Index Fund Return Assumptions

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mpowered
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Index Fund Return Assumptions

Post by mpowered » Thu Nov 06, 2014 1:49 pm

When you run retirement age projections, what kind of return do you assume if you are investing in various index funds?

I have used 7% assumed return on S&P500 and Total Market funds.

4% on Bonds

I feel these assumptions are quite conservative, but I wanted to get a handle on what everyone else here is using.

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TomatoTomahto
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Re: Index Fund Return Assumptions

Post by TomatoTomahto » Thu Nov 06, 2014 1:53 pm

Are those returns real or nominal?

I always use pessimistic returns, because I prefer my surprises to be positive ones. I am okay with 0% real returns, and delighted with 2% real.
Okay, I get it; I won't be political or controversial. The Earth is flat.

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mpowered
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Re: Index Fund Return Assumptions

Post by mpowered » Thu Nov 06, 2014 2:02 pm

Nominal

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mickeyd
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Re: Index Fund Return Assumptions

Post by mickeyd » Thu Nov 06, 2014 4:17 pm

The more conservative you are in your assumptions, the fewer surprises you will see in the future. Bogle says that using a 2.5% yield for 10 year bonds looks about right. You might consider that number rather than 4%.
Part-Owner of Texas | | “The CMH-the Cost Matters Hypothesis -is all that is needed to explain why indexing must and will work… Yes, it is that simple.” John C. Bogle

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SimpleGift
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Re: Index Fund Return Assumptions

Post by SimpleGift » Thu Nov 06, 2014 4:37 pm

mpowered wrote:When you run retirement age projections, what kind of return do you assume if you are investing in various index funds?
For bonds, the current yield is a good predictor of future returns. Today, Vanguard's Total Bond Index is yielding about 2.5% nominal — less projected inflation of 2% (the current Fed target) — so the estimated 10-year return for high-quality, intermediate-term bonds is about 0.5% real.

For stocks, the earnings yield (inverse of the price-earnings ratio) is considered a good estimate of future real returns. Today, the Shiller PE10 for the S&P 500 is at 26.6, so 1/26.6 = 3.8% real.

Sidney
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Re: Index Fund Return Assumptions

Post by Sidney » Thu Nov 06, 2014 4:44 pm

I normally do everything in real rates. ~4% or so for equity. Zero or so for fixed income. Been a couple of years or so since I did this exercise.
I always wanted to be a procrastinator.

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1210sda
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Re: Index Fund Return Assumptions

Post by 1210sda » Thu Nov 06, 2014 4:46 pm

Simplegift wrote:
mpowered wrote:When you run retirement age projections, what kind of return do you assume if you are investing in various index funds?
For bonds, the current yield is a good predictor of future returns. Today, Vanguard's Total Bond Index is yielding about 2.5% nominal — less projected inflation of 2% (the current Fed target) — so the estimated 10-year return for high-quality, intermediate-term bonds is about 0.5% real.

For stocks, the earnings yield (inverse of the price-earnings ratio) is considered a good estimate of future real returns. Today, the Shiller PE10 for the S&P 500 is at 26.6, so 1/26.6 = 3.8% real.
Would you happen to know the Shiller PE10 for Vanguard Total International Stock Fund??

1210

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SimpleGift
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Re: Index Fund Return Assumptions

Post by SimpleGift » Thu Nov 06, 2014 5:28 pm

1210sda wrote:Would you happen to know the Shiller PE10 for Vanguard Total International Stock Fund?
Don't know of a source for the Vanguard Total International Stock Fund directly, but you can get CAPE data for individual countries worldwide from these two websites:

Star Capital has CAPE data for around 50 countries, both developed and emerging, as of 9/30/14

Research Affiliates also has Shiller PE10 data for 12 developed markets and 13 emerging markets

Using the individual country numbers, one could calculate a weighted-average CAPE for most any international index.

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