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

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

Post by Silk McCue » Fri Jul 06, 2018 10:07 am

tennisplyr wrote:
Fri Jul 06, 2018 9:51 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.
He's talking 80% equities, do you know that?
Yes he does. This is the fourth page on this thread. Probably best to read through all of it. By doing so you would find this post by Rick here on page 3.

viewtopic.php?f=1&t=253037&start=100#p4002490

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Grt2bOutdoors
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by Grt2bOutdoors » Fri Jul 06, 2018 5:08 pm

tennisplyr wrote:
Fri Jul 06, 2018 9:51 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.
He's talking 80% equities, do you know that?
He knows. This is Rick you’re asking, “the” author who wrote the book on my shelf - All About Asset Allocation. Yep, he knows. :wink:
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tennisplyr
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by tennisplyr » Fri Jul 06, 2018 7:19 pm

Grt2bOutdoors wrote:
Fri Jul 06, 2018 5:08 pm
tennisplyr wrote:
Fri Jul 06, 2018 9:51 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.
He's talking 80% equities, do you know that?
He knows. This is Rick you’re asking, “the” author who wrote the book on my shelf - All About Asset Allocation. Yep, he knows. :wink:
In my world using words like "likely", "might" and "assumes" do not imply certainty.
Those who move forward with a happy spirit will find that things always work out.

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

Post by Silk McCue » Fri Jul 06, 2018 8:22 pm

tennisplyr wrote:
Fri Jul 06, 2018 7:19 pm
In my world using words like "likely", "might" and "assumes" do not imply certainty.
I haven’t seen anyone claiming any certainty in this thread. I personally learned a few things. Rick’s perspective and knowledge was particularly beneficial.

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Grt2bOutdoors
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by Grt2bOutdoors » Sat Jul 07, 2018 1:00 pm

tennisplyr wrote:
Fri Jul 06, 2018 7:19 pm
Grt2bOutdoors wrote:
Fri Jul 06, 2018 5:08 pm
tennisplyr wrote:
Fri Jul 06, 2018 9:51 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.
He's talking 80% equities, do you know that?
He knows. This is Rick you’re asking, “the” author who wrote the book on my shelf - All About Asset Allocation. Yep, he knows. :wink:
In my world using words like "likely", "might" and "assumes" do not imply certainty.
Point me to the advisor, expert, charlatan that implies “certainty”, I’ll be sure to stay far, far away from them.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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

Post by Rick Ferri » Sun Jul 08, 2018 3:29 pm

I can say with 100% certainty that if you invest in U.S. zero-coupon STRIPS and hold until maturity you will earn the following returns:

WSJ US zero-coupon STRIPS as of 3 PM on Friday July 6, 2018.
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jalbert
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by jalbert » Sun Jul 08, 2018 11:08 pm

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.
Risk premiums are random variables with some unknown probability distribution. Expected risk premiums are the means of those probability distributions. It doesn't make it more deterministic to model the returns as premiums in excess of a 10-year zero coupon treasury vs absolute returns of the asset class.
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by Rick Ferri » Mon Jul 09, 2018 9:57 am

A statement constantly made on this forum is that future returns cannot be known in advance. That is false. We know with certainty what a US zero-coupon STRIP will return out to 30 years.

That’s the starting place for predicting returns on all other asset classes. Risk premiums can be tracked back hundreds if not thousands of years. For example the risk premium for equity over enterprise borrowing cost is about 3% with a pretty tight range around that number.

Everyone who invests in stocks believes they will earn this fair premium. If you don’t believe it, you would not invest in stocks. Pretty simple.
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by jalbert » Mon Jul 09, 2018 1:45 pm

Not sure what you think an expected return actually is, but by definition it is the expected value or mean of the probability distribution of return. Even if you do have a way of knowing this mean, it is just a weighted average of all possible outcomes, weighted by their probability of occurring. The expected return as an outcome may not even be the most probable outcome, but it certainly is not a guaranteed outcome. What was the expected 30-year return for Russian stocks in 1900?

If the equity risk premium for US stocks did not decrease significantly with the creation of the Federal Reserve and FDIC insurance (reducing the risk of bank and credit panics), passage of the Securities Act of 1940 etc, then US investors in say 1920 were getting fleeced because stocks unquestionably were riskier then.

Here are some calculated implied equity premiums in backtested data going back to 1960 computed using a dividend discount model and using a free cash flow model:

http://pages.stern.nyu.edu/~adamodar/Ne ... mplpr.html

Certainly not a tight band around 3%, whether or not the mean of the distribution was changing during this period.
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by Rick Ferri » Mon Jul 09, 2018 2:47 pm

The EXPECTATION of an equity risk premium is known and measurable. There is an expected PREMIUM because there is RISK in the number. If the actual future return of equities was known like it is for zero-coupon bonds, then there would be no expectation of a premium.
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by jalbert » Mon Jul 09, 2018 3:29 pm

The New York Fed doesn’t believe the equity risk premium is a near-constant (narrow band around 3%) that can be applied to a treasury yield:

https://www.newyorkfed.org/medialibrary ... /sr714.pdf

In fact they concluded in that article that the ERP was considerably elevated (around 12%) in 2012 because treasury yields were very low.

They also acknowledge that there is enough disagreement in how to estimate the ERP that they used an average of estimates from no fewer than 20 different models as their estimate.
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by Rick Ferri » Mon Jul 09, 2018 4:39 pm

The New York Fed doesn’t believe the equity risk premium is a near-constant (narrow band around 3%) that can be applied to a treasury yield.
The paper you cited is looking at a "one-year-ahead ERP" and I am talking about a 10-30 year ERP. Slight difference.

When the Fed pushes rates low, it adds significant liquidity to the economy. That liquidity has to go somewhere, and it often gets pumped into stock prices and other assets like real estate prices. The wealth effect caused by higher asset prices cause people to feel good and spend more, this causes corporate earnings to increase, causes the unemployment rate to fall, and justifies even higher stock prices.

It's all very good for stock investors until the Fed takes the punch bowl away.

And guess what? They're taking the punch bowl away! So, it was be a mistake to invest under the belief that we'll see an 12% ERP.

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

Post by jalbert » Mon Jul 09, 2018 5:16 pm

If interest rates fall during a bear market, stocks being low increases their expected return relative to right before the bear market started while simultaneously the rate on the 30-year strip is falling. I would think this is what happened in the bear markets of 2000-2002 and 2008-2009. Falling treasury rates simultaneous with rising expected return on stocks is not consistent with an ERP excess of long-term treasuries that is close to constant.

The yield of the 30-year strip plus 3 percentage points may be as reasonable an estimate as any for 30-year return of stocks, but you haven’t offered any convincing evidence that this would be accurate or that there would be low variance around that estimate.

If the fed taking away the punch bowl has the effect often touted then treasury rates would rise and stocks would fall, lowering the premium relative to treasury rates, again not a source of dampening variance in the ERP at different points in time.
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by jeffh19 » Mon Jul 09, 2018 7:28 pm

Nobody knows, as everyone else says. Keep in mind most don't expect high returns, but nobody knows. I heard last week how the market may have a big dip this week things are so delicate blah blah, the market has been doing outstanding the last few days.

One of my favorite quotes I saw here went something like this- Market Analysts have correctly predicted the last 73 of the last 4 market crashes.

Just keep throwing money in asap, if it has a big drop, find some extra money to throw in. Keep investing, stay the course.

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

Post by jalbert » Mon Jul 09, 2018 11:09 pm

https://www.globalfinancialdata.com/GFD/Article/the-equality-risk-premium wrote: At the end of 2001, the equity risk premium was 4.85% if the holding period was from 1900 to 2001, 5.07% if the holding period was from 1925 to 2001, 5.74% if the holding period was from 1950 to 2001, 3.26% if the holding period was from 1971 to 2001, but 4.96% if the holding period was from 1991 to 2001.
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by Call_Me_Op » Tue Jul 10, 2018 8:02 am

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%.
Not only that, but you'll get to work with someone who has the heart of a teacher.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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

Post by Call_Me_Op » Tue Jul 10, 2018 8:04 am

FIREchief wrote:
Tue Jul 03, 2018 11:48 pm
[Exactly. A: stay the course, B: nobody knows nothing
That would mean that everybody knows something.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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

Post by Silk McCue » Tue Jul 10, 2018 8:27 am

Call_Me_Op wrote:
Tue Jul 10, 2018 8:04 am
FIREchief wrote:
Tue Jul 03, 2018 11:48 pm
[Exactly. A: stay the course, B: nobody knows nothing
That would mean that everybody knows something.
This phrase has been in our lexicon for longer than I have been alive. We all understand exactly what it means.

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

Post by FIREchief » Tue Jul 10, 2018 10:53 am

Silk McCue wrote:
Tue Jul 10, 2018 8:27 am
Call_Me_Op wrote:
Tue Jul 10, 2018 8:04 am
FIREchief wrote:
Tue Jul 03, 2018 11:48 pm
[Exactly. A: stay the course, B: nobody knows nothing
That would mean that everybody knows something.
This phrase has been in our lexicon for longer than I have been alive. We all understand exactly what it means.

Cheers
Exactly!! :sharebeer
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by CnC » Tue Jul 10, 2018 11:02 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.
Well I say 13% with absolutely as much confidence as your 3% real return...


People are quoting a "great" 10 years. You are cherry picking numbers. What about our return for the past 12 or 18 years or 22 years ago?

In 1996 the sp500 was 614.42 cagr of 7.1
In 2000 the sp500 was 1425.29 cagr of 3.8
In 2006 the sp500 was 1278.73 cagr of 6.7

As you see a person can look at completely valid data randomly chosen and see that we are not on that "great" of a run.

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