Author Topic: When Planning or Forecasting, what ROI % do you use?  (Read 11240 times)

h2ogal

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When Planning or Forecasting, what ROI % do you use?
« on: September 29, 2014, 04:02:44 PM »
Just curious. I know what the "historical averages" are, but maybe because I am conservative, I tend to plan using 3.5 or 4.0 percent projected ROI, even though my portfolio is 80% S+P 500 index funds.  I may be leaning towards working longer, building a bigger nest egg that I really need to.  Wanted some feedback from real people, not the financial advisor sites.  Thanks!

SnackDog

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #1 on: September 29, 2014, 04:52:24 PM »
5% for stocks the next decade or so sounds about right.  Bonds might be 2% so a mixed portfolio could yield 4%.

MountainBeard

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #2 on: September 29, 2014, 05:05:43 PM »
I always use a Monte Carlo simulation based approach using distributions fit to historic returns.  I dont run it terribly often though as it doesnt really change any near term planning for me. 

It's a much better approach for me than assuming static returns as I can better characterize risk.

Grateful Stache

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #3 on: September 29, 2014, 05:50:42 PM »
I tend to plan using 3.5 or 4.0 percent projected ROI, even though my portfolio is 80% S+P 500 index funds.

I tend to do this too, but I use 4%. Better safe than sorry! I guess I should state that I am shooting for FI, not RE.

(funny how these acronyms fly off the tongue these days).

Cheers,

Grateful

Eric

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #4 on: September 29, 2014, 06:06:45 PM »
7% here

oldtoyota

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #5 on: September 29, 2014, 06:10:28 PM »
I use 5%.

wtjbatman

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #6 on: September 29, 2014, 06:32:25 PM »
I hope that future real returns on U.S. equities are closer to Rick Ferri's estimates (5.4% to 7.4%) than William Bernstein's (3.5% to 5%). But to be "safe" and keep from overestimating my investment growth, I use a 5% real growth rate when calculating my future stash.

Wile E. Coyote

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #7 on: September 29, 2014, 07:26:43 PM »
I have a cell in my spreadsheet that I plug and generally toggle between 0% and 7% so I can see where I will be in X years.  I generally try to base my decisions on 4%.

milesdividendmd

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #8 on: September 29, 2014, 08:01:02 PM »
4% real for stocks seems prudent given current valuations.

0.5-1% for treasuries.

Cheddar Stacker

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #9 on: September 29, 2014, 08:16:40 PM »
I have a cell in my spreadsheet that I plug and generally toggle between 0% and 7% so I can see where I will be in X years.  I generally try to base my decisions on 4%.

+1, but I use 30% returns just like 2013 had. Too aggressive?

h2ogal

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #10 on: September 29, 2014, 08:26:44 PM »
Thanks for all the replies.  Nice to see what others are thinking.

Terrestrial

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #11 on: September 30, 2014, 08:30:13 AM »
I seem to be in the minority, but unless we are talking inflation-adjusted return (I didn't see it mentioned anywhere in the thread), or most of you are already retired or very close to it, 4% seems ultra conservative. 

I use 8% personally (non-inflation adjusted) up until about 5 years before planned retirement then start ratcheting it down a bit, but I am 30 years old and have ~2 decades of investing to go (plan to retire around 50 when kids are done with college).  I am almost 100% in stocks.

Does everyone else adjust the returns in later years to reflect a shift to more conservative allocations, or do most of you just use a static (but lower) return over the entire forecasting period?


4% real for stocks seems prudent given current valuations.

If you are talking long term returns I dont see why this is relevant?

milesdividendmd

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #12 on: September 30, 2014, 08:35:54 AM »
I'm talking 10 year returns and "real" is synonymous with inflation adjusted.

Sequence of returns can have a dramatic impact on your eventual retirement account value, so the outlook for the next 10 years is far from irrelevant for a long term investor.

On a happier note the valuations of international stocks and particularly emerging markets paint a more optimistic picture.

Cheddar Stacker

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #13 on: September 30, 2014, 08:43:03 AM »
@ Terrestrial, I was just F'ing around with my 30% above, I actually use 8% as well but I do keep it in a spreadsheet linked to all the calculations so I can change the whole thing with a click. That's non-inflation adjusted, same as you.

So, based on what miles stated, it's really closer to 4-6% real returns depending on inflation. It's likely an aggressive position over the next 10 years, but I'm an aggressive investor so I think it's possible.


Terrestrial

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #14 on: September 30, 2014, 09:00:56 AM »
@ Terrestrial, I was just F'ing around with my 30% above, I actually use 8% as well but I do keep it in a spreadsheet linked to all the calculations so I can change the whole thing with a click. That's non-inflation adjusted, same as you.

So, based on what miles stated, it's really closer to 4-6% real returns depending on inflation. It's likely an aggressive position over the next 10 years, but I'm an aggressive investor so I think it's possible.

I knew you were joking, I wasn't referring to your post haha.

Though for fun when I have time today I will jack my spreadsheet up to see how many millions I would have at 30%/year forever!!

Terrestrial

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #15 on: September 30, 2014, 09:06:45 AM »
Sequence of returns can have a dramatic impact on your eventual retirement account value, so the outlook for the next 10 years is far from irrelevant for a long term investor.

Agree that sequence of returns has an impact, where I disagree is the 'given current valuations' part.  It implies that because the market is high right now the returns in the short term will be lower. 

Count me in the camp that says this is akin to market timing, and it's impossible to tell.  The market could be 40% higher in 5 years or 30% lower...nobody has any idea. 

RichMoose

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #16 on: September 30, 2014, 09:30:02 AM »
I use 5% real return for stocks over the long term. Let's hope that its somewhat in the ball park.

wtjbatman

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #17 on: September 30, 2014, 10:28:51 AM »
Terrestrial, you missed a lot of posts that were talking about inflation adjusted return. Aka real return :)

Terrestrial

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #18 on: September 30, 2014, 10:39:29 AM »
Terrestrial, you missed a lot of posts that were talking about inflation adjusted return. Aka real return :)

I don't really think I missed it...the OP's original post said nothing about real return, nor did anybody else's until yours halfway down.  Half of people's said 'real' and half of them didn't.  It was more a clarification than anything.  For me it's easier to talk about non-inflation adjusted return for ease of comparison...everybody has a different perspective on what inflation might be.

It does bring up something interesting that I have been mulling over asking for a while. Do most of you inflation adjust your return (adjust the asset side) or inflation adjust your projected expenses (the spending side).  I think both could have their merits, I personally adjust my expenses as some of them will be fixed and not subject to inflation, or inflate at a different projected rate than the baseline.




Cheddar Stacker

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #19 on: September 30, 2014, 10:47:19 AM »
I believe we have some control over inflation. Not setting prices per se, but buying less and therefore never subjecting ourselves to certain inflated prices. Some of it is outside our control obviously, but with all the hacking we do collectively as a group it seems we can dilute the effects of inflation a bit.

Also, many of my expenses will be decreasing sharply at some point during FIRE. Kids. Interest on debts. I like to look at returns, not real returns when analyzing projected net worth. It just makes things simpler for me.

dandarc

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #20 on: September 30, 2014, 10:48:35 AM »
I use 5% real, although I can vary it in the sheets, and sometimes do for kicks and giggles.

RichMoose

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #21 on: September 30, 2014, 10:52:10 AM »
It does bring up something interesting that I have been mulling over asking for a while. Do most of you inflation adjust your return (adjust the asset side) or inflation adjust your projected expenses (the spending side).  I think both could have their merits, I personally adjust my expenses as some of them will be fixed and not subject to inflation, or inflate at a different projected rate than the baseline.

Edit: NVM this didn't make sense. I inflation adjust my asset side because I don't see much benefit in adjusting for expenses by breaking them out into separate categories. Generally a person who lives a Mustachian life will not be impacted as much as the going rate of inflation because we don't buy expensive consumer goods when they are most highly valued (that 3-D, curved screen TV that your buddy has to get now even though it will be less than 1/2 the price in 3 years). I see the reported rate of inflation as a conservative estimate. Any extra spending money that I come into because of my wise spending habits can be funneled to extra travel or charity.

Most developed countries have central banks that are very focused on inflation rates, its really their guiding factor for most policy. In Canada they are dead set on an inflation rate of 2-3% over the long term so I will bank on that for now. My strategy may have to change if this form of central bank management ever changes.
« Last Edit: September 30, 2014, 11:08:33 AM by TuxedoEagle »

Terrestrial

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #22 on: September 30, 2014, 10:52:28 AM »
I believe we have some control over inflation. Not setting prices per se, but buying less and therefore never subjecting ourselves to certain inflated prices. Some of it is outside our control obviously, but with all the hacking we do collectively as a group it seems we can dilute the effects of inflation a bit.

Also, many of my expenses will be decreasing sharply at some point during FIRE. Kids. Interest on debts. I like to look at returns, not real returns when analyzing projected net worth. It just makes things simpler for me.

I agree, and this was kind of my point.  To take the extremist view:

A man living in a small cabin on a plot in rural Idaho who grows his own food, and has a well powered by a solar cells, will have a much more minimal impact from inflation than someone living in an NYC highrise who buys all their food and electricity/water at market rate.

That is why I do the same Cheddar, and use unadjusted market returns and adjust the expense side.

milesdividendmd

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #23 on: September 30, 2014, 01:34:48 PM »

Sequence of returns can have a dramatic impact on your eventual retirement account value, so the outlook for the next 10 years is far from irrelevant for a long term investor.

Agree that sequence of returns has an impact, where I disagree is the 'given current valuations' part.  It implies that because the market is high right now the returns in the short term will be lower. 

Count me in the camp that says this is akin to market timing, and it's impossible to tell.  The market could be 40% higher in 5 years or 30% lower...nobody has any idea.

Is your view that future returns are random and completely ininfluenced by current prices?

If so there's Plenty of data to suggest you are wrong, and not much to support your belief.

Even vanguard attributes > 40% of future returns to valuation levels/CAPE.

https://personal.vanguard.com/pdf/s338.pdf

To each his own, I guess.

But since the question is what do you project future stock earnings to be, by your definition any answer is market timing, so why even read the thread?




brooklynguy

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #24 on: September 30, 2014, 02:10:16 PM »

Sequence of returns can have a dramatic impact on your eventual retirement account value, so the outlook for the next 10 years is far from irrelevant for a long term investor.

Agree that sequence of returns has an impact, where I disagree is the 'given current valuations' part.  It implies that because the market is high right now the returns in the short term will be lower. 

Count me in the camp that says this is akin to market timing, and it's impossible to tell.  The market could be 40% higher in 5 years or 30% lower...nobody has any idea.

Is your view that future returns are random and completely ininfluenced by current prices?

If so there's Plenty of data to suggest you are wrong, and not much to support your belief.

Even vanguard attributes > 40% of future returns to valuation levels/CAPE.

https://personal.vanguard.com/pdf/s338.pdf

To each his own, I guess.

But since the question is what do you project future stock earnings to be, by your definition any answer is market timing, so why even read the thread?

Miles, the distinction is between whether current valuations can be used to predict near term price movements (as opposed to long term price movements).  In the near term, returns are close enough to random for current valuations to not be a useful predictor.  And sequence of return risks deal primarily with what will happen to your portfolio in the near term.

There was a lengthy debate on this issue starting near the end of page 2 of this thread:

 http://forum.mrmoneymustache.com/welcome-to-the-forum/50-60-year-retirement-timeframes-anyone-have-the-numbers/50/

milesdividendmd

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #25 on: September 30, 2014, 02:31:19 PM »
Brooklyn,

1.  The claim was that current valuations should negatively impact stock market returns over the next 10 years, which is not short term in my book.

2.  Your link seems completely unrelated to your claim. Did you paste the wrong link?

3.  If you are investing for the long haul the best time to have low valuations and high future returns is as early as possible. Low valuations generally lead to high yields, more PE expansion, and a bigger chunk of money to compound over the remainder of your investing life.


Terrestrial

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #26 on: September 30, 2014, 02:47:23 PM »

Sequence of returns can have a dramatic impact on your eventual retirement account value, so the outlook for the next 10 years is far from irrelevant for a long term investor.

Agree that sequence of returns has an impact, where I disagree is the 'given current valuations' part.  It implies that because the market is high right now the returns in the short term will be lower. 

Count me in the camp that says this is akin to market timing, and it's impossible to tell.  The market could be 40% higher in 5 years or 30% lower...nobody has any idea.

Is your view that future returns are random and completely ininfluenced by current prices?

If so there's Plenty of data to suggest you are wrong, and not much to support your belief.

Even vanguard attributes > 40% of future returns to valuation levels/CAPE.

https://personal.vanguard.com/pdf/s338.pdf

To each his own, I guess.

But since the question is what do you project future stock earnings to be, by your definition any answer is market timing, so why even read the thread?

Alright well first no need to get defensive.  I read the thread and expressed my thoughts because that's the point of a message board, to share ideas and read ones that might be different from your own and talk about them.  I'll be sure and not express any 'ideas' in the future.  Also you will note that the question was not 'what do you predict future stock earnings to be', it was what rate of return people use to calculate their projections.  Not the same.

To answer your questions:
No, my view is not that it's 'completely random'.  That's ridiculous and nor was it implied by my answer.  My view is that over a long time horizon the market will generally trend upward, mostly likely around the historical rate, probably in a range of somewhere around 8-12%, and that it doesn't matter at which point you start investing, at XX years in the future you will have made about that return, based on ALOT of years of historical data.  Can this change depending on when you enter the market, sure, but I have no idea when the market is at a 'top'.  How many people were crying out that the market was overblown in '12, '13, etc. 

Furthermore in your initial statement you didn't put a time horizon on your 'based on current valuations' answer.  If you had said returns over the next 3-5 years, perhaps I would say yes, that is more plausible.  The OP asked in general terms what rate of return everyone was using (with no time guideline), I replied with a view that current valuation doesn't impact what I use for my long term return expectations.

I am fully aware of the CAPE/PE 10.  I know it's on the high end right now though not ridiculously so.  I'm also smart enough to not use one number to blindly guide my thoughts, especially when that number is based on 10 years of trailing earnings, of which a substantial part include one of the most severe and prolonged recessions/economically stagnant periods in history.  Of course the trailing PE10 is going to be high, earnings were kicked in the teeth for a solid chunk of that time.  I'm not saying the metric has no value just that I think it's disproportional impacted by recent events moreso than at other times in history with more mild growth/recession cycles. 

Another tidbit of using the CAPE/PE 10.  At the very nadir of the stock market the CAPE was sitting right about 15.  Coincidentally right around it's historic average.  It's been over it's average (one could say this implies 'overvaluation') for the entire run in the market from '11 to now.

Regarding the article, thanks for sharing I am interested to read it.  As I have not read it yet I can't comment, though I do see it was written in October 2012.  Does it imply in it that stocks were at a value where they should not be purchased at the time of writing? (this is an honest question and not a dig...as I have not read it I don't know).



RetireAbroadAt35

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #27 on: September 30, 2014, 03:31:35 PM »
In my spreadsheets, I assume a real return of 5% (inflation adjusted, etc) but I also assume a safe draw-down of 3.5%.  I use cfiresim/monte carlo to fuzz the scenarios and predict likely success.

milesdividendmd

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #28 on: September 30, 2014, 03:40:59 PM »

Sequence of returns can have a dramatic impact on your eventual retirement account value, so the outlook for the next 10 years is far from irrelevant for a long term investor.

Agree that sequence of returns has an impact, where I disagree is the 'given current valuations' part.  It implies that because the market is high right now the returns in the short term will be lower. 

Count me in the camp that says this is akin to market timing, and it's impossible to tell.  The market could be 40% higher in 5 years or 30% lower...nobody has any idea.

Is your view that future returns are random and completely ininfluenced by current prices?

If so there's Plenty of data to suggest you are wrong, and not much to support your belief.

Even vanguard attributes > 40% of future returns to valuation levels/CAPE.

https://personal.vanguard.com/pdf/s338.pdf

To each his own, I guess.

But since the question is what do you project future stock earnings to be, by your definition any answer is market timing, so why even read the thread?

Alright well first no need to get defensive.  I read the thread and expressed my thoughts because that's the point of a message board, to share ideas and read ones that might be different from your own and talk about them.  I'll be sure and not express any 'ideas' in the future.  Also you will note that the question was not 'what do you predict future stock earnings to be', it was what rate of return people use to calculate their projections.  Not the same.

To answer your questions:
No, my view is not that it's 'completely random'.  That's ridiculous and nor was it implied by my answer.  My view is that over a long time horizon the market will generally trend upward, mostly likely around the historical rate, probably in a range of somewhere around 8-12%, and that it doesn't matter at which point you start investing, at XX years in the future you will have made about that return, based on ALOT of years of historical data.  Can this change depending on when you enter the market, sure, but I have no idea when the market is at a 'top'.  How many people were crying out that the market was overblown in '12, '13, etc. 

Furthermore in your initial statement you didn't put a time horizon on your 'based on current valuations' answer.  If you had said returns over the next 3-5 years, perhaps I would say yes, that is more plausible.  The OP asked in general terms what rate of return everyone was using (with no time guideline), I replied with a view that current valuation doesn't impact what I use for my long term return expectations.

I am fully aware of the CAPE/PE 10.  I know it's on the high end right now though not ridiculously so.  I'm also smart enough to not use one number to blindly guide my thoughts, especially when that number is based on 10 years of trailing earnings, of which a substantial part include one of the most severe and prolonged recessions/economically stagnant periods in history.  Of course the trailing PE10 is going to be high, earnings were kicked in the teeth for a solid chunk of that time.  I'm not saying the metric has no value just that I think it's disproportional impacted by recent events moreso than at other times in history with more mild growth/recession cycles. 

Another tidbit of using the CAPE/PE 10.  At the very nadir of the stock market the CAPE was sitting right about 15.  Coincidentally right around it's historic average.  It's been over it's average (one could say this implies 'overvaluation') for the entire run in the market from '11 to now.

Regarding the article, thanks for sharing I am interested to read it.  As I have not read it yet I can't comment, though I do see it was written in October 2012.  Does it imply in it that stocks were at a value where they should not be purchased at the time of writing? (this is an honest question and not a dig...as I have not read it I don't know).

Your advice on not being defensive is good advice.  Feel free to take your own advice. 

Noone is asking you not to share your "ideas," I am merely pointing out that your ideas are illogical.  That is what is known as "an exchange of ideas."

I certainly did not argue or imply that it was necessary to call a market top, so you are arguing against a point that was never made. 

The initial question was what number to use for ROI for forecasting, aka long term returns, so I don't know why you would assume anyone was talking about a return for "the next 3-5 years."  This claim is especially suspect because your initial statement in response to my comment was:

"If you are talking long term returns I don't see why this is relevant?"

So you are arguing both that current valuations are not relevant to future long term results, and that you thought I was talking about the next 3-5 years?"  Huh?

The point that was made, was that high valuations impact future future 10 year returns negatively, which is why I weighed in that it was prudent to use 4% real for ROI at this moment in time.  The usefulness of such a projection is that it encourages you to save more in times when it is wise to do so.  No one has advocated changing asset allocation based on the current market conditions, which could reasonably be called market timing.

Your point about the 10 year trailing returns is exactly wrong.  the financial crisis significantly decreased the price of stocks relative to their earnings, which makes our current CAPE ratio LOWER.

And your final point about the CAPE is utterly irrelevant.  Noone claims that CAPE is good at short term forecasting of stock prices.  Not even Schiller.  So what happened between '11 and now tells us nothing.  If the market continues to grow at this rate until 2021, at that point you would  have a valid point.

Don't hold your breath.
« Last Edit: September 30, 2014, 03:43:40 PM by milesdividendmd »

brooklynguy

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #29 on: September 30, 2014, 03:59:42 PM »
Brooklyn,

1.  The claim was that current valuations should negatively impact stock market returns over the next 10 years, which is not short term in my book.

2.  Your link seems completely unrelated to your claim. Did you paste the wrong link?

3.  If you are investing for the long haul the best time to have low valuations and high future returns is as early as possible. Low valuations generally lead to high yields, more PE expansion, and a bigger chunk of money to compound over the remainder of your investing life.

Yes, 10 years starts getting into long term territory.  But I think the really significant sequence of return risk is a big drop in the first 5 years or so, which I consider short term.  The link was correct, but I did a poor job of pointing you to the specific location (sorry).  In that thread, starting with post # 86, I had started a (somewhat heated) debate about whether it makes sense to "time your retirement" based on then-current valuations.

Terrestrial

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #30 on: September 30, 2014, 04:59:43 PM »
miles,  thank you for your thoughts.

Frankly i'm not going to bother responding to most of this, neither of us is going to get anything productive out of it. 

There is nothing 'illogical' about using a set long term ROI for projections and not factoring in or adjusting for current valuation, and admitting that in the short term I have no idea which way the market goes, which is all I really said.  I know many people including some on this board that do not make adjustments for current valuation.  I did not say (or did not mean to imply) that I think this is the 'best' way, just that it's the way I invest.  To each their own, I hope we both meet our investing goals.

[/quote]
Your point about the 10 year trailing returns is exactly wrong.  the financial crisis significantly decreased the price of stocks relative to their earnings, which makes our current CAPE ratio LOWER.
[/quote]

The only thing I will say is that you're wrong about the CAPE.  The CAPE is a CURRENT metric that takes the CURRENT price of stocks and divides it by the trailing 10 year earnings average (I think earnings are inflation adjusted but it's been a while since I looked at the exact definition). 

The fact that the recession depressed stock prices 5 years ago does not affect the current CAPE as you assert from the Price (numerator) side.  It is not 10 year trailing price AND a 10 year trailing earnings averages that are used to calc the CAPE, so the prices of stocks during the recession are irrelevant in calculating the current CAPE.

So I will hold that my assertion is correct, and it's not illogical to place less emphasis on the current CAPE because it contains what I feel to be an artificially smaller denominator (10 year avg trailing earnings) that was driven down by a larger and lengthier recession/stagnation than is 'likely' or 'typical'.  This is just how I view it, others are free to feel differently.

Again, I also don't dispute that the CAPE has been shown to be correlated to longer term returns, I was more implying that it's possible the current CAPE may not be in a 'historically normalized' position due to the above.

« Last Edit: September 30, 2014, 05:04:02 PM by Terrestrial »

milesdividendmd

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #31 on: September 30, 2014, 07:39:05 PM »

miles,  thank you for your thoughts.

Frankly i'm not going to bother responding to most of this, neither of us is going to get anything productive out of it. 

There is nothing 'illogical' about using a set long term ROI for projections and not factoring in or adjusting for current valuation, and admitting that in the short term I have no idea which way the market goes, which is all I really said.  I know many people including some on this board that do not make adjustments for current valuation.  I did not say (or did not mean to imply) that I think this is the 'best' way, just that it's the way I invest.  To each their own, I hope we both meet our investing goals.

Your point about the 10 year trailing returns is exactly wrong.  the financial crisis significantly decreased the price of stocks relative to their earnings, which makes our current CAPE ratio LOWER.
[/quote]

The only thing I will say is that you're wrong about the CAPE.  The CAPE is a CURRENT metric that takes the CURRENT price of stocks and divides it by the trailing 10 year earnings average (I think earnings are inflation adjusted but it's been a while since I looked at the exact definition). 

The fact that the recession depressed stock prices 5 years ago does not affect the current CAPE as you assert from the Price (numerator) side.  It is not 10 year trailing price AND a 10 year trailing earnings averages that are used to calc the CAPE, so the prices of stocks during the recession are irrelevant in calculating the current CAPE.

So I will hold that my assertion is correct, and it's not illogical to place less emphasis on the current CAPE because it contains what I feel to be an artificially smaller denominator (10 year avg trailing earnings) that was driven down by a larger and lengthier recession/stagnation than is 'likely' or 'typical'.  This is just how I view it, others are free to feel differently.

Again, I also don't dispute that the CAPE has been shown to be correlated to longer term returns, I was more implying that it's possible the current CAPE may not be in a 'historically normalized' position due to the above.
[/quote]

You are right about the CAPE. Thank you for pointing this out. I learned something.

It is illogical to claim that valuations are irrelevant to long term investors which was your origin claim.

No one claimed that using long term projections was illogical.

Mazzinator

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #32 on: September 30, 2014, 08:36:59 PM »
Maybe i don't really understand...

but i use 7% for 15 years because of the "rolling stock market returns" and i don't subtract anything for inflation. I want to "know" how much money i will have in 15 years. I will adjust for inflation closer to the 15 yr mark.

I also, for quick numbers, just double every 10 years. Which i think is 7%...

I'm about 99% invested in S&P/total stock.

For time frames less than 15 years, i still use 7%, but i realize i could have less money than invested, so sometimes i use a range...even 10 years shows a -3% return.

Maybe i just don't understand these charts???

http://moneyover55.about.com/od/stockmarketreturns/ig/Stock-Market-Performance/sp500_index_rolling_returns.htm

RichMoose

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #33 on: September 30, 2014, 09:25:05 PM »
Maybe i don't really understand...

but i use 7% for 15 years because of the "rolling stock market returns" and i don't subtract anything for inflation. I want to "know" how much money i will have in 15 years. I will adjust for inflation closer to the 15 yr mark.

I also, for quick numbers, just double every 10 years. Which i think is 7%...
6
I'm about 99% invested in S&P/total stock.

For time frames less than 15 years, i still use 7%, but i realize i could have less money than invested, so sometimes i use a range...even 10 years shows a -3% return.

Maybe i just don't understand these charts???

http://moneyover55.about.com/od/stockmarketreturns/ig/Stock-Market-Performance/sp500_index_rolling_returns.htm

I think that's about right, just remember that returns after accounting for inflation are quite a bit different. So you should adjust for that somewhere, either by lowering your expected rate of return to reflect real return, or by increasing your income expectations in retirement.

dandarc

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #34 on: October 01, 2014, 07:03:31 AM »

http://moneyover55.about.com/od/stockmarketreturns/ig/Stock-Market-Performance/sp500_index_rolling_returns.htm
Is it just me or does the 0% line on that first chart look like it is sloping upward?  Optical illusions are awesome.

arebelspy

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #35 on: October 01, 2014, 11:39:27 AM »

http://moneyover55.about.com/od/stockmarketreturns/ig/Stock-Market-Performance/sp500_index_rolling_returns.htm
Is it just me or does the 0% line on that first chart look like it is sloping upward?  Optical illusions are awesome.

Hah, yeah, if I unfocus my eyes and look at the whole 0-20% space, I totally see that as well.

I use -3% real.
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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #36 on: October 01, 2014, 11:54:05 AM »

http://moneyover55.about.com/od/stockmarketreturns/ig/Stock-Market-Performance/sp500_index_rolling_returns.htm
Is it just me or does the 0% line on that first chart look like it is sloping upward?  Optical illusions are awesome.

Hah, yeah, if I unfocus my eyes and look at the whole 0-20% space, I totally see that as well.

I use -3% real.

So you assume a conservative 0% return with an inflation adjustment of 3%? Am I reading that correctly? I guess that makes any return feel like gravy.

What do you do for real estate holdings then? Anything at all, or does it not matter since you're concerned with cash flow for your travels rather than net worth?

arebelspy

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #37 on: October 01, 2014, 11:57:20 AM »
Am I reading that correctly?

Yup.

What do you do for real estate holdings then?

I hold them.

What do projections matter?  How will they help me, or change what I'm doing?

If and when reality changes, I reevaluate and take appropriate action.

;)
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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #38 on: October 01, 2014, 12:03:16 PM »
That's roughly what I expected you to say, and it makes sense to me.

What do projections matter?  How will they help me, or change what I'm doing?

ALL long-term projections are incorrect, just like budgets. It's the one thing you know for certain about them. They are impossible to predict. Just a yardstick really, a tool, a hope/dream.

arebelspy

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #39 on: October 01, 2014, 12:48:24 PM »
That's roughly what I expected you to say, and it makes sense to me.

What do projections matter?  How will they help me, or change what I'm doing?

ALL long-term projections are incorrect, just like budgets. It's the one thing you know for certain about them. They are impossible to predict. Just a yardstick really, a tool, a hope/dream.

Yup.  It's fun to dream, and plan (especially at first), but just know that it'll change.  (This is particularly relevant to those posting in this thread.)

Now I tend not to waste the time anymore.
« Last Edit: October 01, 2014, 01:00:40 PM by arebelspy »
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Cheddar Stacker

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #40 on: October 01, 2014, 01:07:06 PM »
That's roughly what I expected you to say, and it makes sense to me.

What do projections matter?  How will they help me, or change what I'm doing?

ALL long-term projections are incorrect, just like budgets. It's the one thing you know for certain about them. They are impossible to predict. Just a yardstick really, a tool, a hope/dream.

Yup.  It's fun to dream, and plan (especially at first), but just know that it'll change.

Now I tend not to waste the time anymore.

Yeah, I'm still in the honeymoon phase of all this FIRE stuff so my projections still have that mystical affect on me.

However, after I calculated my savings rate once, I decided that was enough. I might look at it annually, but that's about it. I just save as much as I can and don't measure it against my earnings. It's sort of irrelevant when you think about it. If someone spends $30K, what difference does it make whether their earnings are $35K or $350K? If $30K meets their desires, why does their income matter?

Maybe I'd think differently about it if I made less, or spent less, or had a more impressive savings rate. Dunno. It just doesn't have the same affect on me as projections and graphs do.

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Re: When Planning or Forecasting, what ROI % do you use?
« Reply #41 on: October 01, 2014, 08:36:10 PM »
That's roughly what I expected you to say, and it makes sense to me.

What do projections matter?  How will they help me, or change what I'm doing?

ALL long-term projections are incorrect, just like budgets. It's the one thing you know for certain about them. They are impossible to predict. Just a yardstick really, a tool, a hope/dream.

Yup.  It's fun to dream, and plan (especially at first), but just know that it'll change.  (This is particularly relevant to those posting in this thread.)

Now I tend not to waste the time anymore.

Such, interesting comments!  I like this....totally agree that for me the projections are a motivational tool....IF I give up something today I MAYBE can have this much tomorrow...not so much a solid plan or even predictor as they are a "what if" I do save this much....how "worth it" is the pain of saving.

[Mod Edit: Fixed quote tags.]
« Last Edit: October 01, 2014, 08:50:34 PM by arebelspy »