Expected returns for 80/20 stock bond for next 10 years.

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HomerJ
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by HomerJ » Tue Jul 03, 2018 9:16 am

Rick Ferri wrote:
Tue Jul 03, 2018 9:11 am
I disagree that predicting 10 year returns is a random event. There is no randomness in a the expected return of a 10-year zero coupon bond. It is 2.87%. That’s an absolute number which all other expect returns can be derived by adding expected risk premiums.
Sure, but "plus or minus 8%" for stocks makes it all pretty futile (and no one even really knows if it's a normal distribution).
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by GAAP » Tue Jul 03, 2018 9:22 am

2.8% Real

Stocks at ~3.1% real, Bonds at ~1.8% Real.
Last edited by GAAP on Tue Jul 03, 2018 10:02 am, edited 1 time in total.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by vineviz » Tue Jul 03, 2018 9:49 am

NotWhoYouThink wrote:
Tue Jul 03, 2018 8:59 am
Might as well ask who realistically has a chance to win the World Cup this year.
This isn't really analogous and, like many of the replies in this thread, seems to be based on confusion about what an "expected" return is.

While forming an expectation about future returns does involve some prediction, by definition it INCORPORATES uncertainty rather than ignore it as some people seem to believe.

When economists say the expected real return on stocks is 3%, they are NOT predicting that it will be exactly 3%. They are saying that the probability-weighted outcome of likely scenarios is 3%. This number is an average, a measure of central tendency.

How likely is it to be EXACTLY 3%? Not very. Is that the best number to use in financial planning? Quite likely.

Honestly, it's not even very unusual: 10 year real returns on large cap stocks have been roughly 3% or less in about 25% of all ten year periods since 1930.
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by NotWhoYouThink » Tue Jul 03, 2018 10:01 am

I agree that the term "expected value" has a meaning in statistics and can be calculated, at least for a system that can be accurately modeled. But whoever said that "economics is history trying to be physics" understood that future returns of stock markets can't necessarily be well modeled.

In any case, it's fine to have a forecast. It's dangerous to believe it will be accurate.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by corn18 » Tue Jul 03, 2018 10:03 am

I’m forecasting 0% real returns on a 60/40 portfolio for the next 5 years. Seems to be as good as anyone else’s backside from which to pull a market forecast.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by youngpleb » Tue Jul 03, 2018 10:25 am

z3r0c00l wrote:
Mon Jul 02, 2018 8:58 pm
I would put a bet down on the range between -50 and +100%. Wouldn't trust a prediction more specific than that.
Just to clarify, that's your CAGR estimate correct? :mrgreen:
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by dbr » Tue Jul 03, 2018 10:32 am

In any case one should put a standard deviation of maybe 6% around that 5% estimate and two standard deviations of 12%. Maybe the best number is "between -7% and +18%." If one wants to believe the right expected return is 7%, then we will say "between -5% and +20%."

Note that trying to understand what to expect in the future for any specific individual instance, predictions of averages are completely wiped out by wild variations in what will actually occur, and, therefore, are not very interesting.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by danielc » Tue Jul 03, 2018 10:52 am

HomerJ wrote:
Tue Jul 03, 2018 9:14 am
There is no way to accurately estimate returns. They can come up with a "expected" number, but then they have to add in "plus/minus 8%". You can safely ignore all the "experts". Too many variables, nobody knows enough. It must be very frustrating for economists to admit the truth.

So use a lowball estimate, and adjust to what you actually get.

Just like we use worst case estimates to come up with the 4% Safe Withdrawal rate (and many people here go even lower), do the same when estimating returns.

Assume 3%-5% nominal stock returns for the next 20 years, and be pleasantly surprised if we get more (and be ready to adjust if we get less).

I would use those numbers, regardless of valuations. Even if valuations were low, it would be imprudent and unwise to plan around 12% returns to meet your goals.
None of that tells me where the 3% real return came from. Also, stock returns are more predictable over longer intervals.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by danielc » Tue Jul 03, 2018 10:53 am

Rick Ferri wrote:
Tue Jul 03, 2018 9:11 am
I disagree that predicting 10 year returns is a random event. There is no randomness in a the expected return of a 10-year zero coupon bond. It is 2.87%. That’s an absolute number which all other expect returns can be derived by adding expected risk premiums.
Does this mean that you estimate the equities risk premium to be 2.13% ?

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by 3funder » Tue Jul 03, 2018 10:55 am

SimplicityNow wrote:
Mon Jul 02, 2018 8:26 pm
Unfortunately that is a realistic number.
+1.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by 3funder » Tue Jul 03, 2018 10:56 am

Rick Ferri wrote:
Mon Jul 02, 2018 8:10 pm
Nope. 2% inflation is included in the 5% estimate. So, 3% real return, before tax.

Don’t like it?

Central Banks around the world will be trying to normalize policy after a decade of negative real interest rates and that means regression to the mean for asset prices - my opinion, of course.

I’m giving you a realistic estimate to work with over the next 10 years. If returns are higher, great! If not, you won’t be disappointed.
I'm not counting on as much of a regression in foreign markets, though.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by danielc » Tue Jul 03, 2018 10:58 am

HomerJ wrote:
Tue Jul 03, 2018 9:16 am
Sure, but "plus or minus 8%" for stocks makes it all pretty futile (and no one even really knows if it's a normal distribution).
That's not true. We know that stocks returns are NOT a normal distribution. We know that the distribution has fat tails. Events that would happen less than once in the history of the universe for a normal distribution happen ever decade or two.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by rich126 » Tue Jul 03, 2018 10:59 am

Some people are predicting lower returns most likely due to the following (written in April 2018):
According to Convoy’s data, stocks averaged a total annualized return of 13.2% thus far this decade, comfortably above the long-term average of 9.6%. While this was below four other decades — the best decade was the 1950s, when the average was 18.8%, followed by the 18.6% gain in the 1990s — equities fared better in terms of their excess return above interest rates.

By the excess-return measure, the 2010s have seen an average annual return of 12.7%, significantly above the 5.8% long-term average (going back to the 1920s).
https://www.marketwatch.com/story/the-2 ... 2018-04-11

Often when you have one extreme, it is followed by the opposite extreme.

I'm definitely on the side that returns will not be good over the next decade.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by Rick Ferri » Tue Jul 03, 2018 12:33 pm

danielc wrote:
Tue Jul 03, 2018 10:53 am
Rick Ferri wrote:
Tue Jul 03, 2018 9:11 am
I disagree that predicting 10 year returns is a random event. There is no randomness in a the expected return of a 10-year zero coupon bond. It is 2.87%. That’s an absolute number which all other expect returns can be derived by adding expected risk premiums.
Does this mean that you estimate the equities risk premium to be 2.13% ?
The exercise was for a 80% stock and 20% bond allocation so the equity side would have about a 2.5% premium over bonds. Low by historic standards, but valuations are high today due to interest rates artificially low from global Central Bank expansion policies coming off the financial crisis (two crisis in Europe).
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by Grt2bOutdoors » Tue Jul 03, 2018 12:37 pm

Rick Ferri wrote:
Mon Jul 02, 2018 8:22 pm
A realistic return number for an 80/20 allocation is 5% nominal and 3% real. Sorry I was not clear in that.
Hmmm, seems I wasn’t too far off on my estimate, was planning on 4%. My allocation though is lower than 80/20.
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by HomerJ » Tue Jul 03, 2018 12:45 pm

danielc wrote:
Tue Jul 03, 2018 10:58 am
HomerJ wrote:
Tue Jul 03, 2018 9:16 am
Sure, but "plus or minus 8%" for stocks makes it all pretty futile (and no one even really knows if it's a normal distribution).
That's not true. We know that stocks returns are NOT a normal distribution. We know that the distribution has fat tails. Events that would happen less than once in the history of the universe for a normal distribution happen ever decade or two.
Sure I'll agree with that... Makes it even harder to model, right?

The point is there are too many variables (AND the variables change over time), and too few data points for anyone to make a good model.
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by FIREchief » Tue Jul 03, 2018 12:47 pm

I'll be (perhaps) the first in this thread to state the obvious; nobody really has a clue because none of us knows what is going to happen in the future. HomerJ's 0% - 14% is the most responsible estimate I saw, because it reflects this fact.
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by TheTimeLord » Tue Jul 03, 2018 1:00 pm

FIREchief wrote:
Tue Jul 03, 2018 12:47 pm
I'll be (perhaps) the first in this thread to state the obvious; nobody really has a clue because none of us knows what is going to happen in the future. HomerJ's 0% - 14% is the most responsible estimate I saw, because it reflects this fact.
In a business environment if I got this question from a client/stakeholder I would ask "Why? What do you plan to do with the information?". Because unless the answer is to the OP's question will result in in changing his AA, what possible value would the answer have. And if you are going to change your AA because of an answer which is being being heavily influenced by people's perceptions of valuations then you are essentially Market Timing.
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by Rick Ferri » Tue Jul 03, 2018 1:01 pm

FIREchief wrote:
Tue Jul 03, 2018 12:47 pm
I'll be (perhaps) the first in this thread to state the obvious; nobody really has a clue because none of us knows what is going to happen in the future.
I know exactly what will happen if you purchases a 10-year Zero coupon Treasury today and hold it to maturity. You will earn 2.87%. The expected return of everything else is adjusted off that number based on risk (many facets of risk). This is not voodoo economics.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by FIREchief » Tue Jul 03, 2018 1:15 pm

Rick Ferri wrote:
Tue Jul 03, 2018 1:01 pm
FIREchief wrote:
Tue Jul 03, 2018 12:47 pm
I'll be (perhaps) the first in this thread to state the obvious; nobody really has a clue because none of us knows what is going to happen in the future.
I know exactly what will happen if you purchases a 10-year Zero coupon Treasury today and hold it to maturity. You will earn 2.87%. The expected return of everything else is adjusted off that number based on risk (many facets of risk). This is not voodoo economics.

Rick Ferri
Good point Rick, but I was referring to the 80% (equity) portion of the question. I thought that was clear from context. Even with your 10 year treasury, you don't know what inflation will be so you don't know what the real return will be (which is arguably all that is important).

"Expected return" is where these topics lose me, because while people are free to expect whatever they wish (best case scenario, worst case scenario, some hybrid averaging of the two, etc.), at the end of the day nobody really knows what to expect, because none of us have a working crystal ball. Those who have bet heavily on US equities in the past, over the long term, have always come out winners. Will this happen over the next ten years? Who knows?? :confused
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by averagedude » Tue Jul 03, 2018 1:16 pm

I can't believe Rick Ferri and all of you bogleheads saying to expect 5% nominal returns in the future. I guess i will have to sell my holdings and contact a SmartVestor Pro. Dave Ramsey says i should get 12%.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by Rick Ferri » Tue Jul 03, 2018 1:29 pm

averagedude wrote:
Tue Jul 03, 2018 1:16 pm
I can't believe Rick Ferri and all of you bogleheads saying to expect 5% nominal returns in the future. I guess i will have to sell my holdings and contact a SmartVestor Pro. Dave Ramsey says i should get 12%.
LOL! That’s what I would do. If 5% was too low for me, I’d visit a high cost adviser and pay 1.5%, for a better outlook, and pay another 1% in fees for actively managed funds that claim to outperform, then have my adviser shift around the asset allocation as needed to take advantage of market opportunities. Oh, I almost forgot, pay taxes on capital gain distributions every year.
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by stemikger » Tue Jul 03, 2018 1:33 pm

Rick Ferri wrote:
Tue Jul 03, 2018 1:29 pm
averagedude wrote:
Tue Jul 03, 2018 1:16 pm
I can't believe Rick Ferri and all of you bogleheads saying to expect 5% nominal returns in the future. I guess i will have to sell my holdings and contact a SmartVestor Pro. Dave Ramsey says i should get 12%.
LOL! That’s what I would do. If 5% was too low for me, I’d visit a high cost adviser and pay 1.5%, for a better outlook, and pay another 1% in fees for actively managed funds that claim to outperform, then have my adviser shift around the asset allocation as needed to take advantage of market opportunities. Oh, I almost forgot, pay taxes on capital gain distributions every year.
+1

Well said Rick!!! My solution to low returns is to simply save more. Nothing else changes in my world.
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by Rick Ferri » Tue Jul 03, 2018 1:37 pm

I’m not trying to be negative. I’m trying to explain there are real economic reasons why the next ten years probably will not be like the last ten. They never are.
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by aristotelian » Tue Jul 03, 2018 1:40 pm

masonstone wrote:
Mon Jul 02, 2018 8:44 pm
Rick Ferri wrote:
Mon Jul 02, 2018 8:22 pm
A realistic return number for an 80/20 allocation is 5% nominal and 3% real. Sorry I was not clear in that.
This is not accurate according to historical returns. Realistic nominal returns are between 7-10
10% is definitely not realistic for a portfolio with 20% bonds.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by FIREchief » Tue Jul 03, 2018 1:47 pm

Rick Ferri wrote:
Tue Jul 03, 2018 1:37 pm
I’m not trying to be negative. I’m trying to explain there are real economic reasons why the next ten years probably will not be like the last ten. They never are.
Help me out here Rick. Although not restated in the post quoted above, I'm assuming that you mean the next ten years will align with your estimates earlier in this thread. What are the primary real economic reasons why the next ten years probably will not be like the last ten? We have low inflation, a growing economy, relative peace, a recent large corporate tax cut, healthy balance sheets, growing earnings, very low interest rates, etc. Those economic factors, IF they continue, certainly don't lay the foundation for historically low equity returns over a ten year period. What am I missing?
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by am » Tue Jul 03, 2018 2:06 pm

Rick Ferri wrote:
Tue Jul 03, 2018 1:37 pm
I’m not trying to be negative. I’m trying to explain there are real economic reasons why the next ten years probably will not be like the last ten. They never are.
How are we going to get to 5% nominal? Crash followed by recovery, steady low, etc. I think I can do better than 5% since I am still accumulating and rebalancing.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by masonstone » Tue Jul 03, 2018 2:14 pm

Also I see the new automation technologies causing an expansion of the economy.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by randomguy » Tue Jul 03, 2018 2:34 pm

FIREchief wrote:
Tue Jul 03, 2018 1:47 pm
Rick Ferri wrote:
Tue Jul 03, 2018 1:37 pm
I’m not trying to be negative. I’m trying to explain there are real economic reasons why the next ten years probably will not be like the last ten. They never are.
Help me out here Rick. Although not restated in the post quoted above, I'm assuming that you mean the next ten years will align with your estimates earlier in this thread. What are the primary real economic reasons why the next ten years probably will not be like the last ten? We have low inflation, a growing economy, relative peace, a recent large corporate tax cut, healthy balance sheets, growing earnings, very low interest rates, etc. Those economic factors, IF they continue, certainly don't lay the foundation for historically low equity returns over a ten year period. What am I missing?
So where can we go from here? Can we get lower inflation, a faster growing economy, more peace, larger tax cuts, healthier balance sheets, faster growing earnings, lower interest rates and so on or are we going to have some unexpected negative events that make out historically high PE10s unsustainable?

Obviously there are also a ton of things that could make the current economy and valuations sustainable. Maybe Europe and Asia start rebounding from 2008 like the US did and we can sell a lot more to them. Maybe we sign some trade laws and the threat of trade wars that we have going on goes away. And so on.

Historically if you look at it, it is very hard to have a 20 years of growth. It just doesn't happen very often because too much stuff has to go right and keep going right. In general after 5-15 years of solid growth we end up with 5-10 years of stagnation/low growth. The why is always a bit different. The overleveraging/trade barriers/concentration of wealth in the 1% of the 1920s was not the same as the oil shocks, economic choices that lead to 70s inflation or the high valuations, terrorist attacks, dot com bubble that lead to 00s or the real estate/credit bubble that lead to 2008-9. They are all slightly different and you can debate if they were inevitable and how the government reaction helped or hindered the recovery.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by FIREchief » Tue Jul 03, 2018 2:37 pm

Exactly. In other words, nobody has a clue. :sharebeer
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by BoggledHead2 » Tue Jul 03, 2018 2:47 pm

makes me feel like CDs are the best bet ... sigh ...

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by vineviz » Tue Jul 03, 2018 2:50 pm

TheTimeLord wrote:
Tue Jul 03, 2018 1:00 pm
In a business environment if I got this question from a client/stakeholder I would ask "Why? What do you plan to do with the information?". Because unless the answer is to the OP's question will result in in changing his AA, what possible value would the answer have.
Some people are still saving money, either to invest for retirement or for some other intermediate term goal. Having a realistic expectation of future returns allows those folks to choose an appropriate savings rate, to select appropriate assets, to reevaluate their planned expenditures, or (at the very least) have reasonable expectations about the performance of their assets.
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by dbr » Tue Jul 03, 2018 2:54 pm

vineviz wrote:
Tue Jul 03, 2018 2:50 pm
TheTimeLord wrote:
Tue Jul 03, 2018 1:00 pm
In a business environment if I got this question from a client/stakeholder I would ask "Why? What do you plan to do with the information?". Because unless the answer is to the OP's question will result in in changing his AA, what possible value would the answer have.
Some people are still saving money, either to invest for retirement or for some other intermediate term goal. Having a realistic expectation of future returns allows those folks to choose an appropriate savings rate, to select appropriate assets, to reevaluate their planned expenditures, or (at the very least) have reasonable expectations about the performance of their assets.
And in that respect the uncertainty what will happen in the individual case is so large compared to the differences in the estimates being debated that the result is not actionable except as an exercise in self deception one way or the other. I dislike aphorisms about investing but one I will offer is "Do not expect to get the expected return."

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by Rick Ferri » Tue Jul 03, 2018 3:20 pm

“You can’t step into the same river twice.” Heraclitus
Estimates are estimates, they are not facts. We will not know how good the estimates were until 10 years from now.

I can tell you in late 2008, estimates were very low because the stock and commodities markets were suffering. Yet, I said it was the greatest buying opportunity in a lifetime for Baby Boomers.

Now I’m saying in the aftermath of the financial crisis, Central Banks all over the world created an ocean of liquidity that has caused all asset values to bloat. The next ten years will see an attrmpt to normalize liquidity, which will stifle asset class values. Hence, my modest 5% number for an 80/20 portfolio.
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by elnegativo » Tue Jul 03, 2018 3:24 pm

If a person truly believes that the next decade was going to be 3% real, shouldnt that person should sell all of her equities and buy treasuries? You would get the same return but none of the risk.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by vineviz » Tue Jul 03, 2018 3:27 pm

dbr wrote:
Tue Jul 03, 2018 2:54 pm
And in that respect the uncertainty what will happen in the individual case is so large compared to the differences in the estimates being debated that the result is not actionable except as an exercise in self deception one way or the other.
Regardless, we still need to make plans and the best plans will be built using the best available information. Anyone with a future financial goal (retirement, college tuition, down payment on a house, etc.) has to make decisions TODAY about how to save for that goal.

Obviously we can't tell people with certainty what the future will hold (a notion so obvious I'd have thought it could go without saying), but if you are suggesting that they NOT use the best available forecasts of future returns that economists can generate TODAY then how do you expect them to plan?
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by vineviz » Tue Jul 03, 2018 3:28 pm

elnegativo wrote:
Tue Jul 03, 2018 3:24 pm
If a person truly believes that the next decade was going to be 3% real, shouldnt that person should sell all of her equities and buy treasuries? You would get the same return but none of the risk.
10 year treasuries aren't yielding 3% real returns, unless you think inflation is going to be zero over the next decade.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by dbr » Tue Jul 03, 2018 3:29 pm

elnegativo wrote:
Tue Jul 03, 2018 3:24 pm
If a person truly believe that the next decade was going to be 3% real, shouldnt that person should sell all of her equities and buy treasuries? You would get the same return but none of the risk.
What Treasury offers 3% real. The current real interest rates on Treasuries are here: https://www.treasury.gov/resource-cente ... =realyield

Right now Treasury real yields are flat across the yield curve and range 0.6%-0.9% roughly.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by Rick Ferri » Tue Jul 03, 2018 3:32 pm

vineviz wrote:
Tue Jul 03, 2018 3:27 pm
dbr wrote:
Tue Jul 03, 2018 2:54 pm
And in that respect the uncertainty what will happen in the individual case is so large compared to the differences in the estimates being debated that the result is not actionable except as an exercise in self deception one way or the other.
Regardless, we still need to make plans and the best plans will be built using the best available information. Anyone with a future financial goal (retirement, college tuition, down payment on a house, etc.) has to make decisions TODAY about how to save for that goal.

Obviously we can't tell people with certainty what the future will hold (a notion so obvious I'd have thought it could go without saying), but if you are suggesting that they NOT use the best available forecasts of future returns that economists can generate TODAY then how do you expect them to plan?
+1
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by dbr » Tue Jul 03, 2018 3:33 pm

vineviz wrote:
Tue Jul 03, 2018 3:27 pm
dbr wrote:
Tue Jul 03, 2018 2:54 pm
And in that respect the uncertainty what will happen in the individual case is so large compared to the differences in the estimates being debated that the result is not actionable except as an exercise in self deception one way or the other.
Regardless, we still need to make plans and the best plans will be built using the best available information. Anyone with a future financial goal (retirement, college tuition, down payment on a house, etc.) has to make decisions TODAY about how to save for that goal.

Obviously we can't tell people with certainty what the future will hold (a notion so obvious I'd have thought it could go without saying), but if you are suggesting that they NOT use the best available forecasts of future returns that economists can generate TODAY then how do you expect them to plan?
The simplest answer to that plan that is not too simple is to simulate a statistical model of the outcome. That is why we have planning models that do that and allow a person to observe the range of possibilities. That, of course, does not get us out of the woods because there is still lots to discuss regarding the assumptions to put in those models. A lot of people argue historical data as in FireCalc is a better approach and other people want to argue for modifications based on knowledge of current circumstances. But at least the investor will not be thinking they can expect to get what is expected (using the word first in the normal sense of the word and second in the statistical sense).

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by dbr » Tue Jul 03, 2018 3:37 pm

Rick Ferri wrote:
Tue Jul 03, 2018 3:32 pm
vineviz wrote:
Tue Jul 03, 2018 3:27 pm
dbr wrote:
Tue Jul 03, 2018 2:54 pm
And in that respect the uncertainty what will happen in the individual case is so large compared to the differences in the estimates being debated that the result is not actionable except as an exercise in self deception one way or the other.
Regardless, we still need to make plans and the best plans will be built using the best available information. Anyone with a future financial goal (retirement, college tuition, down payment on a house, etc.) has to make decisions TODAY about how to save for that goal.

Obviously we can't tell people with certainty what the future will hold (a notion so obvious I'd have thought it could go without saying), but if you are suggesting that they NOT use the best available forecasts of future returns that economists can generate TODAY then how do you expect them to plan?
+1
Rick, surely you do not encourage people to plan an uncertain future based on assuming that investment returns are certain. Are you suggesting that doing so and getting a single number with no range of uncertainty around the result is a better idea than using a probabilistic model as all the current retirement models are? Note that telling people to use a probabilistic model is not telling people to ignore the best available forecasts. It is exactly the opposite in fact.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by vineviz » Tue Jul 03, 2018 3:37 pm

dbr wrote:
Tue Jul 03, 2018 3:33 pm
The simplest answer to that plan that is not too simple is to simulate a statistical model of the outcome.
How, exactly, do you "simulate a statistical model of the outcome" without supplying an input for the parameters of the model? You realize that "expected return" is one of the inputs to such a model, right?
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by vineviz » Tue Jul 03, 2018 3:40 pm

dbr wrote:
Tue Jul 03, 2018 3:37 pm
Note that telling people to use a probabilistic model is not telling people to ignore the best available forecasts. It is exactly the opposite in fact.
I'm wondering if you genuinely don't know what "expected return" means.
The formula for calculating an expected return is Expected Return = SUM (Returni * Probabilityi), where i indicates each known return and its respective probability in the series.
From the "Expected Return" entry on Investopedia ( https://www.investopedia.com/terms/e/ex ... z5KE5CLH86 ).
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by dbr » Tue Jul 03, 2018 3:42 pm

vineviz wrote:
Tue Jul 03, 2018 3:37 pm
dbr wrote:
Tue Jul 03, 2018 3:33 pm
The simplest answer to that plan that is not too simple is to simulate a statistical model of the outcome.
How, exactly, do you "simulate a statistical model of the outcome" without supplying an input for the parameters of the model? You realize that "expected return" is one of the inputs to such a model, right?
Of course. The difference is in how the issue is framed. You frame the issue as a probabilistic problem and explicitly recognize that characteristic or you frame the problem as a deterministic problem where a person gets one certain result. One of the consequences of framing the issue statistically is that it becomes evident that estimating the exact expected return is not very important as the difference disappears in the weeds of a range of uncertainty . . . or it doesn't depending on the judgement one want to apply to the results once demonstrated.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by Ragnoth » Tue Jul 03, 2018 4:16 pm

elnegativo wrote:
Tue Jul 03, 2018 3:24 pm
If a person truly believes that the next decade was going to be 3% real, shouldnt that person should sell all of her equities and buy treasuries? You would get the same return but none of the risk.
What treasury are you buying that gives a 3% real return? You would be lucky to get a nominal rate that high.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by oldcomputerguy » Tue Jul 03, 2018 4:20 pm

danielc wrote:
Tue Jul 03, 2018 10:53 am
Rick Ferri wrote:
Tue Jul 03, 2018 9:11 am
I disagree that predicting 10 year returns is a random event. There is no randomness in a the expected return of a 10-year zero coupon bond. It is 2.87%. That’s an absolute number which all other expect returns can be derived by adding expected risk premiums.
Does this mean that you estimate the equities risk premium to be 2.13% ?
I'm no expert, but I don't believe risk figures for different asset classes are linearly additive.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by selters » Tue Jul 03, 2018 4:24 pm

wootwoot wrote:
Tue Jul 03, 2018 12:16 am
So many fortune tellers in here. What makes you think that anyone can reliably predict future returns?
These forcasts are based on back-tested models for expected returns. The models are very inaccurate, but they are the most accurate models we have.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by dknightd » Tue Jul 03, 2018 4:34 pm

masonstone wrote:
Mon Jul 02, 2018 7:24 pm
What’s a reasonable Expected returns for 80/20 stock bond vanguard admiral shares total market for both sides for next 10 years.
I'd assume 1%, but hope for better than that. It could be -20% or +20% . Or better, or worse. Who knows. 10 years is an awkward time frame. On average you can expect some increase in value. For planning purposes I assume/hope my investments will keep up with inflation.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by corn18 » Tue Jul 03, 2018 4:40 pm

Maybe we could all get together and decide the markets need to correct down 40% right now so we can forecast 7-10% real growth over the next 10 years. Everyone sell everything on Friday and get those prices down!

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by elnegativo » Tue Jul 03, 2018 4:43 pm

Ragnoth wrote:
Tue Jul 03, 2018 4:16 pm
elnegativo wrote:
Tue Jul 03, 2018 3:24 pm
If a person truly believes that the next decade was going to be 3% real, shouldnt that person should sell all of her equities and buy treasuries? You would get the same return but none of the risk.
What treasury are you buying that gives a 3% real return? You would be lucky to get a nominal rate that high.
You are right. I brain-glitched on real v. nominal.

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