What is the prediction of future long-term returns for your portfolio?

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nedsaid
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Re: What is the prediction of future long-term returns for your portfolio?

Post by nedsaid »

If John Bogle is right, we can expect maybe 3% returns from bonds and between 4% and 7% returns from stocks over the next 10 years. Not what most of us want to hear but it might motivate higher savings rates. Those forecasts are "ballpark" estimates and give us some basis for planning but all of this is very inexact.
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bigred77
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Re: What is the prediction of future long-term returns for your portfolio?

Post by bigred77 »

Clive wrote:
Its reasonable however to plan for the worst, hope for the best. 2% SWR is a fine target (50x) providing you don't have to work too much longer/harder to get there. Missing out on years when you and your partner were well and fit enough to enjoy the proceeds of your retirement savings/planning to instead strive to get to perhaps 50x instead of accepting 30x often turns out disastrous - such as one or the other partners physical or mental health deteriorating. I saw a cartoon image once, but can't recall exactly where or when, of a picture of a worker rushing past a graveyard - muttering 'time is money', in the background one of the gravestones had the words 'would have given all my money for some extra time'. Haven't managed to find a copy of that cartoon since, shame - as its a very apt one to have hanging up as a reminder for retirement planning.
To me this is the real danger.

If you're young and planning on 1%-2% real returns going forward than fine, maybe you save too much. Worst case scenario is you get to retire early or become fabulously wealthy. You have time to adjust later when you find out what the markets ended up giving you.

If you're staring retirement in the face however, moving from a 4% SWR to a 2% SWR because you're scared that this time it really is different, is a shame. You're telling yourself "now I need double what I thought I did". The majority of people ARE going to have to work much longer/harder to get there unless they worked their whole career and are now an executive with a current income much higher than the rest of their career. Those 5-10 years are not going to come back. Those are precious years between 50 - 70.
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flyingaway
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Re: What is the prediction of future long-term returns for your portfolio?

Post by flyingaway »

bigred77 wrote:
Clive wrote:
Its reasonable however to plan for the worst, hope for the best. 2% SWR is a fine target (50x) providing you don't have to work too much longer/harder to get there. Missing out on years when you and your partner were well and fit enough to enjoy the proceeds of your retirement savings/planning to instead strive to get to perhaps 50x instead of accepting 30x often turns out disastrous - such as one or the other partners physical or mental health deteriorating. I saw a cartoon image once, but can't recall exactly where or when, of a picture of a worker rushing past a graveyard - muttering 'time is money', in the background one of the gravestones had the words 'would have given all my money for some extra time'. Haven't managed to find a copy of that cartoon since, shame - as its a very apt one to have hanging up as a reminder for retirement planning.
To me this is the real danger.

If you're young and planning on 1%-2% real returns going forward than fine, maybe you save too much. Worst case scenario is you get to retire early or become fabulously wealthy. You have time to adjust later when you find out what the markets ended up giving you.

If you're staring retirement in the face however, moving from a 4% SWR to a 2% SWR because you're scared that this time it really is different, is a shame. You're telling yourself "now I need double what I thought I did". The majority of people ARE going to have to work much longer/harder to get there unless they worked their whole career and are now an executive with a current income much higher than the rest of their career. Those 5-10 years are not going to come back. Those are precious years between 50 - 70.
Around the time I reach my financial independence based on the 4% rule, I started experiencing retirement. Since the only thing that I want to do most in retirement is travel, I started extensive travel without fully retiring. I did not postpone my retirement experience, but I am not retired (semi-retired). I want to contribute more money to my portfolio at a slower rate, but do not delay the enjoyment of retirement and travel.

If future real return is 2%, I will be OK to at least in my early 90s. If it turns out to be below 2%, I am still making more money to deal with that possibility.
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willthrill81
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Re: What is the prediction of future long-term returns for your portfolio?

Post by willthrill81 »

bigred77 wrote:If you're young and planning on 1%-2% real returns going forward than fine, maybe you save too much. Worst case scenario is you get to retire early or become fabulously wealthy. You have time to adjust later when you find out what the markets ended up giving you.
I mostly agree, although it is possible that a young person might make unnecessary sacrifices, including those that could impact the well being of their families, because they're assuming that real returns for the next 30 years will be equal to the absolute worst 30 year period in history. Over 90% of the time, the S&P 500 returned at least 4.44% over 30 years.

And really, how often in other aspects of our lives do we truly prepare for the absolute worst that's ever happened before? Quite seldom I think.
bigred77 wrote:If you're staring retirement in the face however, moving from a 4% SWR to a 2% SWR because you're scared that this time it really is different, is a shame. You're telling yourself "now I need double what I thought I did". The majority of people ARE going to have to work much longer/harder to get there unless they worked their whole career and are now an executive with a current income much higher than the rest of their career. Those 5-10 years are not going to come back. Those are precious years between 50 - 70.
When you take into account that most people are fairly conservative with their portfolios by the time they get close to retirement (i.e. 60/40, 50/50), it would almost certainly take them at least 10 years to double their portfolio and likely closer to 15. Even if they had prepared for retirement at 60, that's now pushed back to around 75. And a 60 year old man's remaining life expectancy is only 23.3 years (according to SS Administration).

For someone who's really nervous that "this time it's different," I think that they might be well served with a single premium immediate annuity (SPIA). They can figure out what their base financial needs are, then determine how much income they would need from a SPIA, combined their anticipated SS (or whatever else their country may provide), in order to meet those needs. Granted, many insurance companies no longer offer inflation-adjusted annuities, but that's not a particularly big problem in this instance as long as they aren't devoting too much of their portfolio to buying the SPIA (Vanguard says that most of their clients buying SPIAs limit it to 20% of their total portfolio). The retiree can then rest assured that they will have two sources of income (SPIA and SS) that they will never outlive, potentially enabling them to be a more aggressive with their remaining portfolio than they would be otherwise. I'm not saying that this is an optimal strategy for all retirees, but I think that it's almost certainly preferable to a 2% WR.

But in reality, a 4% + CPI withdrawal rate from a 60/40 portfolio tilted toward small and value would never have failed even once in U.S. history.
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tadamsmar
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Re: What is the prediction of future long-term returns for your portfolio?

Post by tadamsmar »

bigred77 wrote: If we just observed 17 years with a CAGR that would fall within the lowest decile or so of observed returns over that time frame, then maybe we will observe a CAGR over the following 17 years that lies in the top decile of observed returns? Possible no?
Near zero probability for 9% real. You do realize that the Shiller PE Ratio was off the charts 17 years ago?

(We had to revise the charts to include numbers 50% bigger than 30.)

http://www.multpl.com/shiller-pe/
dkturner
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Re: What is the prediction of future long-term returns for your portfolio?

Post by dkturner »

To put it mildly, it's pretty difficult to predict the future long-term returns of my portfolio. I'll try an settle for something a little easier. I'm content to try and estimate the relative returns of different asset classes over the next decade. Sometimes this is very difficult and at other times it's a little easier.

As an example take a look at international stocks. For the 10 years ending 1/31/2017 European stocks had annualized returns of 0.8%, Pacific stocks 1.9% and Emerging Markets stocks 2.4%. Since all these returns are quite close its pretty difficult to guess/predict which of these 3 asset classes is likely to provide better returns over the next decade.

On the other hand, for the last 10 years U.S. Stocks had annualized returns of 7.2% while International stocks as a group returned only 1.2%. That's a huge relative underperformance of 6 percentage points per year for the last 10 years. Disparities like this don't come around very often. There are no certainties in life but one could do a lot worse than lightening up on U.S. stocks and redeploy the funds to International stocks for the next decade, or until the relative returns of U.S. And International stocks converge again.

I know valuation driven capital redeployment is frowned on around here, but I'm not afraid to admit that I have more than doubled by allocation to International stocks over the last 3 months. Kind of reminds me of early 2000 when Mr. Bogle reported he had reduced his equity exposure by about half.
captpete
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Re: What is the prediction of future long-term returns for your portfolio?

Post by captpete »

Hi everyone,
I was just perusing the forum and found this thread. I am a bit alarmed by some of the posts here. I have anticipated annual return at 7%. That's not including inflation but that was what I am hoping/planning on getting to reach my goals. Also, my 401k requires at least 7% return being that it comes with a 1.25% annual fee. My wife's simple IRA has under-performed the market by a huge margin Mainstay target retirement funds. With these fees and terrible track record how can we hope to ever "make it"? We save diligently and live well below our means. Recently I read SS will most likely not be there for us either. I received a letter from SS preparing me for this eventuality by reporting that at this time SS is only funded 75% through 2025. All very alarming information and makes me feel very discouraged.
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flyingaway
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Re: What is the prediction of future long-term returns for your portfolio?

Post by flyingaway »

dkturner wrote:To put it mildly, it's pretty difficult to predict the future long-term returns of my portfolio. I'll try an settle for something a little easier. I'm content to try and estimate the relative returns of different asset classes over the next decade. Sometimes this is very difficult and at other times it's a little easier.

As an example take a look at international stocks. For the 10 years ending 1/31/2017 European stocks had annualized returns of 0.8%, Pacific stocks 1.9% and Emerging Markets stocks 2.4%. Since all these returns are quite close its pretty difficult to guess/predict which of these 3 asset classes is likely to provide better returns over the next decade.

On the other hand, for the last 10 years U.S. Stocks had annualized returns of 7.2% while International stocks as a group returned only 1.2%. That's a huge relative underperformance of 6 percentage points per year for the last 10 years. Disparities like this don't come around very often. There are no certainties in life but one could do a lot worse than lightening up on U.S. stocks and redeploy the funds to International stocks for the next decade, or until the relative returns of U.S. And International stocks converge again.

I know valuation driven capital redeployment is frowned on around here, but I'm not afraid to admit that I have more than doubled by allocation to International stocks over the last 3 months. Kind of reminds me of early 2000 when Mr. Bogle reported he had reduced his equity exposure by about half.
I have about 30% of my portfolio in international stocks. Every year I pray for international stocks to go on fire. They did not. Sometimes they surged at the beginning of the year, then came down. People lost a lot of money in the past 10 years (relative to S&P 500) by betting on international stocks.
dkturner
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Re: What is the prediction of future long-term returns for your portfolio?

Post by dkturner »

flyingaway wrote: People lost a lot of money in the past 10 years (relative to S&P 500) by betting on international stocks.
Most foreign currencies have been quite weak vs. the U.S.$ lately. The combination of lower valuation metrics of international equities coupled with lower priced foreign currencies has historically been a potent combination for above average future returns. No easy answers, just looking at the relative probablity of stronger international equity returns now compared to several years ago. If I'm wrong I don't believe it will prove to be particularly costly. My current international equity exposure is only 27%, up from 12% last Fall.
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Re: What is the prediction of future long-term returns for your portfolio?

Post by willthrill81 »

captpete wrote:Hi everyone,
I was just perusing the forum and found this thread. I am a bit alarmed by some of the posts here. I have anticipated annual return at 7%. That's not including inflation but that was what I am hoping/planning on getting to reach my goals. Also, my 401k requires at least 7% return being that it comes with a 1.25% annual fee. My wife's simple IRA has under-performed the market by a huge margin Mainstay target retirement funds. With these fees and terrible track record how can we hope to ever "make it"? We save diligently and live well below our means. Recently I read SS will most likely not be there for us either. I received a letter from SS preparing me for this eventuality by reporting that at this time SS is only funded 75% through 2025. All very alarming information and makes me feel very discouraged.
First of all, remember that Bogleheads tend to be a rather pessimistic, assume-the-worst bunch. Many worry about a 2% real (inflation adjusted) return, even though that's historically highly unlikely over even modest periods (i.e. 10+ years).

This thread shows the percentiles for different returns of the S&P 500.
viewtopic.php?f=10&t=210755

Looking at that chart (which turned out a bit messy, I apologize), we see that over a 20 year period, the S&P 500 had at least a 6.89% real return 50% of the time. So there's about an even chance of you earning your 7% if you were 100% in the S&P 500 over that entire period. Bonds are highly likely to create drag on your returns over this length of time, but you may need them to reduce your volatility to a manageable level. You'll have to determine whether a 50% chance of achieving your desired return. It certainly wouldn't be for me; I want at least an 80% (historic) chance of achieving my needed returns.

Second, you really, really need to get that 1.25% annual fee removed. I would recommend speaking to your HR person/group and demonstrating to them that this is completely unnecessary. A 1.25% annual fee plus the expense ratios of funds is absolutely atrocious.
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flyingaway
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Re: What is the prediction of future long-term returns for your portfolio?

Post by flyingaway »

dkturner wrote:
flyingaway wrote: People lost a lot of money in the past 10 years (relative to S&P 500) by betting on international stocks.
Most foreign currencies have been quite weak vs. the U.S.$ lately. The combination of lower valuation metrics of international equities coupled with lower priced foreign currencies has historically been a potent combination for above average future returns. No easy answers, just looking at the relative probablity of stronger international equity returns now compared to several years ago. If I'm wrong I don't believe it will prove to be particularly costly. My current international equity exposure is only 27%, up from 12% last Fall.
My idea is to use the low-valuation international funds to hedge against the high-valuation U.S. funds. Since I just need at least 2% real return for my portfolio, I think I could afford that. So I am actually increasing my international portion in my taxable accounts, and increasing bonds (from zero) in my tax-advantage accounts.
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Re: What is the prediction of future long-term returns for your portfolio?

Post by willthrill81 »

flyingaway wrote:
dkturner wrote:
flyingaway wrote: People lost a lot of money in the past 10 years (relative to S&P 500) by betting on international stocks.
Most foreign currencies have been quite weak vs. the U.S.$ lately. The combination of lower valuation metrics of international equities coupled with lower priced foreign currencies has historically been a potent combination for above average future returns. No easy answers, just looking at the relative probablity of stronger international equity returns now compared to several years ago. If I'm wrong I don't believe it will prove to be particularly costly. My current international equity exposure is only 27%, up from 12% last Fall.
My idea is to use the low-valuation international funds to hedge against the high-valuation U.S. funds. Since I just need at least 2% real return for my portfolio, I think I could afford that. So I am actually increasing my international portion in my taxable accounts, and increasing bonds (from zero) in my tax-advantage accounts.
Here's some food for thought from John Bogle.

"So, I don't do international. And emerging markets is a little separate part of so-called "international." We're wonderful in America--we call non-U.S. funds international. Where's the U.S.? (Laughs.) They are really non-U.S. funds--non-U.S. portfolios. I probably talked about this a year ago. I say, "What are you buying?" There is such a thing as oversimplifying--this coming, of course, from the great simplifier. People say, "Buy the EAFE Index or the FTSE International Index." So, . What are you buying? Look behind the curtain. Your largest investment is Britain. Your second-largest investment is Japan. Your third-largest investment is France.

What, Christine, I ask you, is the possibility that those three nations are going to outpace the U.S. in terms of investment return in the next 10 years? I just don't think it's possible."

http://www.morningstar.com/cover/videoc ... ?id=718644
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flyingaway
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Re: What is the prediction of future long-term returns for your portfolio?

Post by flyingaway »

willthrill81 wrote:[ .
Here's some food for thought from John Bogle.

"So, I don't do international. And emerging markets is a little separate part of so-called "international." We're wonderful in America--we call non-U.S. funds international. Where's the U.S.? (Laughs.) They are really non-U.S. funds--non-U.S. portfolios. I probably talked about this a year ago. I say, "What are you buying?" There is such a thing as oversimplifying--this coming, of course, from the great simplifier. People say, "Buy the EAFE Index or the FTSE International Index." So, . What are you buying? Look behind the curtain. Your largest investment is Britain. Your second-largest investment is Japan. Your third-largest investment is France.

What, Christine, I ask you, is the possibility that those three nations are going to outpace the U.S. in terms of investment return in the next 10 years? I just don't think it's possible."

http://www.morningstar.com/cover/videoc ... ?id=718644[/quote]

I see Bogle's point, but I just want more diversification to reduce risks.
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Re: What is the prediction of future long-term returns for your portfolio?

Post by KyleAAA »

I think 4-5% real is probable for my highly tilted 70/30 portfolio over the next 20-30 years. If I get 6% real maybe I'll buy an extra yacht.

But I don't know anything.
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flyingaway
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Re: What is the prediction of future long-term returns for your portfolio?

Post by flyingaway »

flyingaway wrote: Tue Feb 07, 2017 12:03 pm Based on a retirement calculator, if we retire at 55, we will run out of money at 93 with a 2% real return. For me, that is not too bad.
But the curve with a 3% real return looks really nice, and might be used to convince my wife that we can retire.
9 months after this thread, my 70/30 portfolio can now survive the 2% long-term real return. How remarkably the market can invalidate any fruitless predictions!!!

Now, wait until a market correction of 10% or more, then I will need the 3% return.
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