Bernstein: A Decade of Super-Low Returns [1.4% for 60/40]

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steve_14
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by steve_14 »

It's worth noting that when large caps were dramatically more expensive than small caps back in 2001, Dr. Bernstein predicted a 2% return premium for small (based on this valuations differential):

http://www.efficientfrontier.com/ef/701/cheap.htm
First, large-cap stocks are quite expensive in most of the developing world, with P/Es in the 25 to 30 range. The earnings yield of a market is a fair predictor of its future long-term real return: both the discounted dividend model and P/E predict a real return of about 3% for U.S. stocks. So at best, expect a 4% real return from large-cap foreign stocks.

Second, small stocks are somewhat cheaper than large stocks in most of the world, with P/Es in the 20 range. So expect perhaps a 5% real long-term return from them.
Eyeballing the M* returns from that period, I'd say Bill's estimates were very accurate - large returned around 3% real, but small returned 6.5% real. So, where does that leave us today?

Then:
S&P 500 P/E: 31.2x
Russell 2000 Small Cap Index: 22.1x
DFA Small Company Index: 21.1x
Source: Dr. Bernstein

Now:
Vanguard 500 Fund P/E: 18.3x
Vanguard Small Cap Index: 28.8x
Source: Vanguard
protagonist
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by protagonist »

gtmn wrote: Richard:
Good point about the average utility of valuation metrics. However, does the predictive value of these metrics increase as valuations become more extreme? If the market PE were 40 and the yield 1%, would a Bogle estimate be just as useless as when the PE is 14 and the yield is 3%? What if the starting yield was so fat that it provided 2/3 of the historical return? To ask it another way, is there any valuation at all that would move you to modify your allocation?
If I understand this correctly, it is not that difficult to recognize a bubble. What makes it difficult regarding motivating action is that it is very difficult, and usually impossible, to predict when the bubble will pop.
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JoMoney
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by JoMoney »

protagonist wrote:
gtmn wrote: Richard:
Good point about the average utility of valuation metrics. However, does the predictive value of these metrics increase as valuations become more extreme? If the market PE were 40 and the yield 1%, would a Bogle estimate be just as useless as when the PE is 14 and the yield is 3%? What if the starting yield was so fat that it provided 2/3 of the historical return? To ask it another way, is there any valuation at all that would move you to modify your allocation?
If I understand this correctly, it is not that difficult to recognize a bubble. What makes it difficult regarding motivating action is that it is very difficult, and usually impossible, to predict when the bubble will pop.
...and after it pops, how low will the correction go... and keep in mind that we had PE of 40 during the 2009 crash during what turned out to be the best time to be buying into the market.
For me to modify my allocation, there would have to be some other asset that was so much more appealing for whatever reason (need/ability/risk/story/valuation/whatever) I wouldn't care if I ever was able to buy back my original position. It wouldn't be a matter of timing when to get back in, or expecting that someone else would be willing to sell back to me at a lower price, if I sold it would be because I'm done with that position for any foreseeable future. Conditions might change, but I wouldn't go into it with the pretense that I could predict when conditions will change, or that I would be out-smarting the person on the other side of the transaction.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by Bustoff »

berntson wrote: A 60/40 portfolio has an expected real return of about 1.4% given Bill's estimates. So his outlook is even more bleak.

What do you think of Bill's expected returns? How do you plan to deal with low expected returns?
If this is true it would be insane to take any equity or bond risk.
Seriously, why not just keep the entire portfolio in CD's and go fishing?
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siamond
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by siamond »

Bustoff wrote:
berntson wrote: A 60/40 portfolio has an expected real return of about 1.4% given Bill's estimates. So his outlook is even more bleak.

What do you think of Bill's expected returns? How do you plan to deal with low expected returns?
If this is true it would be insane to take any equity or bond risk.
Seriously, why not just keep the entire portfolio in CD's and go fishing?
Don't forget this is a 10-years 'expected return', adjusted based on today's valuations. And since equities seem pretty high nowadays and bonds in real bad shape, this isn't entirely surprising but this doesn't mean that the longer term is that bleak. Still... it is pretty bleak! Now I like to fish, but I never thought to use CDs as bait... :wink:
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by Johno »

berntson wrote:
Bill Bernstein wrote: PS: For those who are wondering, I estimate div growth at 1.5% real, which has been reasonably stable over the past 14 decades. I see no reason at the present time adjust that up or down. (Incidentally, Mr. Bogle estimates long-run *nominal* earnings growth at 5%, which, taking into account long-run 3% inflation and the increasing retention of earnings, is pretty close to my estimate.)
This relates to something I was wondering about after reading chapter one. Can we really use the Gordon equation to compare expected returns across countries? Other countries tax dividends differently, so companies may have more (or less) incentive to pay out dividends rather than returning equity to shareholder in other ways. It could be that the US has an artificially low dividend rate because companies are more likely to buy back shares or to pay down debt. We wouldn't want to assign lower expected returns to US companies just because they prefer to return equity to shareholders in other ways.
In "Expected Returns" Ilmanen estimated (pp126-127) ex ante expected real returns of US stocks (a/o 2009) as 2% dividend yield plus .75% effect of net buybacks plus 1.3% real dividend growth=4.1% real expect return, 6.4% nominal with 2.3% inflation expectation. This wasn't directly compared to foreign expected returns. But it would seem that different dividend policies between countries and over time would have to be taken into account. The other item in that equation would be net change in valuation (P/E) which Ilmanen is assuming is zero though he records how it wasn't in past periods. A 2% real expected return on US stocks includes a projected P/E contraction I assume in addition to no adjustment to the dividend payout rate due to buybacks, although a slightly higher 1.5% assumption for real dividend growth (which I believe Bill Bernstein specified in a post on this thread).

Another way one might look at equity expected returns, especially in the US with highly developed junk bond market, is in comparison to junk. The Vanguard junk bond fund (VWEAX in Admiral form, albeit relatively higher rated and lower yielding, by perhaps .5%, than junk benchmarks) yields around 4% now. The term is around 4.6 yrs but in the broad-side-of-barning process of computing expected returns I don't think that's a major problem. We can call the equity projection only 5 yrs (with due note that short term factors are more likely to influence a 5 than 10 yr projection) or extrapolate the junk yield out to 10 yrs. But in in either case a ~2%-ish return over 5 yr expected inflation, not including credit losses, would tell us in ballpark terms that the market probably isn't priced for equity returns a whole lot higher than Ilmanen's ~4% real. Bill Bernstein's 2% for US large cap might seem a bit pessimistic by the junk comparison also (still not unreasonable) but his projections for some other stock categories are roughly what you might expect if you can earn less than 2% real in (slightly above average grade) junk. In the last ten years the benchmark for VWEAX (though not the higher grade fund itself) has beaten the S&P by almost 2% pa. (comparing to 10 yr rtn of the ETF IVV) and over a longer period US stocks have only ~1% greater return than junk benchmark (see Vanguard paper 'Worth the Risk?' figure 10). Today's low junk yields tend to corroborate a relatively low equity expected return.

On the general issue of projecting expected returns, it's not that meaningful to go back and compare one estimator's numbers from 10 yrs ago to actual returns for those 10 yrs. The basic framework of formula (like Gordon for example) has indicated its validity over longer time periods, but there's still plenty of room for argument typically about what the inputs should be to the simple formula. To judge how good an author or commentator is in making those inputs, you'd need maybe 10 non-overlapping periods. Humans aren't actively working for that long. That's one of the basic uncertainties people sometimes seem to want to gloss over, and some advisers may want to gloss over so as not to trigger excessive imagination in investors of fearful scenario's. We just don't have that much data, of long non-overlapping periods of similar circumstances, nor in any case assurance that long term future circumstances will be the same as past ones.
countmein
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by countmein »

^ great post, thank you.
protagonist
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by protagonist »

Bustoff wrote:
berntson wrote: A 60/40 portfolio has an expected real return of about 1.4% given Bill's estimates. So his outlook is even more bleak.

What do you think of Bill's expected returns? How do you plan to deal with low expected returns?
If this is true it would be insane to take any equity or bond risk.
Seriously, why not just keep the entire portfolio in CD's and go fishing?
Regarding bond risk, which is (arguably) more predictable than equity risk, I think many people on this site (myself included) agree that it is better to keep money in CDs given the current climate. That has been argued ad infinitum on this site. There is no clear consensus.
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by Hallman »

It seems silly to call a book "Rational Expectations" and then not discuss the effects of buybacks, lowered dividend payouts, not using up to date numbers for dividend growth (he uses 1900-2000, while the 1900-2014 numbers are significantly different, especially for developed ex US. Considering we have so few years of data where buybacks have been of significance, excluding the last 15 is a big deal - proven by how different the 1900-2000 numbers are from the 1900-2014 numbers), using valuations to forecast returns for total market but not for small cap or value (he just tacked on 1 and 1.7% for what he thinks are an "alright" premium), not debating different approaches to evaluating future expected returns, and I generally prefer conservative estimates, but I don't expect overly pessimistic/conservative estimates from a book called "Rational Expectations".

Other than this, I liked the book :)
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by stemikger »

We have to take what the market gives us. In the accumulation phase, the first and only thing we can do if we feel this is true is save more. Stick to your plan. Taking on more risk for someone who is older is not the answer, but saving more is. I'm sticking to my 60/40 and will save a little more and be happy with what the market will give. I stayed invested in the S&P Index Fund during the entire lost decade, so I'll do the same with my Total Bond Market fund during the low returns and when I finally do retire, I will reevaluate my situation and withdraw the right amount so my portfolio lasts. This is why I'm a fan of paying off a mortgage and adjusting your lifestyle so it can enable you to live on less if you need to.

O.K. I just had to put 1.4% in a calculator and I will still be alright. So, if this is the worst case scenario for returns, I'm still retiring in style. Or least being able to go on vacation once a year and do what I want for the rest of my days. And if by chance, we see higher returns, I stay at the moderate resorts in Disney instead of the value. Truth be told, I like the values better.
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by john94549 »

My wife and I are pushing 68, and plan to start tapping our IRA CDs for retirement in about two years. Those CDs should cover the first fifteen years or so of retirement (above and beyond other income). Our 60/40 "portfolio" stays put until we're 85 or so; I would be quite the happy camper with anything between 1 - 2% real, i.e., nominal minus inflation.

Aside from health care expenses not covered by Medicare (the great "known unknown" in retirement), most of our monthly expenses are easily covered by the range noted.
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by protagonist »

hoppy08520 wrote:
protagonist wrote:With all due respect to Dr. Bernstein.....I have a lot of respect for him and what I have read of his work.....I would ignore anybody's financial predictions going ten years into the future.

If you have any doubts about this, go back ten years and read what the experts were predicting for today.

If Bernstein nails it, it is because he is lucky.
If Bernstein is way off, it is because he is unlucky.

Though whether he nails it or not will determine whether he will be a media star in 2024.
Actually, if you look about 5 posts up from your post, I tried to do this for his estimates back in 2002.
.
You listed 14 predictions he made in 2002.

He almost hit VFINX on the head, If that was his only prediction, many people would call it an act of brilliance, though anybody remotely fluent in statistics and/or chaos theory would probably say that more likely he was lucky.

Unfortunately he made 13 other predictions.

He didn't come within 10% on any of the 13.
He came within 20% on 2 out of 13.
He came within 50% on 6 out of 13.
He came within 100% on 10 out of 13.
On 2 out of 13 he was off by 300-600%.

Given the relatively small range of "reasonable guesses" of annualized returns over a 12-13 year period, that strikes me about as close to random as you could get.

Especially given that most of his guesses were pretty reasonable wild guesses given historical market returns and the then-recent crisis of 9/11.

In fact, if he just guessed 7% across the board (a fairly reasonable wild guess based on historical market returns, playing odds), he would have come within 10% in five cases and would never have been more than 250% off. And he would have nailed VWEHX. It would have been a far better performance, but no greater indicator of predictive genius.
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by TradingPlaces »

These valuations might be correct for the period starting 2018 and ending 2028. Or starting in 2017 and ending in 2029. Or starting in 2021 and ending in 2029.

But I just don't see these valuations being correct starting a year ago and ending, say 2023.

Interest rates are low, and possibly getting lower. ECB is doing quant easing. China is doing the same. US FED is carrying $3T on balance sheet. Bernanke, in a back-seat driver fashion, is advocating that the FED continue reloading treasuries, mbs, as coupon payments come in for bonds on the balance sheet.

I mean, for all we know, we see another 5 years of 10%-ish returns.

Another issue is that we have not yet reached the top of the expansion cycle yet. Yet is the key-word. Sure, once we reach the top, there might be 10-20% correction, or whatever. What is the valuation going to say after we experience a 20% drop in 9-15 months?
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by HardKnocker »

These books make for good reading.

After reading please deposit in nearest recycling container. If a recycling container is not available place in trash.

Please don't litter.
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stemikger
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by stemikger »

Is anyone changing their asset allocation due to this advice (i.e. taking on more equity risk).
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backpacker
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by backpacker »

Investing is incredibly simple. Save enough to retire a bit early given 0% real returns. If returns are worse than that, work until normal retirement age. If returns are higher than that, do something fun with the money. Who needs expected returns? :D
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by EnjoyIt »

I look forward to reading Dr. Bernstein's predictions in 2024.
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by IlliniDave »

stemikger wrote:Is anyone changing their asset allocation due to this advice (i.e. taking on more equity risk).
I'm not, I'm just looking at lifestyle alternatives to let me enjoy life as much or more with reduced dependence on tossing money around during retirement. Life has dealt me a number of blows lately, and if the more pessimistic of the medium-term outlooks for financial markets prove accurate, it would be another. I'm just scaling back my plan. I can always adjust it upwards if conditions prove to be more benign than anticipated.
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by grap0013 »

backpacker wrote:Investing is incredibly simple. Save enough to retire a bit early given 0% real returns. If returns are worse than that, work until normal retirement age. If returns are higher than that, do something fun with the money. Who needs expected returns? :D
Is the smiley face for the whole post or just the last sentence?

Bogleheads are notorious for being overly conservative IMHO. Money is a tool for spending at some point in your life or your heirs. I think one should plan for something like 4% real from stocks or you will be taking a bunch of money to your grave. So says math and logic.
There are no guarantees, only probabilities.
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backpacker
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by backpacker »

grap0013 wrote:
backpacker wrote:Investing is incredibly simple. Save enough to retire a bit early given 0% real returns. If returns are worse than that, work until normal retirement age. If returns are higher than that, do something fun with the money. Who needs expected returns? :D
Is the smiley face for the whole post or just the last sentence?

Bogleheads are notorious for being overly conservative IMHO. Money is a tool for spending at some point in your life or your heirs. I think one should plan for something like 4% real from stocks or you will be taking a bunch of money to your grave. So says math and logic.
I've never understood the "taking money to your grave" problem. It's not like they're going to liquidate your portfolio and stuff your casket full of Benjamins. :happy

More seriously, if you're planning to give away a significant amount of money, there's no taking money to your grave problem. Worthy charities will be around to mop up any money that I don't have time to spend. They probably will use it better than I would anyway.
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by stemikger »

IlliniDave wrote:
stemikger wrote:Is anyone changing their asset allocation due to this advice (i.e. taking on more equity risk).
I'm not, I'm just looking at lifestyle alternatives to let me enjoy life as much or more with reduced dependence on tossing money around during retirement. Life has dealt me a number of blows lately, and if the more pessimistic of the medium-term outlooks for financial markets prove accurate, it would be another. I'm just scaling back my plan. I can always adjust it upwards if conditions prove to be more benign than anticipated.
Thanks Dave. I hope the blows are mere bumps in the road, if not, sorry to hear that and hang in there.

Steve
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grap0013
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by grap0013 »

backpacker wrote:
I've never understood the "taking money to your grave" problem. It's not like they're going to liquidate your portfolio and stuff your casket full of Benjamins. :happy

More seriously, if you're planning to give away a significant amount of money, there's no taking money to your grave problem. Worthy charities will be around to mop up any money that I don't have time to spend. They probably will use it better than I would anyway.
Yeah, but in the same token, you don't want to miss cool experiences like taking your kids to "A Christmas Carol" at the theater or bringing your nephew skydiving for his 18 birthday all because you couldn't afford it because you were planning on 0% real returns. Life's a balance and I think being too conservative with these estimates could make you miss some opportunities for great experiences and memories in life. Money can, on occasion, buy some fun experiences.
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by backpacker »

grap0013 wrote:
backpacker wrote: [If you're planning to give away a significant amount of money, there's no taking money to your grave problem.
Yeah, but in the same token, you don't want to miss cool experiences like taking your kids to "A Christmas Carol" at the theater or bringing your nephew skydiving for his 18 birthday all because you couldn't afford it because you were planning on 0% real returns. Life's a balance.
How about this? Everyone has a minimum and a preferred living standard. You want an investment plan that guarantees the minimum. But once you have that, it makes sense to trade some risk of missing your preferred standard to do awesome things right now.

So investors should have two numbers in mind. Use minimum expected returns to make sure you hit your minimum living standard. Use the returns you are most likely to get to make sure you hit your preferred living standard.
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Re: Bernstein: A Decade of Super-Low Returns

Post by MnD »

Fairly close to actual results???????
They were overwhelmingly biased low, often by hundreds of basis points _annually_ and in one case by well over 1000 basis points.
For a board that stresses over differences of a few basis points in annual ER's between funds, I don't see how anyone could conclude these were close.
This time period included the worst financial meltdown since the Great Depression and only part of the recovery, and he was still very low.

IMO Bernstein was biased very low and will continue to be biased very low because of the use of PE10 mean reversion in his return estimates.
PE10 has been elevated for decades now (with a miniscule time slot when it was not) from the long-term mean due to profit and loss accounting reporting rule changes.
It's simply not going to revert to a long-term mean based on an accounting framework that doesn't legally exist anymore.

Here's an article that references the accounting issue.
http://blogs.marketwatch.com/thetell/20 ... -pe-ratio/

In addition current PE1 is depressed versus current PE10 due to strong post-recession earnings. So substituting PE10 now begs the question, what's going to wreck earnings making PE1 unsuitable as a representative market valuation? In retrospect PE1 was unsuitable in 2007/08 due to massive and unsustainable earnings from the financial and related sector fueled by the debt and housing bubble. PE1 was suitable as a measure of equity valuation in 1999/00 as equity prices outstripped non-existent earnings as PE1 clearly indicated. I'd like to see someone make the case for why PE1 today isn't a good measure of valuation.

Currently substituting an elevated PE10 on that dubious premise (that current earnings are "bad data"), then mean-reverting to a historical PE10 when accounting standards were different leads one to the foregone conclusion of very low forward equity returns. Who knows what the future brings, but I certainly wouldn't base anything actionable on forecasts of low future equity returns if it involves reversion to historical PE10. Current PE10 contains the extremely low earnings quarters from the financial meltdown resulting from the accounting changes that aren't reflected in the long-term PE10, making the current PE10 especially suspect as a reasonable indicator of current valuations.
hoppy08520 wrote:Just for kicks, and because I have too much time on my hands, I checked up on William Bernstein's estimated returns that he made back in 2002 in Four Pillars, using probably the same methodology as he did in the estimates he made in 2014 and which we are discussing in this thread. You can see his 2002 estimates here in the wiki:

http://www.bogleheads.org/wiki/Historic ... ed_returns

Summary
Overall, his estimates for the larger asset classes were fairly close to the actual results. His estimates in smaller asset classes, where you might expect more variance, were not as close.

Methodology
Using Morningstar, I tried to find Vanguard funds that hold the asset classes he estimated. Then I looked up their returns from 1/1/2002 - 12/31/2011, a ten year period. I also did this for the 10-year period one year before and one year after (Jan 2001 - Dec 2010 and Jan 2003 - Dec 2012 respectively) to try to introduce some "rolling returns" aspect to his estimates to minimize swings based too much on one set of start and end dates. We are talking about a 10-year estimate, remember. I then took all three sets of data to come up with a rolling CAGR.

Results
The results are shown below. You're also welcome to have a look at the spreadsheet.

Image

The estimates for US stocks are fairly close to the actual results, as is the estimate for Large Foreign (I used a MSCI EAFE fund).

Where the estimates veered was with emerging market, foreign small value, REITs, and precious medal (who could have predicted the gold rush?), all of which performed far higher than the estimates.

Bonds also returned a bit higher than estimated.

My thoughts:
  • Small asset classes (like international value, REIT) can have bigger swings and are harder to estimate.
  • Back in 2002, emerging markets were also a smaller asset class. As we all know in hindsight, EM was the biggest boom asset class of the 2000's and clearly back in 2002, based on the conditions of the time, "the market" didn't see it yet.
  • For the larger asset classes that typically make up the bulk of our equities (US Large Cap, Foreign Developed Large Cap), the methodology of the Gordon Equation that Mr. Bernstein used was fairly accurate. It was also fairly reliable for small cap stocks. Therefore, for those of you casting doubt on Mr. Bernstein's numbers for 2014, he wasn't that far off 12 years ago.
Disclaimers:
  • I might not have picked the most representative funds. I'm sure the DFA boosters will suggest picking DFA's SCV instead of Vanguard.
  • My methodology might not be sound.
  • I might have made a typo transcribing these from Marketwatch to my spreadsheet.
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Re: Bernstein: A Decade of Super-Low Returns

Post by Clearly_Irrational »

schuyler74 wrote:As I understand it, the general equation is:

RealReturns = Dividends + DividendGrowth - Inflation
Where do stock price increases fit into that? For example, a company that does stock buybacks but not dividends..
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Re: Bernstein: A Decade of Super-Low Returns

Post by Clearly_Irrational »

MnD wrote:I'd like to see someone make the case for why PE1 today isn't a good measure of valuation.
PE1 tends to be least reliable when you need it most because at the top of the cycle earnings are high and so are future expectations. Pretty much any alternate PE measure that does something to ameliorate this problem is a better choice for this purpose.
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Re: Bernstein: A Decade of Super-Low Returns

Post by cjking »

MnD wrote:PE10 has been elevated for decades now (with a miniscule time slot when it was not) from the long-term mean due to profit and loss accounting reporting rule changes.
It's simply not going to revert to a long-term mean based on an accounting framework that doesn't legally exist anymore.

Here's an article that references the accounting issue.
http://blogs.marketwatch.com/thetell/20 ... -pe-ratio/
I sometimes use 1/PE10 as a quick and simple estimator of returns at current prices, and call it the smoothed earnings yield. The accuracy of this depends on the accuracy of the earnings figures, which I assume ultimately come from company accounts.

I note the article says that companies have to revalue assets downwards but are not allowed to revalue upwards until/unless they sell the asset in question. (I scanned the article too quickly to register whether this was an example or the totality of the accounting changes.)

So it sounds like the argument is that American accounting standards have changed for the worse, earnings are no longer reported as accurately as they used to be, therefore we should be less worried by an earnings yield of 1/29 (=3.4%) than we would have been before standards slipped. We don't need to worry because the true earnings of US corporations are more than the 3.4% their accounts say they are?

Is that a fair summary?

(Edit: possibly I got PE10 wrong, not sure it it's actually 29 at the moment. But it's in that vicinity.)
Last edited by cjking on Fri Apr 24, 2015 2:30 pm, edited 1 time in total.
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by letsgobobby »

is that a real or nominal earnings yield?
Rodc
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by Rodc »

protagonist wrote:
hoppy08520 wrote:
protagonist wrote:With all due respect to Dr. Bernstein.....I have a lot of respect for him and what I have read of his work.....I would ignore anybody's financial predictions going ten years into the future.

If you have any doubts about this, go back ten years and read what the experts were predicting for today.

If Bernstein nails it, it is because he is lucky.
If Bernstein is way off, it is because he is unlucky.

Though whether he nails it or not will determine whether he will be a media star in 2024.
Actually, if you look about 5 posts up from your post, I tried to do this for his estimates back in 2002.
.
You listed 14 predictions he made in 2002.

He almost hit VFINX on the head, If that was his only prediction, many people would call it an act of brilliance, though anybody remotely fluent in statistics and/or chaos theory would probably say that more likely he was lucky.

Unfortunately he made 13 other predictions.

He didn't come within 10% on any of the 13.
He came within 20% on 2 out of 13.
He came within 50% on 6 out of 13.
He came within 100% on 10 out of 13.
On 2 out of 13 he was off by 300-600%.

Given the relatively small range of "reasonable guesses" of annualized returns over a 12-13 year period, that strikes me about as close to random as you could get.

Especially given that most of his guesses were pretty reasonable wild guesses given historical market returns and the then-recent crisis of 9/11.

In fact, if he just guessed 7% across the board (a fairly reasonable wild guess based on historical market returns, playing odds), he would have come within 10% in five cases and would never have been more than 250% off. And he would have nailed VWEHX. It would have been a far better performance, but no greater indicator of predictive genius.
This happens in many fields. Really surprisingly hard to beat the prediction that the future will look a lot like the past.

That is a boring prediction though, and does not pay the predictor very well. Too, sometimes what you really want to know is when will things change is what is important and this sort of prediction won't do that (in a drought the farmer wants to know when sunny days will change to rain, and while saying next week will look a lot like this week, while it might score well is not very helpful.)

At any rate, this all just adds one more data point to the evidence that financial predictions have little if any value, even if they come from folks you happen to like and admire.
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.
Rodc
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by Rodc »

backpacker wrote:Investing is incredibly simple. Save enough to retire a bit early given 0% real returns. If returns are worse than that, work until normal retirement age. If returns are higher than that, do something fun with the money. Who needs expected returns? :D
Probably overly conservative for most, but I would suggest lots of wisdom is something similar but use 2% real (basically the long term real returns of a broad index of bonds). If stocks beat bonds great, retire early or travel more or whatever. If stock only match bonds you are ok. In the very unlikely event that your multi-decade investing life somehow coincides with a horrible global stock market return, heck you will still likely be better off than most.
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.
MnD
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Re: Bernstein: A Decade of Super-Low Returns

Post by MnD »

cjking wrote: So it sounds like the argument is that American accounting standards have changed for the worse, earnings are no longer reported as accurately as they used to be, therefore we should be less worried by an earnings yield of 1/29 (=3.4%) than we would have been before standards slipped. We don't need to worry because the true earnings of US corporations are more than the 3.4% their accounts say they are?

Is that a fair summary?
pretty much.
I'd summarize to say that reported earnings of the "market" after the 1990's rule changes are different and biased significantly lower during recessions than the earnings time series prior to the accounting rule changes. The current PE10 series contains the impact of the massive write-downs from a relatively small group of companies and thus is suspect as a measure of current valuation. This is especially concerning when mean-reverting to the historic PE10 (in the context of making equity return forecasts) which is dominated by decades of market earnings reported prior to the reporting rule changes.

It would be interesting to hold everything exactly the same and see what the forward equity return estimates would be using a NIPA-PE-10 earnings time series. That would address two problems. The possible bias in the current PE10 series and the possible lack of comparability of any PE10 series that has data in it after the 1990's rule changes to the long-term PE10 mean.
70/30 AA for life, Global market cap equity. Rebalance if fixed income <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.
letsgobobby
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Re: Bernstein: A Decade of Super-Low Returns

Post by letsgobobby »

MnD wrote:
cjking wrote: So it sounds like the argument is that American accounting standards have changed for the worse, earnings are no longer reported as accurately as they used to be, therefore we should be less worried by an earnings yield of 1/29 (=3.4%) than we would have been before standards slipped. We don't need to worry because the true earnings of US corporations are more than the 3.4% their accounts say they are?

Is that a fair summary?
pretty much.
I'd summarize to say that reported earnings of the "market" after the 1990's rule changes are different and biased significantly lower during recessions than the earnings time series prior to the accounting rule changes. The current PE10 series contains the impact of the massive write-downs from a relatively small group of companies and thus is suspect as a measure of current valuation. This is especially concerning when mean-reverting to the historic PE10 (in the context of making equity return forecasts) which is dominated by decades of market earnings reported prior to the reporting rule changes.

It would be interesting to hold everything exactly the same and see what the forward equity return estimates would be using a NIPA-PE-10 earnings time series. That would address two problems. The possible bias in the current PE10 series and the possible lack of comparability of any PE10 series that has data in it after the 1990's rule changes to the long-term PE10 mean.
Is this the same rule change that Larry wrote about last year:

http://www.bogleheads.org/forum/viewtop ... 8#p2139613
hoops777
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Re: Bernstein: A Decade of Super-Low Returns [1.4% for 60/40

Post by hoops777 »

If you believe it why take the risk for so little.
K.I.S.S........so easy to say so difficult to do.
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