Long term return forecast [Research Affil. Expected returns]
Long term return forecast [Research Affil. Expected returns]
Dear all,
For whatever it is worth, Research Affiliates just issued a comprehensive presentation of their view of the future:
http://www.researchaffiliates.com/Asset ... rview.aspx
Even if not accurate, as most other forecasters, they point at very low returns in all asset classes (Fixed income about 1-1.5% real, and equities about 3% real.)
Bottom line: Going forward those in the accumulating phase will need to save much more.
For whatever it is worth, Research Affiliates just issued a comprehensive presentation of their view of the future:
http://www.researchaffiliates.com/Asset ... rview.aspx
Even if not accurate, as most other forecasters, they point at very low returns in all asset classes (Fixed income about 1-1.5% real, and equities about 3% real.)
Bottom line: Going forward those in the accumulating phase will need to save much more.
Erwin
- zaboomafoozarg
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Re: Long term return forecast
This is why I'm trying to save 50% of my income. It's not fun, but it is what it is.
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Re: Long term return forecast
lol...no one can predict future returns...PERIOD!
I use these reports as TP.
I use these reports as TP.
Re: Long term return forecast
supersharpie wrote:lol...no one can predict future returns...PERIOD!
I use these reports as TP.
So you run blind. You are right that no one can predict the future because unexpected events change the picture too often, but that is true in absolutely every field. Engineers are paid to bracket events between worst and best scenarios, and when I plan my future I think in those terms. And I hope you do the same.
Erwin
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Re: Long term return forecast
I've read several places that expected future returns are low. Most recently, I read that in Dr. Bernstein's, "If You Can" pdf. (http://www.etf.com/docs/IfYouCan.pdf He uses an example of a portfolio made up of 2/3 stocks and 1/3 fixed income and estimates real returns of 3%. Sure, we can't know for sure what the future holds but that is also why I am trying to save as much as I can.
- SimpleGift
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Re: Long term return forecast
Thanks for the link. Interesting to see that Research Affiliates' forecast of real returns for U.S. Large Cap stocks is less than 1% real over the next 10 years (1.8% yield + 1.3% growth - 2.4% valuation = 0.7% total return). This is where their estimate fits into the current range of other forecasts of real returns for U.S. Large Cap stocks:
Why Are Expected Investment Returns So Low?
- Jeremy Grantham…….…7 years…........-1.7%
Research Affiliates........10 years...….…..0.7%
William Bernstein………10 years……..….2.0%
PIMCO…………..…..……10 years……..…3.5%
Rick Ferri…………….…..30 years…..……5.0%
Schwab Advisory….......20 years….....….6.0%
Why Are Expected Investment Returns So Low?
Re: Long term return forecast
I have 2 related questions:
Does the prediction of low returns going forward infer anything about inflation expectations?
What, if anything, would a low inflation future mean for sustainable withdrawl rates?
Does the prediction of low returns going forward infer anything about inflation expectations?
What, if anything, would a low inflation future mean for sustainable withdrawl rates?
No matter how long the hill, if you keep pedaling you'll eventually get up to the top.
Re: Long term return forecast
Of course some people can predict future returns. If nothing else, there are enough predictions that some turn out to be accurate by sheer luck.supersharpie wrote:lol...no one can predict future returns...PERIOD!
I use these reports as TP.
The e/p ratio (the inverse of p/e) has explained about 40% of the variation in 10 year real returns. That's a lot higher than zero.
Re: Long term return forecast
Very low inflation seems to be associated with a very slow economy, which tends to mean low real and nominal returns. For example, look at the US, Europe and Japan. Low real returns are not helpful for withdrawal rates.Raybo wrote:I have 2 related questions:
Does the prediction of low returns going forward infer anything about inflation expectations?
What, if anything, would a low inflation future mean for sustainable withdrawl rates?
Re: Long term return forecast
I fully agree. One of the key factors influencing Inflation is jobs demand. Unfortunately presently and for the foreseeable future there is/will be high unemployment. Just look at the situation in Europe, and 5.9% in the US is not great either.richard wrote:Very low inflation seems to be associated with a very slow economy, which tends to mean low real and nominal returns. For example, look at the US, Europe and Japan. Low real returns are not helpful for withdrawal rates.Raybo wrote:I have 2 related questions:
Does the prediction of low returns going forward infer anything about inflation expectations?
What, if anything, would a low inflation future mean for sustainable withdrawl rates?
Erwin
Re: Long term return forecast
If, in fact, low returns augers low inflation, then buying non-inflation indexed SPIAs would be cheaper than having to get an inflation rider.
This might help with SWRs?
This might help with SWRs?
No matter how long the hill, if you keep pedaling you'll eventually get up to the top.
Re: Long term return forecast
What exactly is the FX return? I assume it's currency. For Russia, they estimate a 3.8% real FX return. Why would I expect a 3.8% real return for holding a foreign currency? I don't get it.
New Research Affiliates website: predicted asset returns
[Thread merged into here, see below. --admin LadyGeek]
The boys at Research Affiliates have put up a new website that contains their forecasts for asset returns going forward. Have a look at U.S. small cap - 0% return with 20% volatility. Toxic.
http://www.researchaffiliates.com/Asset ... ities.aspx
The boys at Research Affiliates have put up a new website that contains their forecasts for asset returns going forward. Have a look at U.S. small cap - 0% return with 20% volatility. Toxic.
http://www.researchaffiliates.com/Asset ... ities.aspx
We don't know where we are, or where we're going -- but we're making good time.
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Re: New Research Affiliates website: predicted asset returns
Move to older thread.
Last edited by nisiprius on Sat Oct 18, 2014 10:07 am, edited 2 times in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Re: New Research Affiliates website: predicted asset returns
Stay hydrated; don't sweat the small stuff
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Re: Long term return forecast
Re the small-cap forecast, 0% return, 20% volatility I think it is worth remembering that Robert Arnott, founder of Research Affiliates, wrote in 1983 that
Here are my predictions.
1) Over the next ten years, small-cap stocks are not going to be as great as Robert Arnott said they were in 1983 and are not going to be as lousy as Research Affiliates say they will be now.
2) Ten years from now, people will still be arguing about whether there is a small-company effect.
3) Ten years from now, financial firms will still be making predictions, investors will still be paying attention to them, and investors will still not pay any attention to whether past predictions actually came true.
I guess his own firm has finally refuted it?A growing body of evidence exists that small-capitalization stocks significantly outperform large-capitalization stocks. This effect is so strong and so consistent that even advocates of the Efficient Market Hypothesis have found no refutation of this effect.
Here are my predictions.
1) Over the next ten years, small-cap stocks are not going to be as great as Robert Arnott said they were in 1983 and are not going to be as lousy as Research Affiliates say they will be now.
2) Ten years from now, people will still be arguing about whether there is a small-company effect.
3) Ten years from now, financial firms will still be making predictions, investors will still be paying attention to them, and investors will still not pay any attention to whether past predictions actually came true.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: Long term return forecast
Since fear is the biggest market driver, all bets are off for me.
“Those who move forward with a happy spirit will find that things always work out.” -Retired 13 years 😀
- SimpleGift
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Re: Long term return forecast
Your long-term predictions may prove true, nisiprius, but I suspect you're reading too much into Arnott's forecast of expected returns for small cap stocks:nisiprius wrote:I guess his own firm has finally refuted it?
U.S. Small Cap: 1.3% yield + 2.0% growth - 3.3% valuation = 0.0% total return
U.S. Large Cap: 1.8% yield + 1.3% growth - 2.4% valuation = 0.7% total return
In other words, the growth rate and fundamental return of small cap stocks is still expected to be greater than large cap stocks, but their valuations are currently much higher, so the speculative return of small caps is expected to be lower going forward. Higher valuations = lower expected return is the whole story here, I believe.
Last edited by SimpleGift on Sat Oct 18, 2014 10:43 am, edited 1 time in total.
Re: Long term return forecast [Research Affil. Expected retu
FYI - I merged Browser's thread into here. I also retitled the thread.
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Re: Long term return forecast
If you mean that I have an IPS that I stick to and don't try to time the markets based on projections then "yes".mpt follower wrote:So you run blind.
Re: Long term return forecast [Research Affil. Expected retu
I'd like to point out that this is more than an article. It's a complete set of data with image and spreadsheet usable data exports available.
Click on each menu: Equities, Fixed Income, Currencies, Commodities, and Risk; then scroll down and look for "Generate Image" and "Export Data."
The Risk section is the asset correlation matrix which is used to help with portfolio diversification.
Click on each menu: Equities, Fixed Income, Currencies, Commodities, and Risk; then scroll down and look for "Generate Image" and "Export Data."
The Risk section is the asset correlation matrix which is used to help with portfolio diversification.
Re: Long term return forecast
In order to develop the IPS you made some assumptions about the future, otherwise how do you know that you will meet your goal(s). Further things change and what once was right, may not be right now. Plans must be adjusted as new information becomes available.placeholder wrote:If you mean that I have an IPS that I stick to and don't try to time the markets based on projections then "yes".mpt follower wrote:So you run blind.
Lastly, this is not a cult, it is your responsibility, not Bogleheads' to assure that your goals are met. We can help you with concepts, but how to put them to practice is your responsibility.
Erwin
Re: New Research Affiliates website: predicted asset returns
And .7/15% isn't equally toxic? If you believe the numbers, you should be sinking all your money in high yield debt to get 3x the return and with less risk.Browser wrote:[Thread merged into here, see below. --admin LadyGeek]
The boys at Research Affiliates have put up a new website that contains their forecasts for asset returns going forward. Have a look at U.S. small cap - 0% return with 20% volatility. Toxic.
http://www.researchaffiliates.com/Asset ... ities.aspx
Anyone care to post what the predications from RAFI were in 2003 and 1993?
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Re: Long term return forecast [Research Affil. Expected retu
few quick thoughts
These are REAL estimated returns and have nothing to do with inflation. And inflation should not impact real returns over the long term, either way.
To estimate inflation most take the nominal yield on say 10-year or 30-year Treasury and then subtract yield on same maturity TIPS, which at least is good estimate of expected inflation (though there is noise as there is a risk premium for liquidity and unexpected inflation). But close enough.
Re valuations impact, the speculative part, that is just anyone's guess and would attach little to no value to that.
And inflation should not impact withdrawal rates either (except if own longer term nominal bonds). Remember if inflation higher than nominal corporate earnings will also be higher (and vice versa). This is just another version of the money illusion problem with the Fed model.
Also there is really no logic to idea that low inflation means low real growth or vice versa, that Philips curve nonsense, at least IMO. Inflation is anywhere, everywhere and always a monetary phenomenon. So you can have high inflation and low growth or high growth and low inflation and high or low growth. And can have high inflation and high unemployment and vice versa.
Real growth is function of growth in population and productivity (not impacted by inflation). And inflation not impacted by economy but monetary policy.
Hope that is helpful
Larry
These are REAL estimated returns and have nothing to do with inflation. And inflation should not impact real returns over the long term, either way.
To estimate inflation most take the nominal yield on say 10-year or 30-year Treasury and then subtract yield on same maturity TIPS, which at least is good estimate of expected inflation (though there is noise as there is a risk premium for liquidity and unexpected inflation). But close enough.
Re valuations impact, the speculative part, that is just anyone's guess and would attach little to no value to that.
And inflation should not impact withdrawal rates either (except if own longer term nominal bonds). Remember if inflation higher than nominal corporate earnings will also be higher (and vice versa). This is just another version of the money illusion problem with the Fed model.
Also there is really no logic to idea that low inflation means low real growth or vice versa, that Philips curve nonsense, at least IMO. Inflation is anywhere, everywhere and always a monetary phenomenon. So you can have high inflation and low growth or high growth and low inflation and high or low growth. And can have high inflation and high unemployment and vice versa.
Real growth is function of growth in population and productivity (not impacted by inflation). And inflation not impacted by economy but monetary policy.
Hope that is helpful
Larry
Re: Long term return forecast [Research Affil. Expected retu
This is useful information - yes, 'nobody can predict the future', but the Research Affiliates team is sophisticated and their view that current high valuations across asset classes drives lower expected returns is not inconsistent with many others. I am 54 years old with a nice portfolio and considering early retirement ... my model uses 1.36% real returns going forward for my portfolio, and for me that should generate a comfortable retirement plus leave a meaningful residual for bequests...if I add 200 bps and use 3.36% the impact is massive, and would allow me to have retired yesterday...I tend to believe the 'lower returns going forward' and really value the work done by RAI and others in this area...doesn't mean they're right, but without them (and Ferri and others who have put forth estimates) I may have blindly assumed unrealistic returns and put my retirement at risk by retiring too early or spending to heavily early!
Re: Long term return forecast [Research Affil. Expected retu
For those that doubt that there is a way to predict long term equity performance, the following article (among many) does a pretty good job. It uses a variation of Shiller's PE10, the P-BM10 (book to market). But both should do a decent job of helping a long term investor decide where to place the $. See:
https://gallery.mailchimp.com/6750faf5c ... 483c3b.pdf
https://gallery.mailchimp.com/6750faf5c ... 483c3b.pdf
Erwin
Re: Long term return forecast [Research Affil. Expected retu
Larry,larryswedroe wrote:Remember if inflation higher than nominal corporate earnings will also be higher (and vice versa).
In 1977, Warren Buffett made an elaborate accounting argument that corporate profits are directly harmed by inflation.
http://fortune.com/2011/06/12/buffett-h ... sics-1977/
Do you have any counter or comment on this?
Re: Long term return forecast [Research Affil. Expected retu
You do not need Buffett to explain the concept.lazyday wrote:Larry,larryswedroe wrote:Remember if inflation higher than nominal corporate earnings will also be higher (and vice versa).
In 1977, Warren Buffett made an elaborate accounting argument that corporate profits are directly harmed by inflation.
http://fortune.com/2011/06/12/buffett-h ... sics-1977/
Do you have any counter or comment on this?
Corporate profits and jobs are impacted by inflation. When inflation is too low, real interest rate (nominal interest rate minus the inflation rate) by definition are too high, discouraging investments. That is exactly what is happening in Europe, where inflation is currently too low, causing real interest rates to be way to high in the already weak economy. And the situation reaches extreme conditions when inflation becomes negative, i.e., deflation
Erwin
Re: Long term return forecast
Still don't get it. Someone help me out?Hallman wrote:What exactly is the FX return? I assume it's currency. For Russia, they estimate a 3.8% real FX return. Why would I expect a 3.8% real return for holding a foreign currency? I don't get it.
Re: Long term return forecast [Research Affil. Expected retu
So why are expected returns for bonds so high? Short and intermediate term bonds are the most widely used bond instruments for investors and they are hovering around a zero real return if sticking with a mix of treasuries, agency, and high quality corporate.
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Re: Long term return forecast [Research Affil. Expected retu
This is the breakdown of Research Affiliates' forecast for Barclay's Aggregate Bond Index, which they call U.S. Core and Vanguard calls Total Bond Market Index Fund (all real returns):oneleaf wrote:So why are expected returns for bonds so high? Short and intermediate term bonds are the most widely used bond instruments for investors and they are hovering around a zero real return if sticking with a mix of treasuries, agency, and high quality corporate.
- Yield………..….....….0.9%
Credit Loss…..…..….(0.2%)
Roll Return……....….0.8%
Valuation………….…(0.5%)
TOTAL RETURN……..1.0% real
Re: Long term return forecast [Research Affil. Expected retu
Simplegift,
Thanks for the breakdown. Yep, it is unfortunate that even these measely returns assume a risk on the bond side that is rarely recommended.
Thanks for the breakdown. Yep, it is unfortunate that even these measely returns assume a risk on the bond side that is rarely recommended.
Re: Long term return forecast
This coupled with something well known is why I am skeptical of doing anything like optimizing portfolio construction based on predictions.Simplegift wrote:Thanks for the link. Interesting to see that Research Affiliates' forecast of real returns for U.S. Large Cap stocks is less than 1% real over the next 10 years (1.8% yield + 1.3% growth - 2.4% valuation = 0.7% total return). This is where their estimate fits into the current range of other forecasts of real returns for U.S. Large Cap stocks:
For some discussion on why these forecasts are so much lower than the historical averages, see this recent thread:
- Jeremy Grantham…….…7 years…........-1.7%
Research Affiliates........10 years...….…..0.7%
William Bernstein………10 years……..….2.0%
PIMCO…………..…..……10 years……..…3.5%
Rick Ferri…………….…..30 years…..……5.0%
Schwab Advisory….......20 years….....….6.0%
Why Are Expected Investment Returns So Low?
It is well known for example that mean-variance optimization is very sensitive to input assumptions, the assumed mean and variance in particular. That is small changes in inputs tends to lead to large changes in recommended portfolios. And if this list of well known sources of forecasts is to be believed the expected return varies from -1.7% to 6.0% (admittedly over somewhat different time scales). The recommended portfolios based on these recommendations will be all over the map.
I get it that returns are likely to be lower than average going forward, at least for a while. I'm just not sure how to change my portfolio in light of that.
I have been increasing saving rate. And for now I have a lot of leeway in when I retire (that could of course change). So I don't think I have my head in the sand. I'm just trying to control what I reasonably know how to control. Fortunately I don't think under the best of conditions I know how to optimally set my stock bond allocation to better than +/- 10% and likely more like +/- 20% (I am at 60/40, but maybe 70/30 or 50/50 is better, or even 80/20 or 40/60) and whatever today's conditions call for has a pretty fair chance of being in my range of uncertainty.
I'll note that with my wife and I having two pensions we are somewhat anomalous: we can take a lot of risk if we want, but we have little need for high returns, so we may have a greater than average range for what is a reasonable stock bond split.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
Re: Long term return forecast
I'm not an expert, but I think this is what they mean: Introduction to the Forex MarketHallman wrote:Still don't get it. Someone help me out?Hallman wrote:What exactly is the FX return? I assume it's currency. For Russia, they estimate a 3.8% real FX return. Why would I expect a 3.8% real return for holding a foreign currency? I don't get it.
"Forex" stands for foreign exchange; it's also known as FX.