Poll

What do you think will be US Stock Market's real return over the next 25 years?

<4%
30 (10.4%)
4-5%
90 (31.1%)
6-7%
94 (32.5%)
>7%
46 (15.9%)
Who cares?
29 (10%)

Total Members Voted: 283

Author Topic: US Stock Market Expected Real Return  (Read 14070 times)

AdrianC

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US Stock Market Expected Real Return
« on: July 01, 2016, 11:20:54 AM »
Curious what are Mustachians return expectations for the market. Feel free to give reasons why.

MustacheAndaHalf

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Re: US Stock Market Expected Real Return
« Reply #1 on: July 01, 2016, 02:40:08 PM »
Each of the broad US stock market funds have a P/E of roughly 20, or an E/P of 5%.  Although P/E only has a 0.40 correlation to future returns, that's better than everything else according to Vanguard's white paper "Forecasting Stock Returns" ( https://personal.vanguard.com/pdf/s338.pdf ).  So 5% +/- unknown...

Indexer

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Re: US Stock Market Expected Real Return
« Reply #2 on: July 01, 2016, 06:39:14 PM »
Each of the broad US stock market funds have a P/E of roughly 20, or an E/P of 5%.  Although P/E only has a 0.40 correlation to future returns, that's better than everything else according to Vanguard's white paper "Forecasting Stock Returns" ( https://personal.vanguard.com/pdf/s338.pdf ).  So 5% +/- unknown...

According to that article CAPE has the highest correlation, not P/E.  0.43 VS 0.38 

I'm surprised market cap/GDP didn't make the list. It is also pretty accurate, but I feel that globalization has to distort that.

CAPE is around 25-26 last time I checked, which is well into nosebleed territory so it tells the same story as P/E ratios. I don't expect future returns to be as high as historical averages.

arebelspy

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Re: US Stock Market Expected Real Return
« Reply #3 on: July 02, 2016, 05:55:38 AM »
Shocked that only 15% (at the time of this post) picked > 7%.

The WORST 25-year period in US history is still better than 7%.

Do 77% (not counting those 15% and the ~8% don't care) of Mustachians really, truly believe the next 25 years will be the worst ever?

I sure don't.  I think it may be among the lower 25-year returns.  But I don't think it'll be the worst.  If you had said 5, or 10 years, I would pick a lower real return.  But 25 years?  Nah.  We'll be fine.


Edit: Nevermind.
« Last Edit: July 02, 2016, 03:04:23 PM by arebelspy »
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wenchsenior

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Re: US Stock Market Expected Real Return
« Reply #4 on: July 02, 2016, 10:44:52 AM »
What I plan for re: FI and what I expect are slightly different. Our target minimum for FI is 800K, and with 4% returns we're about 5-6 years out from that.  My conservative minimum withdrawal rate is 3.5% if the market returns stay modest.

However, this conservative expectation is partly because of our short timeline to FI, and my doubt that the market is likely to boom in the next few years. If by some chance another bull takes off, and the market returns >15% for 2 or 3 years, we'll rapidly be suddenly rolling in much cash than my target minimum.

Now, as to my actual EXPECTATION, as opposed to what I plan for? I expect over the rest of our lives, presumably at least 30 years if not more, the market will return somewhere in the range of 6-8%, and we'll be able to draw at least 4%. But I want to be prepared to be happy living on less than that.

AdrianC

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Re: US Stock Market Expected Real Return
« Reply #5 on: July 02, 2016, 10:50:03 AM »
S&P 500 annual return, dividends reinvested with inflation adjustment
1966-1990 3.3%
1991-2015 7.3%
1966-2015 5.3%

https://dqydj.com/sp-500-return-calculator/

10 year CAPE
1965 23
1990 17
2016 26

http://www.multpl.com/shiller-pe/

Valuation measured by CAPE is currently much more like 1965 than 1990.

One way to estimate future long term returns is the Gordon equation (see Bill Bernstein, Burton Malkiel).

Expected Real Return = Dividend Yield + Dividend Growth Rate + Valuation Change

Assuming no valuation change and a dividend growth rate the same as it has been for the last 100 years or so (1.3%, Bernstein 2010):

Expected Real Return =2.1 + 1.3 = 3.4%

CAPE of 26 is an earnings yield of 3.8%
« Last Edit: July 02, 2016, 11:15:14 AM by AdrianC »

beltim

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Re: US Stock Market Expected Real Return
« Reply #6 on: July 02, 2016, 10:52:56 AM »
Shocked that only 15% (at the time of this post) picked > 7%.

The WORST 25-year period in US history is still better than 7%.

Do 77% (not counting those 15% and the ~8% don't care) of Mustachians really, truly believe the next 25 years will be the worst ever?

I sure don't.  I think it may be among the lower 25-year returns.  But I don't think it'll be the worst.  If you had said 5, or 10 years, I would pick a lower real return.  But 25 years?  Nah.  We'll be fine.

The poll said real, not nominal returns.  The long term average real return is between 6 and 7 percent, which is why I picked 6-7%.

AdrianC

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Re: US Stock Market Expected Real Return
« Reply #7 on: July 02, 2016, 01:52:38 PM »
The long term average real return is between 6 and 7 percent, which is why I picked 6-7%.

I agree the long term average real return is between 6 and 7 percent, but I don't see how that tells us anything about future returns.

beltim

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Re: US Stock Market Expected Real Return
« Reply #8 on: July 02, 2016, 02:05:58 PM »
The long term average real return is between 6 and 7 percent, which is why I picked 6-7%.

I agree the long term average real return is between 6 and 7 percent, but I don't see how that tells us anything about future returns.

I don't have any data to indicate with any confidence that it will probably be above or below that range.  So, to me the null hypothesis is that future returns will look similar to past returns (albeit with a wide range of possible outcomes).

Eric

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Re: US Stock Market Expected Real Return
« Reply #9 on: July 02, 2016, 02:16:47 PM »
Valuation measured by CAPE is currently much more like 1965 than 1990.

The only problem with that is it's not an Apples to Apples comparison.  Earnings are measured differently today thanks to stricter and more uniform accounting standards, so it's reasonable to conclude that CAPE should generally be higher.

MustacheAndaHalf

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Re: US Stock Market Expected Real Return
« Reply #10 on: July 02, 2016, 11:04:29 PM »
...
I don't have any data to indicate with any confidence that it will probably be above or below that range.  So, to me the null hypothesis is that future returns will look similar to past returns (albeit with a wide range of possible outcomes).
For those who want to learn, there's Vanguard's white paper "Forecasting Stock Returns"
https://personal.vanguard.com/pdf/s338.pdf

beltim

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Re: US Stock Market Expected Real Return
« Reply #11 on: July 03, 2016, 07:56:25 AM »
...
I don't have any data to indicate with any confidence that it will probably be above or below that range.  So, to me the null hypothesis is that future returns will look similar to past returns (albeit with a wide range of possible outcomes).
For those who want to learn, there's Vanguard's white paper "Forecasting Stock Returns"
https://personal.vanguard.com/pdf/s338.pdf

Yes, that's the data that's available.  No, it doesn't providence any confidence of a particular return over the next 25 years.

capitalninja

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Re: US Stock Market Expected Real Return
« Reply #12 on: July 03, 2016, 09:45:40 AM »
My portfolio's performance this year according to Personal Capital. Buying good companies and indexes when everyone is being irrational can certainly be a good thing.

Granted my portfolio doesn't only consist of the US Stock Market. It would be irrational to do that. :-)


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Re: US Stock Market Expected Real Return
« Reply #13 on: July 05, 2016, 04:34:46 AM »
So I didn't vote in the poll, because "who the hell knows?" wasn't available as a choice.

Jack

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Re: US Stock Market Expected Real Return
« Reply #14 on: July 05, 2016, 06:10:38 AM »
I voted "who cares?" for two reasons:

1. Whatever return we get is the return we're gonna get. We can't affect it so there's not a whole lot of use worrying about it.

2. Why pick such a short time horizon? I'm 32 years old. I plan to live a lot longer than 25 more years!

Remember, folks, your time horizon doesn't stop just because you go from the accumulation phase to the withdrawal phase; it stops when you plan to run out of money entirely.

That said, I expect somewhat lower than average returns (~5%) in the very-short term of maybe 10 years or so, with reversion to the mean by year 25. I also expect international to outperform US.

TheAnonOne

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Re: US Stock Market Expected Real Return
« Reply #15 on: July 05, 2016, 11:01:13 AM »
I voted "who cares?" for two reasons:

1. Whatever return we get is the return we're gonna get. We can't affect it so there's not a whole lot of use worrying about it.

2. Why pick such a short time horizon? I'm 32 years old. I plan to live a lot longer than 25 more years!

Remember, folks, your time horizon doesn't stop just because you go from the accumulation phase to the withdrawal phase; it stops when you plan to run out of money entirely.

That said, I expect somewhat lower than average returns (~5%) in the very-short term of maybe 10 years or so, with reversion to the mean by year 25. I also expect international to outperform US.

I would be surprised if the US lagged very much seeing as how most of the "US" companies are already hugely international.

Seppia

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US Stock Market Expected Real Return
« Reply #16 on: July 06, 2016, 05:39:16 AM »
Valuation measured by CAPE is currently much more like 1965 than 1990.

The only problem with that is it's not an Apples to Apples comparison.  Earnings are measured differently today thanks to stricter and more uniform accounting standards, so it's reasonable to conclude that CAPE should generally be higher.

I would tend to disagree with this.
Accounting has sure got more creative lately if compared to a few decades ago, mostly in search for earnings growth.
Also, Europe (which for sure has sound accounting practices as well) has a much lower CAPE and PB valuation at this moment.

AdrianC

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Re: US Stock Market Expected Real Return
« Reply #17 on: July 07, 2016, 10:59:58 AM »
Valuation measured by CAPE is currently much more like 1965 than 1990.

The only problem with that is it's not an Apples to Apples comparison.  Earnings are measured differently today thanks to stricter and more uniform accounting standards, so it's reasonable to conclude that CAPE should generally be higher.

I would tend to disagree with this.
Accounting has sure got more creative lately if compared to a few decades ago, mostly in search for earnings growth.

Yes. We are at very high price to sales ratios and very high profit margins. These tend to mean-revert.

CAPE aside, what about the prediction from the Gordon equation?

Here's Bernstein's predictions from 2014 for 10 year real returns:

https://www.bogleheads.org/wiki/Historical_and_expected_returns#William_Bernstein

U.S. Large-Cap Stocks  2% 
U.S. Large-Value and Small-Cap Stocks  3% 
U.S. Small-Value Stocks  4% 
Developed Foreign Stocks  5% 
Emerging Markets Stocks  4% 
REITs  1% 
Precious Metals Stocks  1% 
Base Metals and Oil Stocks  3% 
Treasury Bills, Notes, and Bonds -1% 


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Re: US Stock Market Expected Real Return
« Reply #18 on: July 07, 2016, 02:23:03 PM »
So if these lower returns really end up being what happens, is this actionable information or is the answer still "stay the course"?

arebelspy

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Re: US Stock Market Expected Real Return
« Reply #19 on: July 07, 2016, 06:17:52 PM »
So if these lower returns really end up being what happens, is this actionable information or is the answer still "stay the course"?

Exactly.  Unless you have a solid alternate plan (all of the ones I've heard have a large amount of speculation)...  :)
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ysette9

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Re: US Stock Market Expected Real Return
« Reply #20 on: July 07, 2016, 08:26:39 PM »
Is anyone here advocating then that 4%/25x isn't sufficient? Every time I see what sounds like a reasonable argument for <4% SWR, I go check cFIREsim and it reassures me that I should be fine (~90% success rate) with the current plan. I struggle to believe that the future really could be more dismal than most all of the past.

arebelspy

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Re: US Stock Market Expected Real Return
« Reply #21 on: July 08, 2016, 01:01:05 AM »
Is anyone here advocating then that 4%/25x isn't sufficient? Every time I see what sounds like a reasonable argument for <4% SWR, I go check cFIREsim and it reassures me that I should be fine (~90% success rate) with the current plan. I struggle to believe that the future really could be more dismal than most all of the past.

Sure.  There's doom and gloomers everywhere, even here on the MMM forums.

The vast majority of us have optimism guns, and think the 4% SWR will be just fine.  A few hedge down to somewhere between 3 and 4.

Stick to your comfort level, and don't worry what others think. (And then keep an eye on it.)  :)
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Monkey Uncle

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Re: US Stock Market Expected Real Return
« Reply #22 on: July 08, 2016, 03:59:21 AM »
Valuation measured by CAPE is currently much more like 1965 than 1990.

The only problem with that is it's not an Apples to Apples comparison.  Earnings are measured differently today thanks to stricter and more uniform accounting standards, so it's reasonable to conclude that CAPE should generally be higher.

I would tend to disagree with this.
Accounting has sure got more creative lately if compared to a few decades ago, mostly in search for earnings growth.

Yes. We are at very high price to sales ratios and very high profit margins. These tend to mean-revert.

CAPE aside, what about the prediction from the Gordon equation?

Here's Bernstein's predictions from 2014 for 10 year real returns:

https://www.bogleheads.org/wiki/Historical_and_expected_returns#William_Bernstein

U.S. Large-Cap Stocks  2% 
U.S. Large-Value and Small-Cap Stocks  3% 
U.S. Small-Value Stocks  4% 
Developed Foreign Stocks  5% 
Emerging Markets Stocks  4% 
REITs  1% 
Precious Metals Stocks  1% 
Base Metals and Oil Stocks  3% 
Treasury Bills, Notes, and Bonds -1%

Why quote Bernstein's pessimistic 10-year estimates and ignore Ferri's somewhat more optimistic 30-year estimates?

But even if the next 10 years turn out as bad as Bernstein predicts, the coming decade would not be as bad as the 1930s or 1970s (or even as bad as the 2000s for stocks).  To be safe, a person retiring now who believes Bernstein's predictions probably would want his or her cFiresim runs to be hitting as close to 100% as possible.  Because if you run cFiresim and get a success rate of 95%, your few failures probably began in the late 1920s and late 1960s, just before the worst returns in the history of the US market.  Bernstein's predictions are certainly no worse than those returns, so if your simulations show your retirement surviving the 1930s and 1970s, you should be good to go.

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Re: US Stock Market Expected Real Return
« Reply #23 on: July 08, 2016, 06:02:31 AM »
Not sure why people would things would be worse going forward when we have gone through a lot worse in the past. Time will tell but as others have mentioned stay the course and keep an eye on it.

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Re: US Stock Market Expected Real Return
« Reply #24 on: July 08, 2016, 07:33:31 AM »
Is anyone here advocating then that 4%/25x isn't sufficient? Every time I see what sounds like a reasonable argument for <4% SWR, I go check cFIREsim and it reassures me that I should be fine (~90% success rate) with the current plan.

The vast majority of us have optimism guns, and think the 4% SWR will be just fine.  A few hedge down to somewhere between 3 and 4.


I do something similar in my own calculations and planning. Rather than look at a single FIRE number, I break it up into FI and RE:

1) My FI number is the familiar "current yearly spending x 25". When I reach that then I'll feel legitimately financially independent and comfortable essentially living off only the interest of my investments, investing all other income.

2) My RE number takes into account my personal level of comfort, significantly padding my FI number (allowing some room for an unexpected purchase, more trips than usual or a more extravagant trip than usual, etc.), plus room for a laddered CD beyond my existing emergency fund (again, this is simply my personal level of comfort ... I'm fine having a slightly larger than optimal cash position for peace of mind's sake), and all with a targeted 3.5% withdrawal rate (so getting closer to 30x annual expenses).

So I look at it as "FI" means I can definitely rest easy, but "RE" is even more conservative, in the clear and ready to go. After that, it'll simply be a question of whether or not I feel ready to leave my place of employment. Maybe I still will by the time I reach that number, and maybe I'll feel differently. That part can wait for now! The exciting thing either way is that it will absolutely be an option.



AdrianC

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Re: US Stock Market Expected Real Return
« Reply #25 on: July 08, 2016, 09:16:40 AM »
So if these lower returns really end up being what happens, is this actionable information or is the answer still "stay the course"?

The answer is as Bogle, McNabb and countless others keep saying: stay the course, save more!

AdrianC

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Re: US Stock Market Expected Real Return
« Reply #26 on: July 08, 2016, 09:23:02 AM »
Why quote Bernstein's pessimistic 10-year estimates and ignore Ferri's somewhat more optimistic 30-year estimates?

I'm reading Bernstein's book and he makes a lot of sense. Ferri seems like a good guy (heard his interview on Masters in Business) but I don't know his methodology.

Quote
But even if the next 10 years turn out as bad as Bernstein predicts, the coming decade would not be as bad as the 1930s or 1970s (or even as bad as the 2000s for stocks).  To be safe, a person retiring now who believes Bernstein's predictions probably would want his or her cFiresim runs to be hitting as close to 100% as possible.  Because if you run cFiresim and get a success rate of 95%, your few failures probably began in the late 1920s and late 1960s, just before the worst returns in the history of the US market.  Bernstein's predictions are certainly no worse than those returns, so if your simulations show your retirement surviving the 1930s and 1970s, you should be good to go.

I agree.

AdrianC

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Re: US Stock Market Expected Real Return
« Reply #27 on: July 08, 2016, 09:24:27 AM »
Not sure why people would things would be worse going forward when we have gone through a lot worse in the past. Time will tell but as others have mentioned stay the course and keep an eye on it.

Starting valuation matters. It matters a great deal.

tooqk4u22

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Re: US Stock Market Expected Real Return
« Reply #28 on: July 08, 2016, 10:01:22 AM »
Is anyone here advocating then that 4%/25x isn't sufficient? Every time I see what sounds like a reasonable argument for <4% SWR, I go check cFIREsim and it reassures me that I should be fine (~90% success rate) with the current plan. I struggle to believe that the future really could be more dismal than most all of the past.

Sure.  There's doom and gloomers everywhere, even here on the MMM forums.

The vast majority of us have optimism guns, and think the 4% SWR will be just fine.  A few hedge down to somewhere between 3 and 4.

Stick to your comfort level, and don't worry what others think. (And then keep an eye on it.)  :)

Except that you are primarily invested in real estate (and not stocks and bonds) so you haven't gotten comfortable with or subscribe to the 4% rule, or minimally your view is not applicable or somewhat diminished on the matter.  Said otherwise if you really believed it you would sell all your real estate and invest in a stock/bond portfolio and start drawing 4% enabling you to have a far more diverse and conservative FIRE portfolio because you wouldn't have the risk associated with real estate or your market concentration to Vegas.  The reality is there is no way to be sure what your Safe WR it is statistically speaking from historical perspective like the 4% Rule - however I have no doubt you will be more than fine.

It would be hard to give up the cash flow from real estate though.

I am curious though - do you evaluate your portfolio on a mark-to market basis. It seems that you acquired most of your assets during the downturn so the appreciation should be pretty substantial at this point.  What I am getting at is lets say you bought a property with a 10% cash on cash return ($10k NOI/$100k Property)......fast forward now the house is worth $200k and you still get $10k that is a 5% return - in that case it might start looking good to sell and invest in stock/bonds. 

Taxes would come into play, but just curious if you do this analysis.

« Last Edit: July 08, 2016, 10:09:08 AM by tooqk4u22 »

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Re: US Stock Market Expected Real Return
« Reply #29 on: July 08, 2016, 12:00:05 PM »
just work OMY and you don't need to worry about it.
retiring at 40 instead of 39 is still pretty damn good.
Now 41... that's where I draw the line ;)

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Re: US Stock Market Expected Real Return
« Reply #30 on: July 08, 2016, 01:05:32 PM »
Quote
just work OMY and you don't need to worry about it.
retiring at 40 instead of 39 is still pretty damn good.

But I wanna retire at 39 instead of 40 so I can have bragging rights of retiring in my 30s!

Retire-Canada

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Re: US Stock Market Expected Real Return
« Reply #31 on: July 08, 2016, 05:16:47 PM »
Just keep working and saving until you die and you won't have to worry about the 4% rule failing you. ;)

arebelspy

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Re: US Stock Market Expected Real Return
« Reply #32 on: July 08, 2016, 05:56:21 PM »
Except that you are primarily invested in real estate (and not stocks and bonds) so you haven't gotten comfortable with or subscribe to the 4% rule, or minimally your view is not applicable or somewhat diminished on the matter.  Said otherwise if you really believed it you would sell all your real estate and invest in a stock/bond portfolio and start drawing 4% enabling you to have a far more diverse and conservative FIRE portfolio because you wouldn't have the risk associated with real estate or your market concentration to Vegas.

If my portfolio would be enough to support my spending at a 4% SWR after selling my real estate, and paying taxes, I would do so tomorrow.

I don't have a traditional 4% WR stock/bond portfolio not because I don't believe in it, but because real estate gets me so much better returns, it let me FIRE much earlier. 

I'd have had to work like another 7-10 years (depending on the markets during that timeframe) to FIRE on a traditional 4% WR.  It was not worth it to me to double the amount of time I'd have to work.. in other words, the amount of time I put into real estate is much, much, much less than full time work for 7-10 years.

Quote
I am curious though - do you evaluate your portfolio on a mark-to market basis. It seems that you acquired most of your assets during the downturn so the appreciation should be pretty substantial at this point.  What I am getting at is lets say you bought a property with a 10% cash on cash return ($10k NOI/$100k Property)......fast forward now the house is worth $200k and you still get $10k that is a 5% return - in that case it might start looking good to sell and invest in stock/bonds. 

Taxes would come into play, but just curious if you do this analysis.

Of course.

This should be telling: All my surplus funds, besides property reserves, go into VTSAX (25k YTD).  Not more real estate.  And it's not due to lack of opportunity.
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Jeremy E.

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Re: US Stock Market Expected Real Return
« Reply #33 on: July 08, 2016, 06:37:55 PM »
no 5%-6% option.... Which is my answer

Seppia

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Re: US Stock Market Expected Real Return
« Reply #34 on: July 09, 2016, 08:10:00 AM »
So if these lower returns really end up being what happens, is this actionable information or is the answer still "stay the course"?

Exactly.  Unless you have a solid alternate plan (all of the ones I've heard have a large amount of speculation)...  :)

There's a lot of people that are still 100% USA.
Current valuations could/should push people to add international.
That would be an actionable strategy for example.
If one is already diversified the only option is stay the course.

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Re: US Stock Market Expected Real Return
« Reply #35 on: July 09, 2016, 10:40:13 AM »
So if these lower returns really end up being what happens, is this actionable information or is the answer still "stay the course"?

Exactly.  Unless you have a solid alternate plan (all of the ones I've heard have a large amount of speculation)...  :)

There's a lot of people that are still 100% USA.
Current valuations could/should push people to add international.
That would be an actionable strategy for example.
If one is already diversified the only option is stay the course.

The problem I have is that the long term international indexes don't come even remotely close to the long term US (from the US side sitting in the dollar). I just looked in my shiny new Vanguard 401k

I would buy Barclays but Robinhood does oblige the London exchange and I'm not going to Scottrade with it. I'm done with fees and companies that will not direct deposit into bank you already have. Maybe I can set up a Vanguard IRA for it but I'm not sure they allow international purchases.

So I would buy select international companies for the long but don't want the funds. On the US side it's becoming harder and harder to find anything I think is worth buying. I have to sit on my hands with utilities, REITS are slim pickings with my favorites fully valued (for me), all my consumer staples of interest just don't yield enough right now. I don't even want to lump sum a years pay into Vinix right now.

Long term the market will be business as usual but it's the wrong end of the cycle to put a lot of money to work right now. JMHO

Telecaster

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Re: US Stock Market Expected Real Return
« Reply #36 on: July 09, 2016, 12:09:20 PM »

Long term the market will be business as usual but it's the wrong end of the cycle to put a lot of money to work right now. JMHO

What do you do with new money then?  Put it under the mattress?

mrpercentage

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Re: US Stock Market Expected Real Return
« Reply #37 on: July 09, 2016, 12:12:22 PM »

Long term the market will be business as usual but it's the wrong end of the cycle to put a lot of money to work right now. JMHO

What do you do with new money then?  Put it under the mattress?

Sit on it till a correction or late-September/early-October. I might miss a rally but statistics are on my side. It's more about removing some downside that it is maximizing gains.

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Re: US Stock Market Expected Real Return
« Reply #38 on: July 10, 2016, 09:42:35 PM »
So if these lower returns really end up being what happens, is this actionable information or is the answer still "stay the course"?

Exactly.  Unless you have a solid alternate plan (all of the ones I've heard have a large amount of speculation)...  :)





There's a lot of people that are still 100% USA.
Current valuations could/should push people to add international.
That would be an actionable strategy for example.
If one is already diversified the only option is stay the course.

The problem I have is that the long term international indexes don't come even remotely close to the long term US (from the US side sitting in the dollar). I just looked in my shiny new Vanguard 401k

I would buy Barclays but Robinhood does oblige the London exchange and I'm not going to Scottrade with it. I'm done with fees and companies that will not direct deposit into bank you already have. Maybe I can set up a Vanguard IRA for it but I'm not sure they allow international purchases.

So I would buy select international companies for the long but don't want the funds. On the US side it's becoming harder and harder to find anything I think is worth buying. I have to sit on my hands with utilities, REITS are slim pickings with my favorites fully valued (for me), all my consumer staples of interest just don't yield enough right now. I don't even want to lump sum a years pay into Vinix right now.

Long term the market will be business as usual but it's the wrong end of the cycle to put a lot of money to work right now. JMHO

That's a backward-looking statement, for one thing. It may not mean anything going forward. Besides, international has beaten u.s. annually about 50% of the time. This seems like recency bias to me.


tooqk4u22

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Re: US Stock Market Expected Real Return
« Reply #39 on: July 11, 2016, 09:10:25 AM »
Except that you are primarily invested in real estate (and not stocks and bonds) so you haven't gotten comfortable with or subscribe to the 4% rule, or minimally your view is not applicable or somewhat diminished on the matter.  Said otherwise if you really believed it you would sell all your real estate and invest in a stock/bond portfolio and start drawing 4% enabling you to have a far more diverse and conservative FIRE portfolio because you wouldn't have the risk associated with real estate or your market concentration to Vegas.

If my portfolio would be enough to support my spending at a 4% SWR after selling my real estate, and paying taxes, I would do so tomorrow.

I don't have a traditional 4% WR stock/bond portfolio not because I don't believe in it, but because real estate gets me so much better returns, it let me FIRE much earlier. 

I'd have had to work like another 7-10 years (depending on the markets during that timeframe) to FIRE on a traditional 4% WR.  It was not worth it to me to double the amount of time I'd have to work.. in other words, the amount of time I put into real estate is much, much, much less than full time work for 7-10 years.

Quote
I am curious though - do you evaluate your portfolio on a mark-to market basis. It seems that you acquired most of your assets during the downturn so the appreciation should be pretty substantial at this point.  What I am getting at is lets say you bought a property with a 10% cash on cash return ($10k NOI/$100k Property)......fast forward now the house is worth $200k and you still get $10k that is a 5% return - in that case it might start looking good to sell and invest in stock/bonds. 

Taxes would come into play, but just curious if you do this analysis.

Of course.

This should be telling: All my surplus funds, besides property reserves, go into VTSAX (25k YTD).  Not more real estate.  And it's not due to lack of opportunity.

I get it, you are a real estate investor and that it has produced better returns for you - that is not always the case and many times is not the case.  You had the good fortune of a cooperating market (massive downturn) to be able to invest while you were in the accumulation stage combined with willingness to put in the work (either actual work or analysis) and having the balls (higher risk tolerance than most) to do it - and therefore you were rewarded for it. 

This is NOT me saying you were lucky and if I am saying that you are lucky it is because I think of luck in the sense of "Luck is what happens when preparation meets opportunity."   I commend you because I don't have the risk tolerance to invest in other markets with people I don't know and for that I give up opportunities. 


My comments were more to your statement below - it's a bit disingenuous to say that that you have an optimism gun (which I believe you actually have a really big one) and are ok with the 4% rule when if fact you are not doing it or even really trying to do it - even if it is for better returns that allowed you to FIRE much earlier otherwise - believing and living by it are two different things. Putting away excess cash means you are comfortable with investing but doesn't necessarily support your views on 4% rule - and by giving up other opportunities means either you have a enough and/or those other better opportunities aren't worth the effort/work right now (especially while you are doing your travels), or maybe you are starting to diversify a bit more or now like having more liquid assets (all of which is wise). 

You have essentially found a FIRE hack around the 4% rule that works for you, but it is more akin to buying individual stocks and market timing than it is to passive index investing, which is ok - or someone being comfortable with say a 7% SWR.

Quote
The vast majority of us have optimism guns, and think the 4% SWR will be just fine.

Oranges are the greatest, you should be comfortable eating them all the time.....I only eat bananas because they are better for me but really oranges are the best so go with it. 
« Last Edit: July 11, 2016, 10:19:17 AM by tooqk4u22 »

arebelspy

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Re: US Stock Market Expected Real Return
« Reply #40 on: July 11, 2016, 03:03:06 PM »
I can see how you would interpret it that way.

I disagree, for a number of reasons, but I doubt I will change your mind, and that's fine.

EDIT: I just realized what you and I are saying are totally different.  You seem to be arguing about me using the 4% SWR, something I never claimed to do.  So just to quickly clarify, and maybe this will resolve the confusion.. I didn't say I am practicing the 4% SWR.  I said I think it will be fine.  In fact, what I said is that I think the vast majority of us think it will be fine.  That doesn't even imply I think that, just that most of us (Mustachians on the forums) think it will be fine.  I do, in fact, think it will be fine.  But I don't follow it, obviously, and never claimed to.  Read the quote I actually said, with that in mind.  :)
« Last Edit: July 11, 2016, 03:12:45 PM by arebelspy »
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Seppia

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US Stock Market Expected Real Return
« Reply #41 on: July 12, 2016, 03:00:57 AM »

There's a lot of people that are still 100% USA.
Current valuations could/should push people to add international.
That would be an actionable strategy for example.
If one is already diversified the only option is stay the course.

The problem I have is that the long term international indexes don't come even remotely close to the long term US (from the US side sitting in the dollar). I just looked in my shiny new Vanguard 401k

Depends on the timeframe.
The period 2008-today has created the difference between Europe and the USA, for example.

If we start in 1990 (when VEURX was created) and stop in 2008 (not a very short time period), Europe has outperformed the USA.



If we stopped in 2007 the advantage for European stocks would have been even greater.

Now the fact that today the European Stoxx600 trades below 15 PE while VTSAX is around 25 makes me think there's a fairly good chance the next 15 years will see again Europe doing better than the USA.

Obviously nobody knows for sure, that's why it's not a bad idea to own everything.
This way, you don't have to guess.

Zamboni

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Re: US Stock Market Expected Real Return
« Reply #42 on: July 12, 2016, 03:50:08 AM »
I chose 4-5%, but that's because I'd rather err by underestimating than overestimating. That gives me a safety margin.

Aphalite

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Re: US Stock Market Expected Real Return
« Reply #43 on: July 12, 2016, 08:01:05 AM »
I agree with beltim that 6-7% real is likely to repeat. Also don't believe profit margins will actually mean revert - mean reversion sounds nice, but with efficiencies/technologies nowadays being what it is, we're transitioning more and more to a knowledge worker type economy, which means less capital expenditures and less margin erosion (I mean, railroads once made up over half of the market, imagine any industry that's more capital intensive?)

Also, all of the hand wringing about CAPE seems to be a sign of heavy anchoring in historical data, without considering current conditions. It's the reason LTCM exploded so spectacularly.

CAPE has its limitations if you're trying to make an apples to apples comparison. Risk free treasuries were yielding 4%+ in the 1960s, versus less than 1.5% today. That alone means a "fair value" CAPE of 17 (Shiller yield of about 6%, or about 2% risk premium) was more expensive than today's CAPE of 26 (Shiller yield of about 4%, or about 2.5% risk premium).

Additionally, if you adjust for Amazon (don't ask me, I have no idea why it's valued the way it is), CAPE is actually closer to 19 (rough approximation, AMZN is 1.5% of SPX and has a CAPE of about 500, at $1.50 average earnings the past ten years, 2100*26-(31.5*500)/2068.5 = 18.8), which means the risk premium is far, far higher at 4-4.5% (6% yield) for 98.5% of SPX. The average skewing is like discussing average wages in the US versus median wages in the US - if you are sitting at a cafe where the average wages of the patrons is $50,000, and then Bill Gates walks in the door, all of a sudden, the average jumps into the billions

That's the problem with investing, we haven't even started discussing growth and demographics assumptions and there's already too many variables to consider - for most people, an index approach is best

Seppia

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US Stock Market Expected Real Return
« Reply #44 on: July 12, 2016, 11:31:12 AM »
Wow so following your reasoning Europe is insanely cheap right now.
Cape of 15, AND 10 year interest rates in the red.
Also do you somehow avoid buying Amazon in your index funds?

This is not to bash you, but every time there was a huge boom / bust people found reasons why it would not mean revert

"The Internet will change everything" (circa 1999).
True, but not the way these investors thought.

"The death of equities" (before the most incredible bull run ever)

These low long terms interest rates obviously help push stock valuations higher, but
A- I'm not sure how this means it will not mean revert
B- how do people explain european and emerging market valuations (much more in line with history, even a bit below?)

US stocks are on the expensive side right now, it's a fact. Statistically, this SHOULD mean lower returns in the next 10-15 years are to be expected
« Last Edit: July 12, 2016, 11:35:13 AM by Seppia »

Aphalite

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Re: US Stock Market Expected Real Return
« Reply #45 on: July 12, 2016, 12:01:54 PM »
This is not to bash you, but every time there was a huge boom / bust people found reasons why it would not mean revert

Sure, let's go through your points

Wow so following your reasoning Europe is insanely cheap right now.
Cape of 15, AND 10 year interest rates in the red.

So if you're looking at it from the perspective of ABSOLUTE valuation. Certainly so. However, valuation is always about future expectations. What about  demographic differences between the two regions? Or employment and spending levels? How about the rising US dollar and its effects on US earnings vs EU earnings? US earnings are suppressed because companies have to report in US $ while EU reports in lb or euro. Do you think technology/SAAS (heavily US) will be the driver of future economic growth or is it too fadish? These can all explain the valuation gap, but are any of them correct or precisely measurable?

Also do you somehow avoid buying Amazon in your index funds?

1) Construct your own index if you have enough capital for less than 5bps a year
2) If you can't avoid it, just know that only 1.5% of your index is highly valued according to Shiller PE, while the remaining 98.5% is just fine. My point with Amazon is to demonstrate the skew of averages when you have one weird outlier. If you think Shiller PE of 17 is reasonable, then the fact that 98.5% of SP500 is 19 Shiller PE should convince you that the market isn't that frothy

These low long terms interest rates obviously help push stock valuations higher, but
A- I'm not sure how this means it will not mean revert
B- how do people explain european and emerging market valuations (much more in line with history, even a bit below?)

US stocks are on the expensive side right now, it's a fact. Statistically, this SHOULD mean lower returns in the next 10-15 years are to be expected

But the stock market isn't a "statistically" driven vehicle. Looking at it as such is forgetting that what comprises the stock market is many, many businesses, with their own prospects and situations.

My main point has always been the Shiller PE isn't a good catch all metric, and I'm trying to demonstrate why this is the case for the present environment. Shiller PE doesn't consider alternatives, growth expectations, or interest rates. It's an ABSOLUTE valuation measure so isn't helpful 100% of the time. If you think interest rates will mean revert, then the market looks pretty expensive right now. If you think the US will shut off immigration, stop having children, and turn old, the market is also expensive right now. I think we'll have low interest rates for a while, and we'll age slower than other regions, which means I think the market isn't terribly expensive, maybe just a little bit on the higher than fair value side. Overall, returns going forward should still be in the 6-7% real range

Regarding emerging markets (we talked about Europe already above), besides the risks of culture (look at how many companies have had to write off their Argentinian investments in the past year) and accounting (Shiller PE is just a model, garbage in and garbage out, China won't ever have the same focus on reporting as the US does, it's just cultural, and the Chinese don't look at the market as investing, they look at it as merely a form of speculation), there's not the profit driven environment that we have in the US abroad. Look at any number of annual reports from European companies and you will see a section on sustainability and community, if you are an investor for the purposes of monetary gain, there's not a better environment than the US. That's both good news and a little depressing, but, is what it is
« Last Edit: July 12, 2016, 12:05:44 PM by Aphalite »

Seppia

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US Stock Market Expected Real Return
« Reply #46 on: July 12, 2016, 12:56:21 PM »
Great post, thanks for the discussion!

Personally I find all your points very valid, as in "they make a ton of sense".
I have zero counters for the facts you state.
Still, I believe, as stated In a previous post, that owning everything is the best solution, as it eliminates the need to speculate. You just own stocks all over the world and be done with it.

Couple of semi tangent thoughts:

1- I think the idea of future outlooks being much more rosy for the USA carries a bit of recency bias.

2- similarly, the widespread idea of future outlooks being gloomier for Europe undersell a bit europe's history.
It has held (as a whole, with balances shifting through countries) a very prominent role on earth for... 4 thousand years?

sirdoug007

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Re: US Stock Market Expected Real Return
« Reply #47 on: July 12, 2016, 01:14:02 PM »
I voted for 6-7% because that is what has happened most of the time in the past.  People have said "this time is different" many times, most of the time the future looks an awful lot like the present.

"The most significant pattern is this:

Over the very long run, the stock market has had an inflation-adjusted annualized return rate of between six and seven percent."

http://www.moneychimp.com/features/market_cagr.htm

Aphalite

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Re: US Stock Market Expected Real Return
« Reply #48 on: July 12, 2016, 02:06:11 PM »
Couple of semi tangent thoughts:

1- I think the idea of future outlooks being much more rosy for the USA carries a bit of recency bias.

2- similarly, the widespread idea of future outlooks being gloomier for Europe undersell a bit europe's history.
It has held (as a whole, with balances shifting through countries) a very prominent role on earth for... 4 thousand years?

1) Probably so. I think certain parts of the US market are extremely overvalued so I stay away - in no rational way does Amazon deserve the multiple that it has, same for FB and NFLX, seems like investors are being set up for failure - the top EU stocks in the indexes are actually really great companies going for a very fair price, like Nestle, Shell, Novo, etc.

2) I agree, not even just on the history, just that Europe has some really nice and undervalued companies that just happen to be some of the biggest in the world. The only difficulty with European companies is the tax treatment - can't hold many of them in a tax sheltered account as you can't claim the foreign credit. Too bad

Monkey Uncle

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Re: US Stock Market Expected Real Return
« Reply #49 on: July 13, 2016, 04:18:44 AM »
Couple of semi tangent thoughts:

1- I think the idea of future outlooks being much more rosy for the USA carries a bit of recency bias.

2- similarly, the widespread idea of future outlooks being gloomier for Europe undersell a bit europe's history.
It has held (as a whole, with balances shifting through countries) a very prominent role on earth for... 4 thousand years?

1) Probably so. I think certain parts of the US market are extremely overvalued so I stay away - in no rational way does Amazon deserve the multiple that it has, same for FB and NFLX, seems like investors are being set up for failure - the top EU stocks in the indexes are actually really great companies going for a very fair price, like Nestle, Shell, Novo, etc.

2) I agree, not even just on the history, just that Europe has some really nice and undervalued companies that just happen to be some of the biggest in the world. The only difficulty with European companies is the tax treatment - can't hold many of them in a tax sheltered account as you can't claim the foreign credit. Too bad

Do ADRs not solve this problem?