverse (fewer being killed of due to crisis after crisis) = less return

if the world was at war, I'd pick to invest in the country not being bombed... in a world at peace, I never know which country is going to do well because they all are doing okay

that said, I'll diversify and take lower returns than trying to find the needle in the haystack of stocks

everything else isn't something I worry about, the "reasons" for the low return doesn't matter. I pick a stable low return future compared to a volatile high return one because I might be taken out during one of the volatilities before I get to capitalize
« Last Edit: May 11, 2017, 01:56:28 PM by Left »

PathtoFIRE

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Re: Future long term returns of S and P lower then 10%?
« Reply #12 on: May 11, 2017, 02:18:55 PM »
I think we're better positioned for above average long term returns than at most other times in our history.

Look at the things the market has survived while generating roughly 10% returns.  ...

Could there be an element of survivorship bias to this? I honestly don't know, but I'm curious if there are studies looking at the long term rate of other developed countries, and then taking that a step further, including economies that have come and gone, at least in the modern era. Do Germany of Japan still show rates of return in the neighborhood of 10% if their destructive wars are included? Or do we introduce some survivorship bias by often focusing on the USA stock market for the past 100+ years, when we are one of the few advanced countries to have dodged many of the destructive things listed above, or maybe even gained an edge on the world stage because our economy was afforded the opportunity to grow in the vacuums that these caused around the world?

Eric

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Re: Future long term returns of S and P lower then 10%?
« Reply #13 on: May 11, 2017, 03:18:08 PM »
I think we're better positioned for above average long term returns than at most other times in our history.

Look at the things the market has survived while generating roughly 10% returns.  ...

Could there be an element of survivorship bias to this? I honestly don't know, but I'm curious if there are studies looking at the long term rate of other developed countries, and then taking that a step further, including economies that have come and gone, at least in the modern era. Do Germany of Japan still show rates of return in the neighborhood of 10% if their destructive wars are included? Or do we introduce some survivorship bias by often focusing on the USA stock market for the past 100+ years, when we are one of the few advanced countries to have dodged many of the destructive things listed above, or maybe even gained an edge on the world stage because our economy was afforded the opportunity to grow in the vacuums that these caused around the world?

It's a good question, and there are studies, but in my opinion, they're misguided.  They compare what would happen if you invested your entire portfolio in Denmark as opposed to the US, and then conclude that WR may have to be lower because returns in Denmark were not as good.  Except that Denmark only represents 0.5% of the world economy, so viewing such a thin slice as being equal to something controlling ~50% doesn't tell all that much.

I googled "list international countries safe withdrawal rates" and there are a handful of academic papers and forum threads if you want to research.

maizefolk

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Re: Future long term returns of S and P lower then 10%?
« Reply #14 on: May 11, 2017, 03:27:01 PM »
I think we're better positioned for above average long term returns than at most other times in our history.

Look at the things the market has survived while generating roughly 10% returns.  ...

Could there be an element of survivorship bias to this? I honestly don't know, but I'm curious if there are studies looking at the long term rate of other developed countries, and then taking that a step further, including economies that have come and gone, at least in the modern era. Do Germany of Japan still show rates of return in the neighborhood of 10% if their destructive wars are included? Or do we introduce some survivorship bias by often focusing on the USA stock market for the past 100+ years, when we are one of the few advanced countries to have dodged many of the destructive things listed above, or maybe even gained an edge on the world stage because our economy was afforded the opportunity to grow in the vacuums that these caused around the world?

So glad you asked that! This is one of my favorite areas to think about in modeling from historical data. Results below are from "Triumph of the Optimists" by Dimson, Marsh & Staunton. First, context. The idea of a 10% return requires not adjusting for inflation, and sometimes using an "average" instead of a CAGR. The "real" inflation adjusted return of the US stock market with dividends reinvested is more in the 6.7-6.9% range. So the question is how much of that number results from survivorship bias.

From 1900-2002 the US stock market returned 6.7%. This was lower than Sweden (7.6%) and Australia (7.5%) and South Africa (6.8%), however it was higher than Japan (4.5%), Germany (3.6%), France (3.8%) and Italy (2.7%) over the same time-span. The obvious thing that separates the countries that did as well as the USA if not better from the countries that did a lot worse is that these were countries not getting bombed nor having street to street fighting and dying during World War II. For example, the German stock market lost 91% of its value between 1945 and 1948, and the Japanese stock market lost 97% of its value between 1944 and 1947.

If someone wants a stash that can safely see them through a world war being fought right outside ther house without having to relocate or change their spending plans, then the 4% rule is probably not for them.

World stock market returns from 1900-2002 assuming a GDP weighted investment in 16 countries representing 88% of world stock market capitalization were ~5.8% in inflation adjusted terms or ~9.0% in nominal terms. Using the same methodology world bond returns on government bonds were 1.2%.

brooklynguy

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Re: Future long term returns of S and P lower then 10%?
« Reply #15 on: May 11, 2017, 03:40:45 PM »
Could there be an element of survivorship bias to this?

Survivorship bias would be an issue if the claim were that past US stock market performance is somehow representative of any given country's stock market performance over any given period (including the performance of the US stock market itself during future periods), but sol made no such claim.  He made the tautological observation that the future would have to be worse than the worst of the past in order for the future to be worse than the worst of the past, which is precisely why we should take comfort in the severity of the badness of the conditions that existed in the past under which the US stock market not only survived but prospered.

ChpBstrd

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Re: Future long term returns of S and P lower then 10%?
« Reply #16 on: May 14, 2017, 06:58:44 PM »
Maybe the point of this exercise is to think about the underlying causes why some countries economically outperform others over long periods of time. What factors are important? Then we can debate whether the US or any other market is on a winning path or a path more similar to the world's perpetual laggards.

If we went back and time and met an Italian in 1928, we would advise him not to invest in his home country. He would ask why not. What would we say?

Space Pickle

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Re: Future long term returns of S and P lower then 10%?
« Reply #17 on: May 14, 2017, 08:02:48 PM »

If we went back and time and met an Italian in 1928, we would advise him not to invest in his home country. He would ask why not. What would we say?

BOGLE IS A TIME-TRAVELLING ALIEN FROM THE FUTURE????

maizefolk

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Re: Future long term returns of S and P lower then 10%?
« Reply #18 on: May 14, 2017, 08:38:09 PM »
@Space Pickle, are you a Tree Lobsters fan by any chance?

@ChpBstrd, could anyone have predicted WW2 in 1928? If they could, could they also have predicted the side Italy was on would lose?

There are some things that obviously constrain growth. Excessive corruption and excessive bureaucracy are both examples. Undereducated populations.* But deciding to launch a war that you ultimately lose is much harder to predict in advance.

*Although past a certain point it's not clear additional average education provides additional economic growth. The Indian state of Kerala is a good example of a highly educated population but a stagnant economy.

ChpBstrd

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Re: Future long term returns of S and P lower then 10%?
« Reply #19 on: May 15, 2017, 07:39:30 AM »
@ChpBstrd, could anyone have predicted WW2 in 1928? If they could, could they also have predicted the side Italy was on would lose?

Probably not in 1928. But in hindsight, we could inform our Italian friend great-grandpa that the rise of blame ideologies in Europe (fascism blames the minorities, communism blames the rich), and the widespread lack of confidence in democratic institutions now show a pattern of leading to war, corruption, and uneducated populations focused on all the wrong things.

The point of the thought exercise is to identify the most important factors in poor investment returns over 10-20 year timeframes. IMO, widespread anti-democratic ideology is the canary in the coal mine.

sol

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Re: Future long term returns of S and P lower then 10%?
« Reply #20 on: May 15, 2017, 08:44:43 AM »
Exactly.  We are shifting towards a 'monetization of influence' economy.

I think I understand that argument.  Today people get paid for sponsored Instagram posts showcasing a product.  Lifestyle bloggers like MMM make millions to share their opinions.  Apple products commands a premium, even though they are technologically inferior, because people associate the brand with status.  Most of the modern economy's profits aren't made by digging ore out of the ground and turning it into metal to build stuff with, they're made by selling an image.

Which on the one hand, maybe isn't too different from what advertisers have been doing since the 1950s.  Is the MMM blog really that different than a magazine ad for microwaves or cigarettes?  Aren't they both offering you an idealized vision of your future self?

But I also worry that this new economic reality is significantly more fragile than the one where we turned rocks into automobiles and buildings.  Resource extraction and construction output are measurable goods that contribute to the advancement of civilization by generating long-lived productive assets.  Iphone's are deliberately disposable garbage, designed to be replaced in short order and made obsolete long before that.  Isn't a stock market based primarily on the sale of public perception of "influence" much more prone to catastrophic collapse than one based on building physical objects? 

GM's stock might crash, but they will still have billions of dollars worth of factory equipment and raw materials.  When facebook's stock crashes, what do they have left?  If their product is suddenly uncool, aren't they essentially bankrupt?

talltexan

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Re: Future long term returns of S and P lower then 10%?
« Reply #21 on: May 15, 2017, 09:09:30 AM »
@ChpBstrd, could anyone have predicted WW2 in 1928? If they could, could they also have predicted the side Italy was on would lose?

Probably not in 1928. But in hindsight, we could inform our Italian friend great-grandpa that the rise of blame ideologies in Europe (fascism blames the minorities, communism blames the rich), and the widespread lack of confidence in democratic institutions now show a pattern of leading to war, corruption, and uneducated populations focused on all the wrong things.

The point of the thought exercise is to identify the most important factors in poor investment returns over 10-20 year timeframes. IMO, widespread anti-democratic ideology is the canary in the coal mine.

There actually was someone who predicted WWII a decade before 1928. His name was John Maynard Keynes. See, for example, http://www.history.com/this-day-in-history/keynes-predicts-economic-chaos

Left

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Re: Future long term returns of S and P lower then 10%?
« Reply #22 on: May 21, 2017, 01:50:54 PM »
Exactly.  We are shifting towards a 'monetization of influence' economy.

I think I understand that argument.  Today people get paid for sponsored Instagram posts showcasing a product.  Lifestyle bloggers like MMM make millions to share their opinions.  Apple products commands a premium, even though they are technologically inferior, because people associate the brand with status.  Most of the modern economy's profits aren't made by digging ore out of the ground and turning it into metal to build stuff with, they're made by selling an image.

Which on the one hand, maybe isn't too different from what advertisers have been doing since the 1950s.  Is the MMM blog really that different than a magazine ad for microwaves or cigarettes?  Aren't they both offering you an idealized vision of your future self?

But I also worry that this new economic reality is significantly more fragile than the one where we turned rocks into automobiles and buildings.  Resource extraction and construction output are measurable goods that contribute to the advancement of civilization by generating long-lived productive assets.  Iphone's are deliberately disposable garbage, designed to be replaced in short order and made obsolete long before that.  Isn't a stock market based primarily on the sale of public perception of "influence" much more prone to catastrophic collapse than one based on building physical objects? 

GM's stock might crash, but they will still have billions of dollars worth of factory equipment and raw materials.  When facebook's stock crashes, what do they have left?  If their product is suddenly uncool, aren't they essentially bankrupt?
in terms of youtube stars/instagram people/MMM

even if they are like the old lifestyle magazines, the magazines and the products were owned by "corporations" as in we could invest in them and as they made money, investors get a cut

how do you invest in MMM/youtube stars/instagram people? Assuming you don't want to invest in instagram/youtube but the people directly

runewell

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Re: Future long term returns of S and P lower then 10%?
« Reply #23 on: May 21, 2017, 05:04:14 PM »
Google Star Research CAPE and you can see that they expect a 6.5%  term return but only 3.5% from the US because our valuations are so sky-high.  The run-up has been good but I am going to be one of the first people to leave the party when things eventually fall apart.

I also think that as interest rates increase there will be less demand for stocks that have been bid up when it has been difficult to find yield elsewhere.  When yield alternative shows up I expect stock prices to deflate like a balloon.

Tyson

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Re: Future long term returns of S and P lower then 10%?
« Reply #24 on: May 21, 2017, 05:08:57 PM »
1. No one can predict the market.
2. Well, I'm going to try anyway.

Pretty much the gist of every one of these threads.

SeattleCPA

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Re: Future long term returns of S and P lower then 10%?
« Reply #25 on: May 22, 2017, 06:45:43 AM »
I don't know if one should expect over next decade or so "historical average" type returns. I doubt it... but who knows. (I actually want to think like Sol does... but I worry...)

That said, I do think investors need to continue to stay alert to the reality that outcomes vary wildly. People can, for example, save the exact same amount over the exact same number of years using the exact same asset allocation... and end up with wildly different results.

For example, the median expected accumulation, based on last 150 years, is right around $600K if you max your IRA and go 75% stocks and 25% bonds. But the standard deviation is around $170K.

http://evergreensmallbusiness.com/retirement-plan-b-need-one/


nereo

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Re: Future long term returns of S and P lower then 10%?
« Reply #26 on: May 22, 2017, 01:40:06 PM »
Backing up the drumbeat of "no one knows" - I just want to throw out a historical perspective.

Start reading back-issues of financial publications and you quickly see a pattern; for literally generations very smart people have been writing that the "easy money is behind us" and we should expect lower returns over the next decade+.

It's nothing new.  This was said back in the late 1990s, and the 1970s and the 1950s, and the 1930s...

Regardless of what happens the approach remains the same; spend much less than you earn and invest the difference. Doesn't matter (much) whether your LT returns will be 3% or 13% - your strategy is the same, only the timeline changes, and that is largely out of your control.

shotgunwilly

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Re: Future long term returns of S and P lower then 10%?
« Reply #27 on: May 22, 2017, 04:09:47 PM »
When facebook's stock crashes, what do they have left?  If their product is suddenly uncool, aren't they essentially bankrupt?

We can only hope...

h82goslw

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Re: Future long term returns of S and P lower then 10%?
« Reply #28 on: May 23, 2017, 08:39:02 AM »
I use 6%, 4% real for planning.  I don't think we will see lower than that in market yields or higher than annual 2% inflation, unless the economy really starts humming then we would most likely see higher yields and inflatin.  If the market returns more than 4% real, then yay me!

This.  I've run projections of savings and future value of my funds using historical averages and then run variations of different returns. Even at 4% I'll be where I need to be at the age I want. 

BigHaus89

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Re: Future long term returns of S and P lower then 10%?
« Reply #29 on: May 23, 2017, 01:07:03 PM »
When facebook's stock crashes, what do they have left?  If their product is suddenly uncool, aren't they essentially bankrupt?

We can only hope...
They have accumulated a huge repository of highly personal information, including facial recognition via photos, who is connected with whom.  The opportunities to monitize this by understanding consumer behavior, preferences, political influence, threats, are huge, even if people stop using it.  It can be correlated with the next thing and i believe govt and private 'information mining' co tracts would create revenue for quite a while.  In fact it might improve their profitability to focus on asset monetization and to not have to pump so much into costomer and product development .

Not to mention all their physical assets (server farms, IT infrastructure, etc.).

andysandp

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Re: Future long term returns of S and P lower then 10%?
« Reply #30 on: May 27, 2017, 08:10:17 AM »
The last 20 years has given 7.355% compounded return with dividends.

The worst 30 years in history has given 8.25% according to this
 http://allfinancialmatters.com/2015/12/15/sp-500-30-year-rolling-total-returns/

Doesn't that mean the next 10 years should give at least 9% compound return in order to beat the worst 30 year return of 8.25%?

If we don't, I guess we will have the worst 30 year return in history...

nereo

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Re: Future long term returns of S and P lower then 10%?
« Reply #31 on: May 27, 2017, 08:37:59 AM »
The last 20 years has given 7.355% compounded return with dividends.

The worst 30 years in history has given 8.25% according to this
 http://allfinancialmatters.com/2015/12/15/sp-500-30-year-rolling-total-returns/

Doesn't that mean the next 10 years should give at least 9% compound return in order to beat the worst 30 year return of 8.25%?

If we don't, I guess we will have the worst 30 year return in history...

In short, no.  Your information is misleading for several reasons
#1) the numbers you cite confound real returns (those which factor in inflation) with non adjusted returns (like from that chart/article you cited, which in the text actually highlights this fact).
The worst 30 year real annualized return of the SP500 is 3.2%.  The best is 10.2%

#2) over the last 20 years we've seen 7.33% non-adjusted returns.  In real terms that's 5.1%. Solid but slightly below the median.  Also not the difference between arithmetic vs geometric means here.

#3) The past does not dictate what the future will do (at least not to the degree you are specifying). Because the previous 20 year period has been slightly sub-part doesn't mean the next 10 will be better in some sort of return to average, just as flipping a coin and getting heads 20x doesn't mean the next 10 'should' be tails.  One could also (incorrectly) look at the past 8 years of amazing returns and conclude that the next two "should" be awful or else this will be among the greatest 10 year period in history (not quite the best, but close).

andysandp

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Re: Future long term returns of S and P lower then 10%?
« Reply #32 on: May 27, 2017, 09:22:54 AM »
Both numbers I gave are without inflation.

Last 20 years with Dividends reinvested is without inflation- 7.335%
https://dqydj.com/sp-500-return-calculator/

Worst historical 30 years with Dividends reinvested without inflation - 8.25%
http://allfinancialmatters.com/2015/12/15/sp-500-30-year-rolling-total-returns/

I understand that past doesn't dictate the future, but if we do get less the 9% compounded returns (without inflation) for the next 10 years, then we will have the worst 30 years in history!  That is if you invested from May 1997- May 2027.

Or did I calculate wrong?
« Last Edit: May 27, 2017, 09:50:09 AM by andysandp »

nereo

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Re: Future long term returns of S and P lower then 10%?
« Reply #33 on: May 27, 2017, 09:44:59 AM »
Both numbers I gave are without inflation.

Last 20 years with Dividends reinvested is without inflation- 7.335%
https://dqydj.com/sp-500-return-calculator/

Worst 30 years with Dividends reinvested without inflation - 8.25%
http://allfinancialmatters.com/2015/12/15/sp-500-30-year-rolling-total-returns/

I understand that past doesn't dictate the future, but if we do get less the 9% compounded returns (without inflation) for the next 10 years, then we will have the worst 30 years in history!  If you invested in May 1997- May 2027.

Or did I calculate wrong?
Not necessarily your calculation, but what you missed is that INFLATION is not a constant. During the last 20 years inflation has been pretty close to nil (sub 2% with nothing above 3%).  Compare that with the 1970s & 80s when it averaged over 5% and had year-long spikes above 10%.
The non-inflation adjusted period from 1973-2003 (30yr) was 10.6%, but real returns were 5.4%.  Why the huge jump?  Inflation.
Compare that with 1997 -2017; 7.6% annualized returns (5.3% real).  The real returns were almost identical, but the inflationary environments are drastically different.

This is why almost all economists use real returns for datasets longer than a couple of years.


andysandp

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Re: Future long term returns of S and P lower then 10%?
« Reply #34 on: May 30, 2017, 05:05:27 AM »
The last 20 years has given 7.355% compounded return with dividends.

The worst 30 years in history has given 8.25% according to this
 http://allfinancialmatters.com/2015/12/15/sp-500-30-year-rolling-total-returns/

Doesn't that mean the next 10 years should give at least 9% compound return in order to beat the worst 30 year return of 8.25%?

If we don't, I guess we will have the worst 30 year return in history...

In short, no.  Your information is misleading for several reasons
#1) the numbers you cite confound real returns (those which factor in inflation) with non adjusted returns (like from that chart/article you cited, which in the text actually highlights this fact).
The worst 30 year real annualized return of the SP500 is 3.2%.  The best is 10.2%

#2) over the last 20 years we've seen 7.33% non-adjusted returns.  In real terms that's 5.1%. Solid but slightly below the median.  Also not the difference between arithmetic vs geometric means here.

#3) The past does not dictate what the future will do (at least not to the degree you are specifying). Because the previous 20 year period has been slightly sub-part doesn't mean the next 10 will be better in some sort of return to average, just as flipping a coin and getting heads 20x doesn't mean the next 10 'should' be tails.  One could also (incorrectly) look at the past 8 years of amazing returns and conclude that the next two "should" be awful or else this will be among the greatest 10 year period in history (not quite the best, but close).



Nereo, thanks for clarifying.  The real returns makes sense.  What years was the worst 30 years real annualized return of 3.2%?  I can't seem to find it.

Thanks!

talltexan

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Re: Future long term returns of S and P lower then 10%?
« Reply #35 on: May 30, 2017, 01:23:32 PM »
Am I the only one nerding out here in all this inflation talk? Good posts, guys!

DavidAnnArbor

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Re: Future long term returns of S and P lower then 10%?
« Reply #36 on: May 30, 2017, 02:22:39 PM »
This concern about future returns is at odds with the current boom taking place in corporate earnings.

"With nearly all companies in the S&P 500 having reported results, aggregate earnings for the first quarter are on track to grow 13.6% from the year-earlier period, according to FactSet, the highest growth since the third quarter of 2011. "

With both Europe and China back to growth, S&P 500 companies are sitting pretty right now.

http://www.4-traders.com/WTI-2355639/news/Corporate-Profits-Barrel-Along-WSJ-24485909/

sol

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Re: Future long term returns of S and P lower then 10%?
« Reply #37 on: May 30, 2017, 02:38:11 PM »
With both Europe and China back to growth, S&P 500 companies are sitting pretty right now.

Don't worry, I'm expecting protectionist trade policies, immigration controls that slash the workforce and our population growth numbers, and global military conflict aaaaaaaaaaaaannny day now. 

The best thing for the economy now, as ever, is for nothing else dramatic to happen.  No news is good news.

nereo

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Re: Future long term returns of S and P lower then 10%?
« Reply #38 on: May 30, 2017, 03:17:40 PM »

Don't worry, I'm expecting protectionist trade policies, immigration controls that slash the workforce and our population growth numbers, and global military conflict aaaaaaaaaaaaannny day now. 

The best thing for the economy now, as ever, is for nothing else dramatic to happen.  No news is good news.
I agree that no news is good news when this lot with their protectionist/isolationist fantasies are involved.

A particularly irony occurred to me today: under Obama the income gap widened considerably, with those earning the top 1% doing the best.  One of the biggest goals among this demographic is to repeal the 3.8% surtax on households earning >$250k (aka "Obamacare tax"), claiming it's somehow stifling growth.

DavidAnnArbor

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Re: Future long term returns of S and P lower then 10%?
« Reply #39 on: May 30, 2017, 05:02:05 PM »

Don't worry, I'm expecting protectionist trade policies, immigration controls that slash the workforce and our population growth numbers, and global military conflict aaaaaaaaaaaaannny day now. 


Oh yeah of course I expect he's going to pull a George W. on us.

nereo

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Re: Future long term returns of S and P lower then 10%?
« Reply #40 on: May 30, 2017, 05:15:45 PM »

Don't worry, I'm expecting protectionist trade policies, immigration controls that slash the workforce and our population growth numbers, and global military conflict aaaaaaaaaaaaannny day now. 


Oh yeah of course I expect he's going to pull a George W. on us.

explain please....

sol

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Re: Future long term returns of S and P lower then 10%?
« Reply #41 on: May 30, 2017, 05:58:13 PM »
Oh yeah of course I expect he's going to pull a George W. on us.

explain please....

Slash taxes, start a few wars, send the country into spiraling deficits. 

DavidAnnArbor

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Re: Future long term returns of S and P lower then 10%?
« Reply #42 on: May 30, 2017, 06:41:40 PM »
And then there's weak federal governance:
  • lack of oversight of Wall Street banks
  • not appointing professionally competent people to positions of Federal Emergency Management
  • weak ethical controls over military contractors/suppliers
  • destroying environmental cleanup efforts/stopping climate change mitigation efforts
  • ignoring or being casual about national security threats

respond2u

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Re: Future long term returns of S and P lower then 10%?
« Reply #43 on: May 31, 2017, 12:03:21 AM »
Nereo, thanks for clarifying.  The real returns makes sense.  What years was the worst 30 years real annualized return of 3.2%?  I can't seem to find it.

Thanks!
Eyeballing the chart, http://www.multpl.com/inflation-adjusted-s-p-500, I'd guess 1929-1959. 2000-2017 hasn't been all that rosy either.


andysandp

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Re: Future long term returns of S and P lower then 10%?
« Reply #44 on: May 31, 2017, 12:07:38 PM »
Nereo, thanks for clarifying.  The real returns makes sense.  What years was the worst 30 years real annualized return of 3.2%?  I can't seem to find it.

Thanks!
Eyeballing the chart, http://www.multpl.com/inflation-adjusted-s-p-500, I'd guess 1929-1959. 2000-2017 hasn't been all that rosy either.



From August 1929- August 1959, the Real Return with Dividends reinvested after adjusting for inflation was 6.049%.  That's the worst 30 year in history?
https://dqydj.com/sp-500-return-calculator/

The last 20 years, the Real Returns with Dividends reinvested adjusted for inflation was 5.102%.

That means if we don't hit 8% Real Returns for the next 10 years, then we will have the worst 30 year Real Return in history!!
« Last Edit: June 01, 2017, 08:50:41 AM by andysandp »

respond2u

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Re: Future long term returns of S and P lower then 10%?
« Reply #45 on: June 02, 2017, 06:13:23 PM »
Nereo, thanks for clarifying.  The real returns makes sense.  What years was the worst 30 years real annualized return of 3.2%?  I can't seem to find it.

Thanks!
Eyeballing the chart, http://www.multpl.com/inflation-adjusted-s-p-500, I'd guess 1929-1959. 2000-2017 hasn't been all that rosy either.



From August 1929- August 1959, the Real Return with Dividends reinvested after adjusting for inflation was 6.049%.  That's the worst 30 year in history?
https://dqydj.com/sp-500-return-calculator/

The last 20 years, the Real Returns with Dividends reinvested adjusted for inflation was 5.102%.

That means if we don't hit 8% Real Returns for the next 10 years, then we will have the worst 30 year Real Return in history!!

multpl charts didn't have dividends reinvested--thanks for the calculator link!

If you're looking at living off your savings, you won't be reinvesting your dividends (well, not long enough for them to compound). I'm guessing that's the scenario Nereo might have been trying for, and for that, the calculator gives ~1% return from 1/1929 - 1/1959.

Anyway, all that really matters out of all this is that it's not the X% / year CAGR that matters, it's whether we get hit with low returns at the beginning of our retirement.