Author Topic: Stocks will only return 4% annually for next decade - John Bogle  (Read 6325 times)

Alchemisst

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Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns of recent decades.
Bogle believes the U.S. stock market will enter a period of relatively low returns. He reached his estimate by looking at 2 percent dividend yield, a “deadweight loss from the 4.4 percent it has been historically,” and earnings growth of about 4 percent, which matches typical economic growth, to predict future investment return of 6 percent. He also looked at the difference between today’s price/earnings ratio of about 24, and the historic P/E ratio to estimate the speculative return.

Legendary investor Jack Bogle weighs in on the record rally
“My guess — an informed guess, but still a guess — is that by decade’s end the P/E ratio might ease down to, say, 20 times or even less. Such a revaluation would reduce the market’s return by about 2 percentage points per year, resulting in an annual rate of return of 4 percent for the U.S. stock market,” he wrote in the Little Book of Common Sense Investing.

hhttps://www.morningstar.com/videos/885733/what-jack-bogle-expects-from-the-market.html

Bogle’s dour view on stocks, bonds. What if he was right?
https://www.financial-planning.com/opinion/jack-bogle-forecasts-lower-stock-and-bond-returns

https://www.cnbc.com/2017/11/20/jack-bogles-5-bold-investment-predictions-for-2018-and-beyond.html


What to do in this situation? He also mentions he thinks international returns will be even lower..


Edit: Fixed links
« Last Edit: April 14, 2019, 01:32:32 AM by Alchemisst »

TheHardenedInvestor

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #1 on: April 13, 2019, 08:27:19 PM »
What was Bogle’s recommendation in this lower return environment. He said, “save more”. If you save a lot, return becomes less crucial.

solon

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #2 on: April 13, 2019, 08:36:23 PM »
When did he tell you this?

You know he died in January, right?

All your links are broken.

markbike528CBX

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #3 on: April 14, 2019, 01:22:49 AM »
Better link
https://www.cnbc.com/2017/11/20/jack-bogles-5-bold-investment-predictions-for-2018-and-beyond.html

Don't copy and paste URLs from a laptop.

Leseee,  the SP500 is up ~13% since the article above posting.     13/1.5years is ~8% /year (not including dividends of 1.5-2%).

Of course, doing some cherry picking like ending on Dec 26 2018 would have gotten you -10%, so there's that to consider too...

Join a double comma club and relax.

Alchemisst

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #4 on: April 14, 2019, 01:33:00 AM »
fixed links, last interview was from November last year.

vand

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #5 on: April 14, 2019, 04:20:30 AM »
Investors who think the last 5-10 years is "the norm" need to stick around for the next couple of decades, because all the 10-30yr regression analyses from current valuations suggest that US stocks will struggle to return even half of the historical average over the next decade and more.

the conversion usually goes like this:

me: stocks are overpriced
u: so what, I'm buying for the long term
me: define the long term
u: 20yrs+
me: yeah, stocks will still underperform in that time
u: how do you know
me: nobody can be sure, but we have things like valuation, statistical regression, historical precedence that can be used to construct a model and give a forecast
u: you can't time the market
me: that's true for most people over the short term, say 1-3 years but the longer you extrapolate the data the stronger the correlation between valuation vs return is. There are no recorded time periods on history where the stocks have returned above average over 20 years starting from these current valuations
u: nobody has a crystal ball
me: it's might be prudent to consider alternative strategies like all-weather portfolio that give awesome risk adjusted returns in any economic environment given the late stage we are in the business cycle
u: why would I want to hold anything but stocks when stocks have the best historic return. Bonds are overpriced, commodities have no earnings, cash pays 1%.
me: preserving your capital is at least as important as earning a return on it
u: I already said I have a 20yr investment horizon
me: (gives up at this point)
« Last Edit: April 14, 2019, 04:30:57 AM by vand »

Maenad

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #6 on: April 14, 2019, 05:39:59 AM »
That's a nice strawman argument you've got there. One should always have a portfolio that matches one's risk tolerance, and be prepared for any and all of the financial scenarios we've seen in the last century or so (though of course new ones will surface as well). We've already seen the freakout from the 20% drop in Q4 2018, so it's obvious some folks aren't mentally or emotionally prepared for the next recession. We never know how we'll react until we go through it.

That doesn't negate the fact that no one has a crystal ball. I started investing over 20 years ago and I've heard bulls and bears be wrong far more often than they were right. That doesn't mean that the next 20 years will be sunshine and roses and 25% returns every year, just that it's useless to predict anything other than "we'll have a recession now and then, and the stock market will drop a chunk at that time".

bacchi

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #7 on: April 14, 2019, 09:24:50 AM »
me: it's might be prudent to consider alternative strategies like all-weather portfolio that give awesome risk adjusted returns in any economic environment given the late stage we are in the business cycle

A portfolio that depends on an event that happens once every 39 years (and counting) doesn't seem prudent.

Or are you predicting a high inflationary environment with interest rates in the teens?

FIREstache

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #8 on: April 14, 2019, 01:24:16 PM »
Bogle believes the U.S. stock market will enter a period of relatively low returns.

This isn't anything new.  Same basic info has come up quite a few times.

Examples:

Bogle Projects 'Nominal To Zero' Real Returns Over The Next Decade
https://forum.mrmoneymustache.com/investor-alley/bogle-projects-%27nominal-to-zero%27-real-returns-over-the-next-decade/100/

'Nominal to Zero % Returns' Over coming decade - Jack Bogle
https://forum.mrmoneymustache.com/investor-alley/%27nominal-to-zero-returns%27-over-coming-decade-jack-bogle/

Jack Bogle's warning: Invest in 2019 with 'a little extra caution'
https://forum.mrmoneymustache.com/investor-alley/jack-bogle%27s-warning-invest-in-2019-with-%27a-little-extra-caution%27/

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

https://www.barrons.com/articles/vanguard-founder-jack-bogle-on-the-stock-market-51545950443

He was talking about a longer time frame than just a few years when he mentions "decade", so he could still be right.

vand

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #9 on: April 14, 2019, 02:19:25 PM »
me: it's might be prudent to consider alternative strategies like all-weather portfolio that give awesome risk adjusted returns in any economic environment given the late stage we are in the business cycle

A portfolio that depends on an event that happens once every 39 years (and counting) doesn't seem prudent.

Or are you predicting a high inflationary environment with interest rates in the teens?

It's quite clear that you have zero understanding of what an all-weather portfolio actually is, and the benefits it provides even absent a financial meltdown. Like I said, hang around for another decade.
« Last Edit: April 14, 2019, 02:21:48 PM by vand »

Indexer

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #10 on: April 14, 2019, 02:34:13 PM »
me: it's might be prudent to consider alternative strategies like all-weather portfolio that give awesome risk adjusted returns in any economic environment given the late stage we are in the business cycle

A portfolio that depends on an event that happens once every 39 years (and counting) doesn't seem prudent.

Or are you predicting a high inflationary environment with interest rates in the teens?

It's quite clear that you have zero understanding of what an all-weather portfolio actually is, and the benefits it provides even absent a financial meltdown. Like I said, hang around for another decade.

The All weather portfolio is a nice adventure in back testing. It is very heavy in long term bonds. Long term bonds have historically paid very high yields making them attractive investments over the past 20+ years, but rates have been falling ever since. Now they pay 3-4%. Over the next 20 years it's highly unlikely they will return much more than 3-4%...

Given that, the All Weather Portfolio is likely to see lower returns over the next 20 years than it saw over the last 20 years.
« Last Edit: April 14, 2019, 02:36:03 PM by Indexer »

ender

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #11 on: April 14, 2019, 06:34:41 PM »
It's kind of remarkable to me how many years in a row people have been saying things like "only return 4% for the next decade."

I remember that from heading into 2015. And the market is up almost 50% from then.

Eventually, the clock will be right.

harvestbook

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #12 on: April 14, 2019, 07:10:57 PM »
What if this great decade is the mean reversion from the previous decade and now we're back to "normal"? I'd be happy with four percent real.

ender

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #13 on: April 14, 2019, 07:13:25 PM »
What if this great decade is the mean reversion from the previous decade and now we're back to "normal"? I'd be happy with four percent real.

Isn't it great that eventually, one of these 10-year predictions might come true, too!


And also, OP, the title here is a bit misleading - the quote you cite explicitly states he is guessing, not definitively stating things. The title comes across much more definitive than Bogle meant.

flipboard

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #14 on: April 15, 2019, 12:19:29 PM »
It's kind of remarkable to me how many years in a row people have been saying things like "only return 4% for the next decade."

I remember that from heading into 2015. And the market is up almost 50% from then.

Eventually, the clock will be right.
We're only 4 years into the decade starting in 2015.

bacchi

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #15 on: April 15, 2019, 01:06:30 PM »
It's kind of remarkable to me how many years in a row people have been saying things like "only return 4% for the next decade."

I remember that from heading into 2015. And the market is up almost 50% from then.

Eventually, the clock will be right.
We're only 4 years into the decade starting in 2015.

So the market can stay flat for the next 6 years and we'll have 4% annualized (does the 4% return include dividends?).

What asset would people chase if stock returns are meager and bond yields are low or negative? More real estate? Oil? Gold?

Telecaster

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #16 on: April 15, 2019, 01:20:07 PM »
I don't quite see the problem.   There have been a number of ten year periods when stocks returned less than 4%.  There have even been a few ten year periods when the total return was negative.   If you aren't prepared, mentally or otherwise, for that to happen you shouldn't be in stocks.   


FINate

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #17 on: April 15, 2019, 02:08:51 PM »
"All-weather portfolio"? My BS meter is flashing. The finance world loves to come up with gimmicky terms to sound impressive, and to make it seem like you need to pay for their "services". Besides, what's being describing is basically a "balanced" or "capital preservation" portfolio, depending on specifics. Lower allocation of equities, more bonds and perhaps some commodities and/or alternative investments. Simply put, it's a more conservative portfolio.

Investing is very personal, and depends on your risk tolerance and investment horizon. If you're more risk averse and/or your investment horizon is short, then sure, makes sense to be a bit more conservative. But you don't need to convince others that it's a good idea. And don't jerk your investments around based on some guys opinion of the unknowable future. Be a principled investor - make a plan and stick to it.

Even if the 4% growth rate prediction comes true, what are you going to do about it? Really, what are your alternatives? This would indicate problems in the wider economy, not like you can avoid this systemic risk. If you move investments around in taxable accounts then you generate a ton of taxable events and fees. And then you're stuck with this structure once the bear market ends, unless you're willing to trigger a bunch of new tax events.

Meh, no thanks. I'll keep investing in the total stock market index and ride out whatever comes.

YttriumNitrate

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #18 on: April 15, 2019, 02:15:20 PM »
Jack Bogle was famous for NOT trying to predict the market. Articles like these are akin to a vegan offering their opinion as to the best way to cook a steak.

Radagast

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #19 on: April 15, 2019, 08:47:43 PM »
I see no problems with an "all weather portfolio" as long as it meets my standard guidelines:
At least 50% stocks
Not more than 50% in stocks of a single country (US included)
Not more than 40% bonds, or less than 10%
At least 10% in international stocks
"stay the course"

Ideally, follow the approach here https://www.bogleheads.org/forum/viewtopic.php?t=206028 more than the popular version that is 55% long term government bonds, risky risky risky.

statistical regression
I don't think any useful information has ever appeared in the same post/article/thing as this phrase. Along with "stochastic." At least not in finance or social science. I have never been able to infer the meaning of the phrase from the context of the surrounding words. Put another way, I think the sentence would always say the same thing with the phrase removed entirely, therefore it adds length but no information. So I think it is always added to sound knowledgeable in lieu of content. I have to think really hard before I realize "oh draw a line through some dots? like that thing you do in excel? valuable tool for fortune telling, that". "Statistical regression" is what makes my BS meter flash.

talltexan

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #20 on: April 17, 2019, 07:12:38 AM »
Bonds are not bad.

But if you choose a strategy like the All-weather, do you also have the confidence to stick with it if--contrary to what the gloomy are saying--SP gets to 4,000 during 2020?

vand

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #21 on: April 18, 2019, 04:43:17 AM »
I see no problems with an "all weather portfolio" as long as it meets my standard guidelines:
At least 50% stocks
Not more than 50% in stocks of a single country (US included)
Not more than 40% bonds, or less than 10%
At least 10% in international stocks
"stay the course"

Ideally, follow the approach here https://www.bogleheads.org/forum/viewtopic.php?t=206028 more than the popular version that is 55% long term government bonds, risky risky risky.


It's not risky; quite the opposite. Stocks are typically 3 times more volatile  than bonds. That is something that many people, including most on this forum, clearly do not get. If you have a traditional 50/50 of stocks/bonds portfolio then in reality you still have 80%+ risk in equities because of volatility. That 20% bond allocation that you think is there just to smooth out the ride? Yeah, that isn't really going to do much for you when the next meltdown happens. That is why many traditional portfolios appear overweight in bonds... because professional money managers actually understand portfolio risk, rather than just see risk as reduction of potential upside by underexposure to equities
« Last Edit: April 18, 2019, 04:54:57 AM by vand »

Maenad

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #22 on: April 18, 2019, 04:53:06 AM »
Risk and volatility are not the same thing. Savings accounts, for instance, have extremely low volatility, but high inflation risk.

A summary: https://www.lynalden.com/stock-market-volatility/.

EfficientInvestor

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #23 on: April 18, 2019, 06:45:52 AM »
If you like the concept of risk parity but are turned away by its limited potential long term upside (relative to being stock heavy), consider adding leverage to a risk parity portfolio instead of sliding more risk to equities. This strategy has shown to be more efficient than being stock heavy and therefore you can get stock-like returns with less risk or get better than stock returns for similar risk. The backtest below, since 1998, represents a couple of different ways you can get leverage. Portfolio 1 uses a 2X S&P 500 mutual fund (ULPIX) and a long term treasury fund (VUSTX) which is comparable in duration risk to a 2X intermediate term treasury fund, such as UST. SSO would now be preferred over ULPIX, but ULPIX has been around longer. Portfolio 2 represents the use of futures contracts to obtain leverage. In this case, it would be the e-mini S&P (/ES) and 5-year treasury note (/ZF). This backtest is not true risk parity because it should also include more to protect against inflation, but it is a starting point to present the concept.

https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=4&startYear=1955&firstMonth=1&endYear=2019&lastMonth=12&calendarAligned=true&endDate=04%2F17%2F2019&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&showYield=false&reinvestDividends=true&benchmark=VFINX&sameFees=true&symbol1=ULPIX&allocation1_1=30&symbol2=VUSTX&allocation2_1=70&symbol3=VFINX&allocation3_2=60&symbol4=VFITX&allocation4_2=140&symbol5=CASHX&allocation5_2=-100&total1=100&total2=100&total3=0

talltexan

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #24 on: April 18, 2019, 07:45:53 AM »
Indeed I am intrigued by this "levered up" portfolio, but I'm curious why the backtest to 1998, and not farther back?

EfficientInvestor

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #25 on: April 18, 2019, 07:50:26 AM »
Indeed I am intrigued by this "levered up" portfolio, but I'm curious why the backtest to 1998, and not farther back?

It is limited by the inception of ULPIX.

vand

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #26 on: April 19, 2019, 02:18:14 AM »
Good point.. with a better risk adjusted return, it is easier to employ leverage. The predictability of returns is the reason that real estate investing works so well, even though the outright returns may not be as high as in stocks, the research shows that more investors build wealth in real estate than they do in paper assets like stocks.
« Last Edit: April 19, 2019, 02:20:06 AM by vand »

TheAnonOne

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #27 on: April 19, 2019, 10:14:08 AM »
So my wealth will ONLY increase through NO EFFORT OF MY OWN by about 50% (with compounding) and I will get a DECADE TO BUY INTO LOWS and highs?

Seems rough. Actually. Getting all that free money, that is.

effigy98

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #28 on: April 19, 2019, 08:28:42 PM »
When I get my Universal Basic Income and Free Health Care when AOC takes office in 2024, I can easily live on the low returns.

sol

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #29 on: April 19, 2019, 08:44:29 PM »
"Statistical regression" is what makes my BS meter flash.

It can flash all you want, but statistical analysis and logistic regression in particular is a much more useful tool than most people realize.  Particularly in multivariable problems where overlapping influences are not otherwise evident.

If you're talking about a single time series, plotted on a x-y graph, then I agree it's just a fancy name for chartism.  Lots of market timers draw otherwise arbitrary lines on price graphs and claim that they've done statistics.  Those people are silly.

honeyfill

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #30 on: April 19, 2019, 10:55:12 PM »
When I get my Universal Basic Income and Free Health Care when AOC takes office in 2024, I can easily live on the low returns.

Plus you will have plenty of free time to write poetry, solve global warming  and actualize your true potential. 

Alchemisst

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #31 on: April 19, 2019, 11:14:57 PM »
I guess the point is if there's a high likelihood that the next decade is going to be 4% returns or less should you look at alternatives such as real estate etc. or pay off mortgage instead? Also lower returns are fine if you are going to be working for the next 30 years, but what about newly retired or other situations?

powskier

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #32 on: April 19, 2019, 11:24:42 PM »
When I get my Universal Basic Income and Free Health Care when AOC takes office in 2024, I can easily live on the low returns.
Andrew Yang can give it to you in 2020!

vand

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #33 on: April 20, 2019, 02:21:54 AM »
I'm fairly pessimistic on stocks.. even a 4% real return projection, which is already toward the upper end of probability based on current valuations, is quite an optimistic forecast, because you will have an additional demographic factor coming into play, which is the baby boomer generation reaching retirement age beginning to work against the market, so a fundamental factor that has acted as a tailwind for the last 30 years will start to turn around and become a headwind.

It won't happen overnight but it will be a much more prevalent drag on the market in over the course of the next decade.

vand

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #34 on: April 20, 2019, 02:47:42 AM »
me: it's might be prudent to consider alternative strategies like all-weather portfolio that give awesome risk adjusted returns in any economic environment given the late stage we are in the business cycle

A portfolio that depends on an event that happens once every 39 years (and counting) doesn't seem prudent.

Or are you predicting a high inflationary environment with interest rates in the teens?

It's quite clear that you have zero understanding of what an all-weather portfolio actually is, and the benefits it provides even absent a financial meltdown. Like I said, hang around for another decade.

The All weather portfolio is a nice adventure in back testing. It is very heavy in long term bonds. Long term bonds have historically paid very high yields making them attractive investments over the past 20+ years, but rates have been falling ever since. Now they pay 3-4%. Over the next 20 years it's highly unlikely they will return much more than 3-4%...

Given that, the All Weather Portfolio is likely to see lower returns over the next 20 years than it saw over the last 20 years.

Perhaps that will be the case, but the its the same argument against a stock-heavy portfolio. Any portfolio can only return the sum of its individual components.

But the point of the portfolio is not to try to maximize growth rate, its to provide as stable growth as possible with minimal downside.

And if you will see that these type of portfolios make use of gold and/or commodities. THAT is one asset class that is very beaten down, so there is a possibility that bulk of the portfolio's returns will be harvested from these asset classes over the next 20 years to offset the lower returns in the currently overpriced paper asset classes.

By your logic, the portfolio should have done poorly in the last 30 years because we have seen seen economic conditions hugely unfavourable to cash, commodities and gold, but that has been offset but performance in other areas. Now ask yourself, what will happen to the individual components if the the tailwinds that have driven bonds and crushed commodities over the last 30 years start to turn around?

That's the whole point of a balanced portfolio.. as economic conditions that cause one part of the portfolio to thrive and depress other parts change over time, those depressed parts start to come into fashion again. The portfolio's overall stability and performance come from harvesting the relative movements in these different parts not necessarily from economic expansion and the ever increasing valuations put on future growth.

« Last Edit: April 20, 2019, 02:51:19 AM by vand »

Maenad

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #35 on: April 20, 2019, 07:23:04 AM »
I guess the point is if there's a high likelihood that the next decade is going to be 4% returns or less ...

But that's the thing - there isn't. You're looking for more certainty than anyone can really give you. I've seen next-decade predictions all over the map for over 20 years now. We all want there to be some kind of logical rules, but the market really can stay irrational longer than you can stay solvent. Even the 4% rule is based on the huge caveat that it relies on the next 30 years being similar to the past 100, and it won't, not quite.

What's really going to bake your noodle is when you realize how global political events impact these returns, and predictions for those are even worse than for the stock market. Good luck seeing when the next big war is coming, or assassination, or a meltdown in one country's economy triggering a whole series of crises. Our economy is more global in nature now than it was in the 20th century, and that genie isn't going back in the bottle.

Your best bet is to determine how agile you can be, how much extra income you can pick up in a pinch, how much spending you can cut. Then adjust your withdrawal rate down for decreased agility or up for increased, and keep tracking your spending so you can correct your course quickly in small ways before the big corrections are needed.

Telecaster

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #36 on: April 20, 2019, 11:35:30 AM »
I guess the point is if there's a high likelihood that the next decade is going to be 4% returns or less should you look at alternatives such as real estate etc. or pay off mortgage instead? Also lower returns are fine if you are going to be working for the next 30 years, but what about newly retired or other situations?

If you are newly retired, then you (presumably) are relying on the 4% rule.  The 4% rule included historical ten year periods where stocks returned less than 4%.  So in that case don't worry about it.

Real estate has been a successful investment for many on this board.  Certainly worth considering independent of stock returns.

Paying off the mortgage is a high risk/low reward proposition and is a viable strategy only in a limited number of situations.   

sol

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #37 on: April 20, 2019, 12:21:59 PM »
Paying off the mortgage is a high risk/low reward proposition and is a viable strategy only in a limited number of situations.

Those situations don't appear to be very uncommon for people on this board, though.  I think they're mostly related to tax optimization.

One of those situations appears to be qualifying for ACA subsidies, by reducing your taxable income generated by 401k rollovers required to pay your mortgage each year.  That's easily worth $10k per year to an average family, especially one that carries a very large mortgage that otherwise precludes them from getting subsidies.  The expected premium from carrying your mortgage is almost always worth less than that and is far more variable than government issued insurance subsidies, which are basically guaranteed if you do your paperwork right.

Another appears to be having high school age children who will be disqualified from financial aid considerations for the same reason, because even if you have no real income your taxable income on paper is too high after making the annuals rollovers required to pay the ongoing mortgage costs.  If you eliminate $30k/year in mortgage payments, suddenly you can get by on a super low annual spending rate.

I would love to be corrected on either of these points, because I'm seriously considering paying off my primary mortgage this year by selling a rental property.  In one sense, I would just be moving RE equity from one property to another, but it also means giving up a bunch of RE leverage.  Maybe that's a good thing, if the local housing market turns south.

My risk tolerance appears to be dropping considerably in retirement.  Now that I've "won" the FIRE game, I no longer need to gamble on 10% market returns.  My plan is totally safe with 2% market returns, I just need to avoid -40% market returns.  I'm happy to give up the possibility of ever crossing the $10M threshold in exchange for guaranteeing that I never go broke.  Suddenly, products like annuities make a lot more sense to me than they did two years ago. 

Note that this is the exact opposite of Telecaster's post above.  He said paying off your mortgage is a high risk and low reward gamble, and I'm considering paying off my mortgage in order to have LESS risk in my overall portfolio.  I would love to find options for where to park the proceeds from the sale of a rental property, somewhere that I can access them for living expenses (and hypothetical ongoing mortgage payments) without generating taxable income for the next ten years or otherwise disqualifying myself from the ACA or simplified FAFSA.  Because right now, home equity in my primary residence appears to be the best place to put that money.

Help me, friends.  I seek your financial guidance and wisdom.
« Last Edit: April 20, 2019, 12:23:58 PM by sol »

use2betrix

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #38 on: April 20, 2019, 01:24:27 PM »
Paying off the mortgage is a high risk/low reward proposition and is a viable strategy only in a limited number of situations.

Those situations don't appear to be very uncommon for people on this board, though.  I think they're mostly related to tax optimization.

One of those situations appears to be qualifying for ACA subsidies, by reducing your taxable income generated by 401k rollovers required to pay your mortgage each year.  That's easily worth $10k per year to an average family, especially one that carries a very large mortgage that otherwise precludes them from getting subsidies.  The expected premium from carrying your mortgage is almost always worth less than that and is far more variable than government issued insurance subsidies, which are basically guaranteed if you do your paperwork right.

Another appears to be having high school age children who will be disqualified from financial aid considerations for the same reason, because even if you have no real income your taxable income on paper is too high after making the annuals rollovers required to pay the ongoing mortgage costs.  If you eliminate $30k/year in mortgage payments, suddenly you can get by on a super low annual spending rate.

I would love to be corrected on either of these points, because I'm seriously considering paying off my primary mortgage this year by selling a rental property.  In one sense, I would just be moving RE equity from one property to another, but it also means giving up a bunch of RE leverage.  Maybe that's a good thing, if the local housing market turns south.

My risk tolerance appears to be dropping considerably in retirement.  Now that I've "won" the FIRE game, I no longer need to gamble on 10% market returns.  My plan is totally safe with 2% market returns, I just need to avoid -40% market returns.  I'm happy to give up the possibility of ever crossing the $10M threshold in exchange for guaranteeing that I never go broke.  Suddenly, products like annuities make a lot more sense to me than they did two years ago. 

Note that this is the exact opposite of Telecaster's post above.  He said paying off your mortgage is a high risk and low reward gamble, and I'm considering paying off my mortgage in order to have LESS risk in my overall portfolio.  I would love to find options for where to park the proceeds from the sale of a rental property, somewhere that I can access them for living expenses (and hypothetical ongoing mortgage payments) without generating taxable income for the next ten years or otherwise disqualifying myself from the ACA or simplified FAFSA.  Because right now, home equity in my primary residence appears to be the best place to put that money.

Help me, friends.  I seek your financial guidance and wisdom.

I haven’t dug into the “don’t pay off your mortgage club” threads, but as I consider income/tax optimization for requirement, I see the benefits for things like ACA in the exact situation above you described. If you need to take out an extra $20k-$30k/year to pay a mortgage, that could easily disqualify someone from ACA subsidies..

Eager to hear some arguments against that justification for paying off the mortgage..

Subscribed..

FIREstache

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #39 on: April 20, 2019, 01:44:19 PM »
Paying off the mortgage is a high risk/low reward proposition and is a viable strategy only in a limited number of situations.

Those situations don't appear to be very uncommon for people on this board, though.  I think they're mostly related to tax optimization.

One of those situations appears to be qualifying for ACA subsidies, by reducing your taxable income generated by 401k rollovers required to pay your mortgage each year.  That's easily worth $10k per year to an average family, especially one that carries a very large mortgage that otherwise precludes them from getting subsidies.  The expected premium from carrying your mortgage is almost always worth less than that and is far more variable than government issued insurance subsidies, which are basically guaranteed if you do your paperwork right.

Another appears to be having high school age children who will be disqualified from financial aid considerations for the same reason, because even if you have no real income your taxable income on paper is too high after making the annuals rollovers required to pay the ongoing mortgage costs.  If you eliminate $30k/year in mortgage payments, suddenly you can get by on a super low annual spending rate.

I would love to be corrected on either of these points, because I'm seriously considering paying off my primary mortgage this year by selling a rental property.  In one sense, I would just be moving RE equity from one property to another, but it also means giving up a bunch of RE leverage.  Maybe that's a good thing, if the local housing market turns south.

My risk tolerance appears to be dropping considerably in retirement.  Now that I've "won" the FIRE game, I no longer need to gamble on 10% market returns.  My plan is totally safe with 2% market returns, I just need to avoid -40% market returns.  I'm happy to give up the possibility of ever crossing the $10M threshold in exchange for guaranteeing that I never go broke.  Suddenly, products like annuities make a lot more sense to me than they did two years ago. 

Note that this is the exact opposite of Telecaster's post above.  He said paying off your mortgage is a high risk and low reward gamble, and I'm considering paying off my mortgage in order to have LESS risk in my overall portfolio.  I would love to find options for where to park the proceeds from the sale of a rental property, somewhere that I can access them for living expenses (and hypothetical ongoing mortgage payments) without generating taxable income for the next ten years or otherwise disqualifying myself from the ACA or simplified FAFSA.  Because right now, home equity in my primary residence appears to be the best place to put that money.

Help me, friends.  I seek your financial guidance and wisdom.

I haven’t dug into the “don’t pay off your mortgage club” threads, but as I consider income/tax optimization for requirement, I see the benefits for things like ACA in the exact situation above you described. If you need to take out an extra $20k-$30k/year to pay a mortgage, that could easily disqualify someone from ACA subsidies..

Eager to hear some arguments against that justification for paying off the mortgage..

Subscribed..

There was some chatter about this last year in this thread
https://forum.mrmoneymustache.com/post-fire/retire-with-just-$620-000/100/

boarder42 had an argument against it.

Telecaster

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #40 on: April 20, 2019, 03:47:35 PM »
I haven’t dug into the “don’t pay off your mortgage club” threads, but as I consider income/tax optimization for requirement, I see the benefits for things like ACA in the exact situation above you described. If you need to take out an extra $20k-$30k/year to pay a mortgage, that could easily disqualify someone from ACA subsidies..

Eager to hear some arguments against that justification for paying off the mortgage..

Subscribed..

I'll say the same thing I said before:

Quote from: Telecaster
Paying off the mortgage is a high risk/low reward proposition and is a viable strategy only in a limited number of situations.

For example, this poster did the comparison and found essentially no difference between paying off the mortgage and taking a subsidy and not paying off the mortgage with no subsidy.     

https://forum.mrmoneymustache.com/post-fire/retire-with-just-$620-000/msg2041511/#msg2041511

Can you come up with a scenario where paying off the mortgage makes sense?  You bet!   But there are a limited number of situations where that is the case, and they are green eyeshade scenarios that requires some in-depth analysis.   

Dragging this conversation back onto topic, the OP was asking a general question about investing.  He believes the real return of stocks will be about 4% over the next decade, and was wondering if paying off the mortgage might make sense in that scenario.     If you make the same inflation assumption of 2-3% then paying off a 4.5% mortgage gives you an expected return of about 1.5-2.5%.   That is a high risk/low reward scenario.   

Full_Beard

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #41 on: April 20, 2019, 05:41:15 PM »
Dragging this conversation back onto topic, the OP was asking a general question about investing.  He believes the real return of stocks will be about 4% over the next decade, and was wondering if paying off the mortgage might make sense in that scenario.     If you make the same inflation assumption of 2-3% then paying off a 4.5% mortgage gives you an expected return of about 1.5-2.5%.   That is a high risk/low reward scenario.

I think you and Sol are talking about risk differently. He was referring to the risk of not having his stash last for the duration. I believe you're talking about the risk of opportunity costs -- taking a small return when better ones are available. If 1.5% returns don't affect your retirement, then I'd say that's low risk and low financial reward but high personal satisfaction reward.

My point is that there is no one right answer.

Sol, if you're willing to share, how old are you? I'm not close, so I know little about it, but the other factors to consider is how long until Medicare and how you place odds on today's tax rate vs. tomorrow's. It seems likely that those rates will go up, but perhaps not by so much that the taxes on the withdrawals today vs. ACA subsidies vs. withdrawals in 10 years change the view that going for best ACA subsidy today is probably the wiser move.

MustacheAndaHalf

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #42 on: April 20, 2019, 09:06:18 PM »
Most people use P/E to describe valuation levels, or CAPE 10 (P/E with 10 years of earnings).  But the correlation with future returns is closer to ~0.4, not 100%, according to Vanguard's white paper "Forecasting Future Stock Returns":
https://personal.vanguard.com/pdf/s338.pdf

method : correlation with 10 year real returns
CAPE/10 : 0.43
PE (1 yr) : 0.38
GDP       : 0.23
And various models of future returns under 0.20 correlation.

Most of the time, P/E will provide incorrect predictions of the next 10 years of stock returns.

Buffalo Chip

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #43 on: April 21, 2019, 03:14:04 AM »
Investors who think the last 5-10 years is "the norm" need to stick around for the next couple of decades, because all the 10-30yr regression analyses from current valuations suggest that US stocks will struggle to return even half of the historical average over the next decade and more.

the conversion usually goes like this:

me: stocks are overpriced
u: so what, I'm buying for the long term
me: define the long term
u: 20yrs+
me: yeah, stocks will still underperform in that time
u: how do you know
me: nobody can be sure, but we have things like valuation, statistical regression, historical precedence that can be used to construct a model and give a forecast
u: you can't time the market
me: that's true for most people over the short term, say 1-3 years but the longer you extrapolate the data the stronger the correlation between valuation vs return is. There are no recorded time periods on history where the stocks have returned above average over 20 years starting from these current valuations
u: nobody has a crystal ball
me: it's might be prudent to consider alternative strategies like all-weather portfolio that give awesome risk adjusted returns in any economic environment given the late stage we are in the business cycle
u: why would I want to hold anything but stocks when stocks have the best historic return. Bonds are overpriced, commodities have no earnings, cash pays 1%.
me: preserving your capital is at least as important as earning a return on it
u: I already said I have a 20yr investment horizon
me: (gives up at this point)

Sounds about right. I don’t go down that rabbit hole much, and just owe up to my ignorance and inability to grasp advanced math concepts. In my case, i can’t wrap my head around the idea that the Shiller PE ratio is twice it’s median and by investing in equities I somehow come out a winner in the medium to long term.  What can I say? I’m a dummy.

Buffalo Chip

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #44 on: April 21, 2019, 03:34:55 AM »
I guess the point is if there's a high likelihood that the next decade is going to be 4% returns or less should you look at alternatives such as real estate etc. or pay off mortgage instead? Also lower returns are fine if you are going to be working for the next 30 years, but what about newly retired or other situations?

Speaking for myself, the RE market has the aroma of 2003-2005 all over again. That didn’t end well. Overall, looks like a lot of overpriced assets everywhere you turn. Debt payoff with its guaranteed returns look pretty attractive. That and sitting on the sidelines.

People who are retired should be looking for capital protection in my view.

That said, you should not listen to me. I clearly don’t understand the equities and real estate math that says there is a great deal of room for added appreciation for assets that are already very pricey.

secondcor521

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #45 on: April 21, 2019, 08:28:34 AM »
Paying off the mortgage is a high risk/low reward proposition and is a viable strategy only in a limited number of situations.

Those situations don't appear to be very uncommon for people on this board, though.  I think they're mostly related to tax optimization.

One of those situations appears to be qualifying for ACA subsidies, by reducing your taxable income generated by 401k rollovers required to pay your mortgage each year.  That's easily worth $10k per year to an average family, especially one that carries a very large mortgage that otherwise precludes them from getting subsidies.  The expected premium from carrying your mortgage is almost always worth less than that and is far more variable than government issued insurance subsidies, which are basically guaranteed if you do your paperwork right.

Another appears to be having high school age children who will be disqualified from financial aid considerations for the same reason, because even if you have no real income your taxable income on paper is too high after making the annuals rollovers required to pay the ongoing mortgage costs.  If you eliminate $30k/year in mortgage payments, suddenly you can get by on a super low annual spending rate.

I paid off my mortgage before FIREing partly for the simplification and partly for the above two items - and more generally the several benefits that I figured would come with low AGI.  I didn't put a pencil to it to analyze it, so I'll concede that my choice may have not been optimal.

I am currently on an ACA plan and have a senior and junior in high school, along with a junior in college.  In aggregate in 2019, I'll receive about $35,672 in tax free discounts related to those two.  I also generally have negative federal and state income tax effective rates.  I also use the extra income tax bracket room to do Roth conversions which will help me reduce my tax torpedo situation.

And I'm sure you know this, @sol , but primary home equity doesn't count against you in FAFSA (simplified or not).

sol

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #46 on: April 21, 2019, 08:43:51 AM »
I think you and Sol are talking about risk differently. He was referring to the risk of not having his stash last for the duration. I believe you're talking about the risk of opportunity costs -- taking a small return when better ones are available.

Spot on, Full_Beard.

Risk means different things to different people, who are at different points in their FIRE journey.  For me, it is getting to be more and more worthwhile to consider low-return investments that are less volatile, even though that's a worse strategy for a younger person just starting out.  The same strategy that would have guaranteed failure for 25-year-old me can now protect 42-year-old me from failure of a different sort.

And I'm sure you know this, @sol , but primary home equity doesn't count against you in FAFSA (simplified or not).

Right, that's a big part of the reason why I'm considering paying it off.  I would like to reduce the value of my assets and accounts that count against me for FAFSA and ACA purposes.  Equity in your primary residence is a very convenient place to shelter a large sum of money, and as an added bonus it still "earns" me the equivalent of my mortgage rate (in avoided monthly interest costs).  I can't think of any other places to store hundreds of thousands of dollars that won't hurt me for ACA or FAFSA, still generates a monthly profit of sorts, and can always be accessed again in the future (e.g. through a HELOC) if necessary.

But like I said, I would love to be wrong on this.  Someone please convince me to keep my mortgage.  I miss boarder42, this is when I need him most.

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #47 on: April 21, 2019, 08:49:48 AM »
Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns of recent decades.
Bogle believes the U.S. stock market will enter a period of relatively low returns. He reached his estimate by looking at 2 percent dividend yield, a “deadweight loss from the 4.4 percent it has been historically,” and earnings growth of about 4 percent, which matches typical economic growth, to predict future investment return of 6 percent. He also looked at the difference between today’s price/earnings ratio of about 24, and the historic P/E ratio to estimate the speculative return.

Legendary investor Jack Bogle weighs in on the record rally
“My guess — an informed guess, but still a guess — is that by decade’s end the P/E ratio might ease down to, say, 20 times or even less. Such a revaluation would reduce the market’s return by about 2 percentage points per year, resulting in an annual rate of return of 4 percent for the U.S. stock market,” he wrote in the Little Book of Common Sense Investing.


Couple points to think about:
- As for the dividend yield, the trend has been for companies to spend a similar amount on share buy-backs as on dividends. If you factor that in, you are back in the 4% range again.
- Earnings growth: I agree, an important number. More important than the correlation with the GDP growth is the allocation of the growth in productivity. That means between corporations, state and employees. So changes in the tax environment or minimal wage can have an impact here.
- The P/E average of the S&P 500 is around 22 right now. That is higher than the often quoted historical average, but not so far from the average of the last 30 years. But even if you feel the current multiple is high, it doesn't mean it will necessarily come down over the next decade. I'm not saying that trees grow to the sky, but without critical events taking place, there is no bubble that will definitely burst.
- The single most important factor driving the markets is still the QE. Over ten years of QE, so much money has been pumped into the economy that central banks have a hard time to squeeze it out slowly. They tried in Q4/2018 and failed.

All in all, the outlook is not so grim. Even the deterioration of global trade had little impact on the markets. I believe the next negative impulse for the markets will come with the next war.

secondcor521

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #48 on: April 21, 2019, 08:56:16 AM »
Well, it's not a place, @sol, but the simplified needs test (SNT), if you can qualify, ignores all assets for FAFSA purposes.  It just bases aid essentially on AGI.  SNT is AGI < $50K and a few other criteria.  Again, I'm guessing you know about it already.

The other thing is it does affect the college search.  FAFSA vs. Profile can produce very different results and therefore aid packages for people like me.  So you'd want to be aware of which schools use which method and act accordingly.  Thankfully all three of my kids are currently planning on attending FAFSA schools.

sol

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Re: Stocks will only return 4% annually for next decade - John Bogle
« Reply #49 on: April 21, 2019, 10:30:39 AM »
Well, it's not a place, @sol, but the simplified needs test (SNT), if you can qualify, ignores all assets for FAFSA purposes.  It just bases aid essentially on AGI.  SNT is AGI < $50K and a few other criteria.  Again, I'm guessing you know about it already.

I started a whole new thread about my real estate problems, rather than continuing to clutter this one.