Vanguard estimating a pre-tax 8.1% pa return-overoptimistic???

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
student5
Posts: 51
Joined: Wed Jan 06, 2016 8:07 pm

Vanguard estimating a pre-tax 8.1% pa return-overoptimistic???

Post by student5 »

Hi everyone,

I need some help with this estimated average 8.1 % annual return estimate given by Vanguard. This is pre-tax, and includes all returns-capital gains, interest and dividends.

The suggested 50/50 stock/bond portfolio is:

Total Stock Market index - 29%
Total International Stock Market -21%
Limited Term Tax Exempt Bond - 15%
Intermediate Term Tax Exempt Bond - 20%
Long Term Tax Exempt Bond - 15%

I'm mainly asking for advice on the estimated average 8.1% gross return rather than the portfolio itself. Is this estimate very high and not realistic? I would prefer something realistic myself if this is overoptimistic. Any more accurate gross returns for this portfolio? Thanks!
Lafder
Posts: 4070
Joined: Sat Aug 03, 2013 7:56 pm
Location: East of the Rio Grande

Re: Vanguard estimating a pre-tax 8.1% pa return-overoptimistic???

Post by Lafder »

Why are you estimating the return?

Yes I think 8.1 is overly optimistic. Some years will be a loss.

You will only know actual returns in retrospect. Others will likely chime in with more historical returns. But I know 8% is higher than any estimates I have used which are closer to 4-7%. But the bottom line is that there is no guaranteed returns, they just are what they are.

lafder
hicabob
Posts: 3225
Joined: Fri May 27, 2011 5:35 pm
Location: cruz

Re: Vanguard estimating a pre-tax 8.1% pa return-overoptimistic???

Post by hicabob »

Here is what Mr Bogle predicts, from a few months ago...
"
Bogle, however, argues against pulling out of the stock market entirely, saying other asset classes could leave investors in even worse financial shape.

"You really don't have a cash option because the return on a money-market fund is 0.1 percent or something like that, just barely above zero. The return on money that's in that mattress of yours is zero. So, invest we must," Bogle said.

“We've got a 4% return for stocks — maybe a little bearish, but we just don't know — and a 3% return for bonds. That's a 3.5% return on a balanced 50-50 portfolio,” Bogle said.

“You're talking about a really tough decade for equity investors. I don't think there's any way around that conclusion. My numbers may be wrong; but I think when investors are doing their financial planning and their IRAs or their 401(k)s, predicting a 7.5% or 8.5% return is just silly,” he said.

“Let me add: How can an individual investor, under these circumstances, be so dumb as to think that 7.5% might be possible? You probably figured out what I'm going to say next. That's what the smartest pension-fund managers — corporate, state, and local — are using for their assumed returns in their pension plans, 7.5%. It's just not going to happen," Bogle said.
"
http://www.newsmax.com/Finance/Investin ... id/699084/
RadAudit
Posts: 3970
Joined: Mon May 26, 2008 10:20 am
Location: Second star on the right and straight on 'til morning

Re: Vanguard estimating a pre-tax 8.1% pa return-overoptimistic???

Post by RadAudit »

student5 wrote: Is this estimate very high and not realistic?
Over what time frame?
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The cavalry isn't coming, kids. You are on your own.
User avatar
Toons
Posts: 13893
Joined: Fri Nov 21, 2008 10:20 am
Location: Hills of Tennessee

Re: Vanguard estimating a pre-tax 8.1% pa return-overoptimistic???

Post by Toons »

That might be somewhat optimistic,,but one never knows.
I think a more practical psychology is to "lower your expectations" for your returns moving forward,
and be thankful if there is any upside to that. :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
KyleAAA
Posts: 8698
Joined: Wed Jul 01, 2009 5:35 pm
Contact:

Re: Vanguard estimating a pre-tax 8.1% pa return-overoptimistic???

Post by KyleAAA »

For what time period? If that estimate is for the next 10 years, I think it's probably optimistic. If it's for the next 30 years, I think it's reasonable. But nobody knows. I assume 3% real for my own calculations and save accordingly. I hope I end up being far too conservative!
User avatar
Taylor Larimore
Advisory Board
Posts: 30176
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: Vanguard estimating a pre-tax 8.1% pa return-overoptimistic???

Post by Taylor Larimore »

student5 wrote: I'm mainly asking for advice on the estimated average 8.1% gross return rather than the portfolio itself. Is this estimate very high and not realistic? I would prefer something realistic myself if this is overoptimistic. Any more accurate gross returns for this portfolio? Thanks!
Student5:

Welcome to the Bogleheads Forum!

I would not waste much time trying to estimate future stock returns. Whatever guess you use is almost certain to be wrong. As Lafter wrote: "They just are what they are." In my opinion, Vanguard's guess is as good as any.

Best wishes.
Taylor
Last edited by Taylor Larimore on Sun Feb 21, 2016 3:45 pm, edited 1 time in total.
"Simplicity is the master key to financial success." -- Jack Bogle
User avatar
goingup
Posts: 3967
Joined: Tue Jan 26, 2010 1:02 pm

Re: Vanguard estimating a pre-tax 8.1% pa return-overoptimistic???

Post by goingup »

Here's a page from the forum Wiki with various forecasted returns: https://www.bogleheads.org/wiki/Histori ... ed_returns

You probably got your 8.1% from the Vanguard portfolio tool. The big disclaimer is that past returns can't predict future ones. Have you heard Jack Bogle's famous refrain, "Nobody knows nothing."? It's true!
Grogs
Posts: 667
Joined: Tue Mar 24, 2015 4:55 pm

Re: Vanguard estimating a pre-tax 8.1% pa return-overoptimistic???

Post by Grogs »

I think it's high. It's hard to pin down a reasonable figure for bond returns, but if you assumed 4% then you would need to earn 12.2% in stocks for a 50/50 portfolio to return 8.1%. The historic U. S. stock market return is around 10% nominal, but most people are predicting returns will be a good bit below that level for the upcoming decade.

For theoretical planning I think it's easier to work in terms of real returns. Then you can do quick easy calculations like, "If my salary keeps up with inflation and I invests $10k/yr at a 4% rate, how much will I have in 25 years?" Nobody knows what rates will look like, but you can play with different levels of real return and quickly see what % you would need to attain your desired asset level by retirement.
User avatar
Kevin M
Posts: 11721
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Vanguard estimating a pre-tax 8.1% pa return-overoptimistic???

Post by Kevin M »

As others have mentioned, the 8% number looks like something based on historical returns, and that's going to be high, if for no other reason than bonds cannot return over the next 10 years what they have historically, since yields are historically low.

Each year Vanguard publishes an economic and investment outlook. Here is what they say in a summary article about their 2016 outlook:
Bonds

The return outlook for fixed income remains positive, yet muted. In line with our past outlooks, our long-term estimate of the equilibrium federal funds rate remains anchored near 2.5% and below that of the Fed's "dot plots."1 As a result, our "fair value" estimate for the benchmark 10-year U.S. Treasury yield still resides at about 2.5%, even with a Fed liftoff. As we stated in our 2015 outlook, even in a rising rate environment, duration tilts are not without risks, given global inflation dynamics and our expectations for monetary policy.

Stocks

After several years of suggesting that low economic growth need not equate with poor equity returns, our medium-run outlook for global equities remains guarded in the 6%–8% range. That said, our long-term outlook is not bearish and can even be viewed as constructive when adjusted for the low-rate environment.
Source: Highlights from Vanguard's 2016 global economic and investment outlook

Their statement about bonds is a bit misleading, because they talk about fair value yield and not actual yield or expected return. The 10-year bond rate currently is 1.76%, so that's the nominal return you can lock in for 10 years. Let's round to 2%.

So with bonds at 2% and stocks at 6%-8%, you're looking at 4% to 5% for a 50/50 portfolio.

If you click on the link in the highlights article to the research paper, you'll see that Vanguard forecasts a probability distribution of returns, not a point return. Look on page 22 of the paper for their probability distribution forecast for global stocks. Even just the two highest probability bars span a range of 4% - 12%, so even if you believe in Vanguard's forecasts, there's significant uncertainty in the expected return for stocks.

Back to bonds. You don't own a 10-year Treasury, so you can refine your estimate by estimating 10-year return for each fund as about the SEC yield +/- 1%. For example, SEC yield for int-term tax-exempt bond is 1.43% for Admiral shares. You should adjust the income portion of the return for taxes, so if you want to assume that all return is from income in the 25% bracket, that's a taxable-equivalent expected return of 1.43 / (1 - 0.25) = 1.9%, so pretty close to the 2% for the 10-year Treasury.

But unlike holding a 10-year Treasury to maturity, this return is uncertain. Based on some analysis I've done, the 10-year return is likely to be within about +/-0.5% of the initial SEC yield, but it could vary by as much as +/-1%: Initial SEC yield and subsequent 5yr and 10yr returns - Bogleheads.org.

So you could use maybe 2% +/- 1% for bonds, and say 8% +/- 8% (or more) for stocks. Some will argue that 8% is too high as the central tendency for stocks (John Bogle seems to think it's much lower).

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)
Topic Author
student5
Posts: 51
Joined: Wed Jan 06, 2016 8:07 pm

Re: Vanguard estimating a pre-tax 8.1% pa return-overoptimistic???

Post by student5 »

Over what time frame?

Time frame 30+ years, but I get it that 8.1% is too optimistic. I will temper my expectations. Thanks all!
dbr
Posts: 34186
Joined: Sun Mar 04, 2007 9:50 am

Re: Vanguard estimating a pre-tax 8.1% pa return-overoptimistic???

Post by dbr »

student5 wrote:Over what time frame?

Time frame 30+ years, but I get it that 8.1% is too optimistic. I will temper my expectations. Thanks all!
FWIW you can consult Rick Ferri's 30 year forecast which is more optimistic than some current dismal expectations:

http://portfoliosolutions.com/latest-le ... ecast-2015
User avatar
patrick013
Posts: 3073
Joined: Mon Jul 13, 2015 7:49 pm

Re: Vanguard estimating a pre-tax 8.1% pa return-overoptimistic???

Post by patrick013 »

Well I've read analysts predicting a recession and others predicting
the 500 at 2100 short term. Today I read GDP estimate is +3%.
Watch stocks go up Monday then.

The Fed rate could easily be 3% long term as that correlates with
history of inflation, federal deficit, and fed funds rate. But is life
a correlation ? But 3% does mimic Federal Reserve future hopes.

Bonds look down for the count till something else happens. A year
from now something else will happen.
age in bonds, buy-and-hold, 10 year business cycle
User avatar
cheese_breath
Posts: 10055
Joined: Wed Sep 14, 2011 7:08 pm

Re: Vanguard estimating a pre-tax 8.1% pa return-overoptimistic???

Post by cheese_breath »

Have they been talking to Dave Ramsey?
The surest way to know the future is when it becomes the past.
User avatar
Christine_NM
Posts: 2791
Joined: Tue Feb 20, 2007 1:13 am
Location: New Mexico

Re: Vanguard estimating a pre-tax 8.1% pa return-overoptimistic???

Post by Christine_NM »

I plugged this portfolio into portfoliovisualizer.com and got a CAGR (compound annual growth rate) of 5.65% backtested since 1985. No rebalancing, no additional contributions, dividends reinvested.

The inflation-adjusted CAGR since 1985 is 4.08%.

You might want to play with the backtest date range and see if Vanguard is simply reporting past performance in some favorable time period. Surely 8% is past data and not a prediction?
18% cash 44% stock 38% bond. Retired, w/d rate 2.5%
delamer
Posts: 10660
Joined: Tue Feb 08, 2011 6:13 pm

Re: Vanguard estimating a pre-tax 8.1% pa return-overoptimistic???

Post by delamer »

I have always done estimates based on real returns, as others have mentioned. An 8% return doesn't mean much without the context of inflation. You'd be doing well if inflation is 2%, but not so great if it is 10%.

I also find that thinking in real terms helps me visualize how much a future amount is "worth." If $100,000 in today's terms is the equivalent of $200,000 in 10 years (for instance), then I have a rough idea of what my $200,000 will buy in the future.
User avatar
Kevin M
Posts: 11721
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Vanguard estimating a pre-tax 8.1% pa return-overoptimistic???

Post by Kevin M »

Christine_NM wrote: You might want to play with the backtest date range and see if Vanguard is simply reporting past performance in some favorable time period. Surely 8% is past data and not a prediction?
You can see here that Vanguard shows a 50/50 stock/bond portfolio as having returned 8.3% for the period 1926-2015: Portfolio allocation models. I suspect it's something like this that the estimate mentioned by the OP is coming from.

I wouldn't think that a knowledgeable Vanguard advisor would throw out this number as the expected return for a 50/50 portfolio with expected bond return at 2%-3% and expected stock return at about 6%-8% (central tendency, Vanguard's own numbers). That gives you an expected return in the range of 4%-6% for a 50/50 portfolio. Also, Vanguard tends to use 10 years as their forecast period, so that's the period I'd keep in mind when viewing Vanguard forecasts.

Perhaps student5 could tell us exactly where the 8.3% number came from.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)
Topic Author
student5
Posts: 51
Joined: Wed Jan 06, 2016 8:07 pm

Re: Vanguard estimating a pre-tax 8.1% pa return-overoptimistic???

Post by student5 »

Kevin M wrote:
Christine_NM wrote: You might want to play with the backtest date range and see if Vanguard is simply reporting past performance in some favorable time period. Surely 8% is past data and not a prediction?
You can see here that Vanguard shows a 50/50 stock/bond portfolio as having returned 8.3% for the period 1926-2015: Portfolio allocation models. I suspect it's something like this that the estimate mentioned by the OP is coming from.

I wouldn't think that a knowledgeable Vanguard advisor would throw out this number as the expected return for a 50/50 portfolio with expected bond return at 2%-3% and expected stock return at about 6%-8% (central tendency, Vanguard's own numbers). That gives you an expected return in the range of 4%-6% for a 50/50 portfolio. Also, Vanguard tends to use 10 years as their forecast period, so that's the period I'd keep in mind when viewing Vanguard forecasts.

Perhaps student5 could tell us exactly where the 8.3% number came from.

Kevin
Thanks Kevin-the Vanguard CFP gave it to me, and your link must have been where it came from-surely not realistic nowadays as almost everyone has stated. I'll go back and challenge him on it. Thanks again!
bhsince87
Posts: 2694
Joined: Thu Oct 03, 2013 1:08 pm

Re: Vanguard estimating a pre-tax 8.1% pa return-overoptimistic???

Post by bhsince87 »

It can be complicated. Are you investing lump sum, or dollar cost averaging like in a retirement fund?

Over the past 15 years or so, the S&P 500 returned around 4% on average. But if you dollar cost averaged in monthly over that time, you got close to 8%.

So it's possible.

http://servowealth.com/resources/articl ... ow-half-it
"If ye love wealth better than liberty, the tranquility of servitude better than the animating contest of freedom, go home from us in peace." Samuel Adams
User avatar
Fieldsy1024
Posts: 710
Joined: Sun Feb 24, 2013 8:23 am

Re: Vanguard estimating a pre-tax 8.1% pa return-overoptimistic???

Post by Fieldsy1024 »

8.1% return would rock! But I am one just hoping for half that each year. Like others said, you may have years where you take a hit, maybe a small hit, or a big hit. IMO you just have to stick it out and if you are worried, be on the conservative side.

Listen to more experienced people like Taylor. I see this as a game and you are playing against the House. I was all about going 100% stocks, but now I am in that popular 3 fund Portfolio Taylor has laid out.

I plan to have my 3 fund as this when I can exchange on 3/13....
Total Stock: 75%
Total Bonds: 15%
Total International 10%

I'm 31 years old, so as I get older the bonds will rise, the international I may always keep at 15%, and the stocks will lower since I have to be more conservative as time goes on. Create something to where you can sleep at night and don't panic IF the market keeps dropping. In 5-10 years my portfolio could look something like this if I get a little nervous...
Total Stock 60%
Total Bonds 30%
Total International 10%.

Again, I am just a novice looking to see where I am comfortable. Less than a year ago you'd have to have an iron stomach to what I invested in lol, but I'm trying to listen to the experienced B-Heads here ;)
User avatar
Taylor Larimore
Advisory Board
Posts: 30176
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Buy the market; then stay-the-course.

Post by Taylor Larimore »

Bogleheads:

I started trying to "beat the market" in 1950 at the age of 26 when the S&P 500 was about 20. Today it is about 2,000 (not including dividends).

If I had simply bought and held 500 stocks (which was impossible until Mr. Bogle introduced the first index mutual fund in 1975), I would be a multi-millionaire today.

Lesson learned: Buy the market; then stay-the-course.

The Three-Fund (market) Portfolio

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
Post Reply