What would you estimate for return?

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mule
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What would you estimate for return?

Post by mule » Sat Nov 21, 2015 9:52 pm

I do know this is a question that may be more of a guess because of what the future economy may bring.

Over a 5 year period what has been your return on your money or what do you expect your money to bring in the next 5 years. I also know many have their money in different places and all earning different rates. So what is an honest % of return that you can pencil in for return.

amphora
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Re: What would you estimate for return?

Post by amphora » Sat Nov 21, 2015 10:07 pm

Difficult to say and nearly impossible if over the next 5 years.

I would say you can only estimate over long periods of time. John Bogle predicts 6% nominal returns for stocks and 3% for bonds, which is as good a guess as any. Personally, I'm comfortable estimating I will get 5% real returns over the long term with an 80/20 stock to bond portfolio and small value tilt.

See earlier thread:
viewtopic.php?t=129938

and an official Bogleheads page

https://www.bogleheads.org/wiki/Histori ... ed_returns

mule
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Re: What would you estimate for return?

Post by mule » Sat Nov 21, 2015 11:02 pm

Thank you. I will use 3% for my number and be conservative. I will have money that I won't have to touch in my life time so long term I would expect better then 3% but who knows.

MathWizard
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Re: What would you estimate for return?

Post by MathWizard » Sun Nov 22, 2015 12:15 am

The last 5 years, ROI was about 12% nominal, but I don't expect that going forward.

5 years is too short, I am planning on about 4% real long term (15-30 years)

This is not far from Rick Ferri's company's 30 year forecast.

Detroittl
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Re: What would you estimate for return?

Post by Detroittl » Sun Nov 22, 2015 12:41 am

Dave Ramsey quotes 12 percent s and p 500 nominal gain on average. That's a really long timeline (almost 100 years). What would the real return be after inflation even with that long timeline? I believe 9 percent?

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JoMoney
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Re: What would you estimate for return?

Post by JoMoney » Sun Nov 22, 2015 1:31 am

Detroittl wrote:Dave Ramsey quotes 12 percent s and p 500 nominal gain on average. That's a really long timeline (almost 100 years). What would the real return be after inflation even with that long timeline? I believe 9 percent?
Note that the 12% "average" Dave Ramsey quotes is a simple "arithmetic average" of the annual returns and not the "geometric" or "Compound Annual Growth Rate". Be sure to understand the difference http://www.investopedia.com/ask/answers ... icmean.asp
The 12% "arithmetic average" is misleading, that's the average if you took the return of each year and divided it by the number of years, but does not get you to the actual return.
The actual CAGR of the S&P from the end of 1925 to present is closer to 10% in nominal returns, and just under 7% in real inflation adjusted returns.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

Erwin
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Re: What would you estimate for return?

Post by Erwin » Sun Nov 22, 2015 1:48 am

I have kept accurate data since I seriously started investing for retirement in 1994. My allocation has never exceeded 40% equities and today in retirement it is 35%. With all that my compounded real (after inflation) return has been 5.8% with a standard deviation (based on annual nominal returns) of 8.7%. Not bad! But, with bonds and most likely also stocks in the toilet for years to come and my decision early this year to build a long term TIPS ladder (with basically zero real yield) to cover expenses during retirement, i am sure that my return will deteriorate very rapidly.
Erwin

lack_ey
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Re: What would you estimate for return?

Post by lack_ey » Sun Nov 22, 2015 2:32 am

mule wrote:Thank you. I will use 3% for my number and be conservative. I will have money that I won't have to touch in my life time so long term I would expect better then 3% but who knows.
The probability of lower than 3% (you mean nominal, right?) over any 5-year period is substantial, especially with inflation low now.

I'll quote myself from a previous thread:
lack_ey wrote:For some theoretical frameworks and equity risk premium estimates (also some ways to adapt that to other countries, stock subclasses), check Aswath Damodaran's site here, especially the links at the bottom:
http://pages.stern.nyu.edu/~adamodar/

You may want to see Vanguard's methodology and numbers from last year here. Some conditions are definitely different now than about a year ago, though. It has a range of estimates on stocks, bonds, inflation, etc.:
http://www.vanguard.com/pdf/ISGVEMO.pdf

William Bernstein has a simple methodology for both stocks and bonds that is more pessimistic than the above that you can see described in If You Can (from last year; it's easy to plug in today's numbers, though) in the "hurdle number two" section:
http://www.etf.com/docs/IfYouCan.pdf

AQR publishes some numbers and estimates stock returns based on averaging an earnings yield approach and dividend discount model approach, with the methodology explained a little more in the 1q14 rather than 1q15 publication. This also has some numbers for bonds:
https://www.aqr.com/~/media/files/paper ... g-1q15.pdf

BNY Mellon has their own 10-year capital market return assumptions for different asset classes:
http://us.bnymellonam.com/core/library/ ... ptions.pdf

Rick Ferri has a 30-year forecast he publishes every year. Personally I think some of his bond numbers look a bit kooky (high). This has been discussed before:
http://www.rickferri.com/blog/investmen ... -for-2015/

You may also be interested in Rick's post about estimates of returns by CFOs (wow the numbers are hilariously wrong from 2000 8-)):
http://www.rickferri.com/blog/investmen ... he-market/

For reference, here is the main overview page for the Research Affiliates projections:
http://www.researchaffiliates.com/Asset ... rview.aspx
Basically the numbers spit out in the 5-year timeframe are the same as for the longer periods (unless using a model that assumes some change in valuations), but the deviation on an annualized basis is more likely to be larger.

red5
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Re: What would you estimate for return?

Post by red5 » Sun Nov 22, 2015 5:00 am

mule wrote:I do know this is a question that may be more of a guess because of what the future economy may bring.

Over a 5 year period what has been your return on your money or what do you expect your money to bring in the next 5 years. I also know many have their money in different places and all earning different rates. So what is an honest % of return that you can pencil in for return.
Over the last 5 yeas I've achieved 8.5% with a pretty high stock allocation. Unfortunately this tells nothing about what the next 5 years will bring me.

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Re: What would you estimate for return?

Post by Swampy » Sun Nov 22, 2015 6:17 am

Just to be devil's advocate - how would your projections look if your return was flat or 2% at the high end?

How would that affect your asset allocation and/or spending-saving?
If you fail to plan, you plan to fail. | Failure is not an option. | If I have seen further, it is because I was carried on the shoulders of giants.

Carl53
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Re: What would you estimate for return?

Post by Carl53 » Sun Nov 22, 2015 7:02 am

I've used 2% real since 2010 in my planning. It's nice to know that if things go south you are in better shape than had you been counting on historical returns.

mule
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Re: What would you estimate for return?

Post by mule » Sun Nov 22, 2015 7:21 am

Thank you again for the help. I'm not a finical guru and I really don't like working with money related issues so my questions will reflect this.

So what would you estimate for return means to me is that if I use 3% that would mean I would get 3% return on my money for one year. If I leave that money there for 20 years I would like to receive 3% every year for 20 years. Is that correct thinking?

I have an account I start 13 years ago with $10000 and today it is %27000. So this looks like I made about 13% each year on that money. Is that correct?

Carl53
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Re: What would you estimate for return?

Post by Carl53 » Sun Nov 22, 2015 7:41 am

mule wrote:Thank you again for the help. I'm not a finical guru and I really don't like working with money related issues so my questions will reflect this.

So what would you estimate for return means to me is that if I use 3% that would mean I would get 3% return on my money for one year. If I leave that money there for 20 years I would like to receive 3% every year for 20 years. Is that correct thinking?

I have an account I start 13 years ago with $10000 and today it is %27000. So this looks like I made about 13% each year on that money. Is that correct?
(27000/10000)^(1/13)= 1.079 or you've made about 7.9% nominal return. The CPI has increased from 181.3 to 237.8 over the last 13 years.
((27000/10000)*(181.3/237.8))^(1/13) yields a real return of 5.1%. These numbers assume that you have not added any additional funds to the account over the last 13 years. If you have you would need to use an IRR or similar function on your cash flows to determine the exact return but it would be lower than what I've shown.

mule
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Re: What would you estimate for return?

Post by mule » Sun Nov 22, 2015 8:09 am

Carl53 >>> I told you I was stupid. Lol I can explain how I come up with the numbers I did but it will make me look even more stupid. That does make a lot of sense and I didn't add to that account over the past 13 years. I maybe should have it didn't do to bad as an average for those years.

Thanks and thanks.

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jeffyscott
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Re: What would you estimate for return?

Post by jeffyscott » Sun Nov 22, 2015 10:29 am

For our planning I use 1% real as a worst case. I had once seen a statistic that the worst case, historically, for a moderate portfolio had been about 1.3% real. With assumption of 2.5-3% inflation, those figures would mean around 3.5-4.5% nominal.

As of Sept. 30 our trailing 5 year return was 34% cumulative, which is about 6% annualized. I've got 18 years of records and our IRR has been 7% over that time frame, that was with equities at about 75% at the start and now down to about 35%.
press on, regardless - John C. Bogle

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Peter Foley
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Re: What would you estimate for return?

Post by Peter Foley » Sun Nov 22, 2015 10:40 am

I have a 4% above inflation return built into my withdrawal spreadsheet. While I have done better than that since I built the spreadsheet about 10 years ago, I think that it is about 1% too high. One of my reasons for using 4% was that my wife and I both had access to stable value funds that paid in the range of about 3% to 4.5%. With this guarantee, I felt comfortable with projecting a slight higher return for about a 50/50 portfolio. Our stable value funds pay about a half percent less overall today.

In my spreadsheet I pegged inflation at 4% and SS and pension increases at 3% - just to be conservative.

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vitaflo
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Re: What would you estimate for return?

Post by vitaflo » Sun Nov 22, 2015 11:44 am

I use a 4% real return over time when trying to calculate how I'm doing in relation to where I want to be. I used to use 5% real, and still think that's more likely, but decided to be conservative to force myself to save a little more "just in case".

As far as what the actual returns will be over the next 5 years, nobody knows. FWIW, my previous 5-year nominal return was 7.92% (annual). My 15-year nominal return was 6.57%. With low inflation, that's about in the ballpark I expect, but it could go anywhere moving forward.

DVMResident
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Re: What would you estimate for return?

Post by DVMResident » Sun Nov 22, 2015 11:52 am

When there is uncertainty, you have to account for it in your projections.

I use the e/p +/- 2 SD (historical average, 10 year rolling periods). I run my projections at e/p-2 SD, e/p-1 SD, e/p, e/p+1 SD, and e/p+2 SD. This gives me a range of possibilities to prepare for.

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Re: What would you estimate for return?

Post by Carson » Sun Nov 22, 2015 12:00 pm

mule wrote:Carl53 >>> I told you I was stupid. Lol I can explain how I come up with the numbers I did but it will make me look even more stupid. That does make a lot of sense and I didn't add to that account over the past 13 years. I maybe should have it didn't do to bad as an average for those years.

Thanks and thanks.
I don't think it is stupid. I have a degree in accounting with a minor in finance and never learned that.

As it is I think I am double dipping - I plan for my investments to increase 5% each year, but for my expenses to increase 3% as well. So I'm probably being pretty conservative as well. not uncommon for this group.
30-something personal finance enthusiast, just get getting started on this whole portfolio thing.

SQRT
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Re: What would you estimate for return?

Post by SQRT » Sun Nov 22, 2015 12:32 pm

I've been retired for 9 years. The nominal CAGR total return of my 100% equity portfolio over this time has been about 10% about 3.5% of this have been divs which form the basis of my spending. I don't really need to plan for future returns. I just spend what I get and let the rest ride. At least for now. For those retired, why would you need to forecast future returns? Why wouldn't you just react to the actuals? What am I missing?

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patrick013
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Re: What would you estimate for return?

Post by patrick013 » Sun Nov 22, 2015 2:35 pm

I would expect on the low side that the S&P 500 will close at
2200 for YE 2016.

VTI should have similar return as it has close beta to the 500.
age in bonds, buy-and-hold, 10 year business cycle

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Re: What would you estimate for return?

Post by LadyGeek » Sun Nov 22, 2015 2:47 pm

This thread is now in the Investing - Theory, News & General forum (future investment returns).

As amphora previously noted, the wiki has some background info: Historical and expected returns

John Bogle's section is from the 2015 Bogleheads Conference.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

Carl53
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Re: What would you estimate for return?

Post by Carl53 » Sun Nov 22, 2015 4:42 pm

Carson wrote:
mule wrote:Carl53 >>> I told you I was stupid. Lol I can explain how I come up with the numbers I did but it will make me look even more stupid. That does make a lot of sense and I didn't add to that account over the past 13 years. I maybe should have it didn't do to bad as an average for those years.

Thanks and thanks.
I don't think it is stupid. I have a degree in accounting with a minor in finance and never learned that.

As it is I think I am double dipping - I plan for my investments to increase 5% each year, but for my expenses to increase 3% as well. So I'm probably being pretty conservative as well. not uncommon for this group.
As an engineer, but someone that always thought that finance would be something fun to get into, I was always amazed that bankers would look dumbfounded as to how I could bang out a loan payment calculation for whatever term/interest/loan on a TI SR50 back in the 70s in a matter of seconds. Engineers were trained to do present value and similar calculations. Apparently bankers used lookup tables instead of formulas. So it is just a difference in training as to what is important, certainly not a difference in intelligence.

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Toons
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Re: What would you estimate for return?

Post by Toons » Sun Nov 22, 2015 5:08 pm

4-6% :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

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Peter Foley
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Re: What would you estimate for return?

Post by Peter Foley » Sun Nov 22, 2015 5:54 pm

SQRT wrote:
For those retired, why would you need to forecast future returns? Why wouldn't you just react to the actuals? What am I missing?
Charitable giving, gifting to children/grandchildren, estate planning and state inheritance taxes.

SamB
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Re: What would you estimate for return?

Post by SamB » Sun Nov 22, 2015 7:37 pm

Geormetric mean since 1989 is 8% and the arithmetic mean is 8.8%. One standard deviation is about 13%. The difference in the returns reflects the risk, or about one half the variance.

The last five years have are hardly been what I would consider normal, or what I would base an estimated return on. My best guess would be the nominal returns above, but then 80's and 90's were spectacular return wise. The stock market really has been flat for the last 15 years, when you consider the DOW was about 750 in the late 70's when I started investing.

So go ahead and place a bet. That is what I did in 1978. There is no reason to believe that your bet will turn out like mine, but I think using the last five years is a bit primitive. I keep being impressed by the fact that although bonds have no where to go, the stock market really did not set the world on fire in the last 15 years, at least not compared to the previous 20 years.

Whether you are a passive investor or not, there is no way to know what the next 20 years will bring, but I certainly would not place too much emphasis on the last five years.

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Re: What would you estimate for return?

Post by duffer » Mon Nov 23, 2015 10:13 am

mule wrote:I do know this is a question that may be more of a guess because of what the future economy may bring.

Over a 5 year period what has been your return on your money or what do you expect your money to bring in the next 5 years. I also know many have their money in different places and all earning different rates. So what is an honest % of return that you can pencil in for return.

I expect 7% annualized real from equities over the next 5 years. Quite possible in my amateur estimate is 8-9% annualized. I expect less than 1.5% annualized real from bonds over the same period.

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Maynard F. Speer
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Re: What would you estimate for return?

Post by Maynard F. Speer » Mon Nov 23, 2015 11:35 am

Over 5 years my guestimate would be -5% from US stocks and -1% bonds ..

I think it'll be a miracle if we're not in recession at some point over the next 5 years

Best prospects: Europe, alternative lending, long/short equity
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes

Detroittl
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Re: What would you estimate for return?

Post by Detroittl » Sun Dec 06, 2015 11:02 pm

Last 7 years I averaged 10 percent per year. Last 5 years 6 percent per year.

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