Rick Ferri's estimated future returns
Rick Ferri's estimated future returns
Looking at Rick's numbers for estimated future returns for large cap stocks, for both developed international and the US, he estimates they'll increase with 5-5.5% real annually (numbers vary a little from year to year). This year's numbers are her: http://www.rickferri.com/blog/investmen ... -forecast/
He also states;
"The following table is provided for informational purposes only and not intended to be used for short-term market timing. This forecast always attempts to err on the conservative side. It is wise to expect and plan for lower returns and then be pleasantly surprised if the forecast is too low."
My question is, why are these numbers conservative? Aren't his estimates pretty close to the long term global return?Looking at the Credit Suisse Global Investment Returns Yearbook 2014, the global return from 1900 to 2014 has been 5.2% real and some of that has been "speculative return", i.e. from P/E expansion.
Are the historical returns from 1900 - now, that is 5.2% real, considered to be on the low end?
He also states;
"The following table is provided for informational purposes only and not intended to be used for short-term market timing. This forecast always attempts to err on the conservative side. It is wise to expect and plan for lower returns and then be pleasantly surprised if the forecast is too low."
My question is, why are these numbers conservative? Aren't his estimates pretty close to the long term global return?Looking at the Credit Suisse Global Investment Returns Yearbook 2014, the global return from 1900 to 2014 has been 5.2% real and some of that has been "speculative return", i.e. from P/E expansion.
Are the historical returns from 1900 - now, that is 5.2% real, considered to be on the low end?
Re: Rick Ferri's estimated future returns
This is just a guess without doing further research. 5.2% is the average for global returns over the last century, but that may not be the best way to gauge "typical" returns, especially for well-functioning capitalist democracy.
For example, Germany has had very low equity returns of 3.8% over the whole time period. But since the mid sixties, they have been much more like the rest of the world with 5.1% returns. It turns out that fighting a world war and losing is bad news for investors. Even countries who were on the right side of the war, like Belgium and France, had much lower returns during the first half of the 20th century than they did during the rest of the century. Similar calamities have hurt Chinese investors (ineffective communist financial system) and Japanese investors (demographics and terrible deflation).
It might be that a better picture of global returns is something like this. 5.5% to 6% is everything goes normally. But much less than that if there is a real economic catastrophe like war, hyperinflation, or the confiscation of government assets.
Rick is likely giving his best estimate for "normal" returns. Those returns we can expect to get if there are no disasters.
For example, Germany has had very low equity returns of 3.8% over the whole time period. But since the mid sixties, they have been much more like the rest of the world with 5.1% returns. It turns out that fighting a world war and losing is bad news for investors. Even countries who were on the right side of the war, like Belgium and France, had much lower returns during the first half of the 20th century than they did during the rest of the century. Similar calamities have hurt Chinese investors (ineffective communist financial system) and Japanese investors (demographics and terrible deflation).
It might be that a better picture of global returns is something like this. 5.5% to 6% is everything goes normally. But much less than that if there is a real economic catastrophe like war, hyperinflation, or the confiscation of government assets.
Rick is likely giving his best estimate for "normal" returns. Those returns we can expect to get if there are no disasters.
Re: Rick Ferri's estimated future returns
Wouldn't get too hung up on the boilerplate. 5% real is certainly not a conservative estimate today, with bonds yielding ~0% real.
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Re: Rick Ferri's estimated future returns
I think Rick is VERY optimistic on US common equity. This isn't the end all by any means, but to give a different perspective, check out this article...in particular, the chart on page 3. [As a reference, the current Shiller PE is 25.47]Rick Ferri wrote:This forecast always attempts to err on the conservative side.
http://www.aqr.com/Portals/1/ResearchPa ... Asness.pdf
Edit to add: Just realized Rick's forecast is 30 years out...and my brain was thinking 10. I'll leave the link in case anyone wants a perspective on 10 year returns.
Last edited by billjohnson on Sat Mar 15, 2014 12:13 am, edited 4 times in total.
Re: Rick Ferri's estimated future returns
I wonder if anyone is going to suggest to Rick that he should enter the Bogleheads contest, as happened on another thread in which estimated returns were discussed?
Most of my posts assume no behavioral errors.
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Re: Rick Ferri's estimated future returns
I think he is optimistic on everything. He has 2.9% real on 30 year TIPS, while investors are buying them with 1.3% real yield. Maybe just use that 1.6% difference to adjust all his numbers, putting large cap US at 3.4% real.
Re: Rick Ferri's estimated future returns
I assume he means that the investor is selling the TIPS as they age and buying new ones in the way a long term bond fund would. So it is possible that 30-year TIPS could return that much over the next 30 years. It still seems like an aggressive estimate to me but not by 1.6%.jeffyscott wrote:I think he is optimistic on everything. He has 2.9% real on 30 year TIPS, while investors are buying them with 1.3% real yield. Maybe just use that 1.6% difference to adjust all his numbers, putting large cap US at 3.4% real.
Re: Rick Ferri's estimated future returns
Its a 30 year projection. We could be in the 10 year period of under peformance (1.4% real) which will be followed by 20 years of over performance (4% real). It is easy to get blinded by our current situation of low yields and project that out for 30 years.
cjg wrote:I assume he means that the investor is selling the TIPS as they age and buying new ones in the way a long term bond fund would. So it is possible that 30-year TIPS could return that much over the next 30 years. It still seems like an aggressive estimate to me but not by 1.6%.jeffyscott wrote:I think he is optimistic on everything. He has 2.9% real on 30 year TIPS, while investors are buying them with 1.3% real yield. Maybe just use that 1.6% difference to adjust all his numbers, putting large cap US at 3.4% real.
Re: Rick Ferri's estimated future returns
I'd say the current rate is the best predictor of the next 30 days, or the next 30 years. Global demand for capital, just like demand for anything else, could rise, fall or stay about the same going forward.freddie wrote:Its a 30 year projection. We could be in the 10 year period of under peformance (1.4% real) which will be followed by 20 years of over performance (4% real). It is easy to get blinded by our current situation of low yields and project that out for 30 years.