Could all of these "low expected returns over next 10 years" predictions be wrong?

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TheBogleWay
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Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by TheBogleWay » Fri Mar 16, 2018 3:05 am

The obvious answer is yes (lol I know that will get quoted) but I'm just wondering, as much as BHs are "anti market time" they all seem to subscribe to the recent predictions that suggest the next 10 years might have 4% returns on average or so.


What are the chances that's entirely wrong?

Or, here's some food for thought. What if... for the first time in recorded human history, computer programs have become so advanced that efficiency at companies has increased to never before seen levels with logistics programs/statistics/AI/etc. Therefore, these abnormally good company returns are actually the new norm.


Maybe it doesn't work like that?

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by Utahdogowner » Fri Mar 16, 2018 3:33 am

I sure hope they're wrong, because I'm just at the beginning really of the investing end of my career, and you're right, there are a lot of really smart people who are saying that the future looks awful; but if it does my future doesn't look as awful as most of the rest of America that can't save anything from a paycheck . . . But that doesn't make me feel any better. So, I just hope they're wrong.

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by AlohaJoe » Fri Mar 16, 2018 4:01 am

TheBogleWay wrote:
Fri Mar 16, 2018 3:05 am
The obvious answer is yes (lol I know that will get quoted) but I'm just wondering, as much as BHs are "anti market time" they all seem to subscribe to the recent predictions that suggest the next 10 years might have 4% returns on average or so.


What are the chances that's entirely wrong?
Just taking Vanguard as an example, this is what they are actually saying:

There is a 50% chance that US equity returns are between 2% and 7% nominal returns. And a 50% chance it isn't. There's a 25% chance it is lower than 2%. And a 25% chance it is higher than 7%. That's according to their own model, which may very well be wrong. When you say "entirely wrong" you seem to mean "entirely way too low". So according to Vanguard's own model there is a 25% chance returns are higher than 4% (in the range of 4-7%) and a 25% chance they are higher than 7%.

Most people would look at that and say "there is a 25% chance it is entirely wrong" (on the upside).

Virtually all other forecasts, from GMO, AQR, BlackRock, etc -- work in the same way. The number that gets quoted in the news is usually the median number, meaning there's a 50% chance returns will be higher and about a 25% chance they will be substantially higher.

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by TheBogleWay » Fri Mar 16, 2018 4:04 am

Utahdogowner wrote:
Fri Mar 16, 2018 3:33 am
I sure hope they're wrong, because I'm just at the beginning really of the investing end of my career, and you're right, there are a lot of really smart people who are saying that the future looks awful; but if it does my future doesn't look as awful as most of the rest of America that can't save anything from a paycheck . . . But that doesn't make me feel any better. So, I just hope they're wrong.


On the contrary, somebody here just said something in another thread that was an eye opener. I wonder if anyone else will read this and confirm. Early on in your investing life, assuming you have decades in front of you, a crash would actually be beneficial to you because it would be like buying stocks on sale. Then hopefully by retirement it corrects, you bought everything on sale and see some unusually good "catch up" years.

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by b.lock » Fri Mar 16, 2018 4:20 am

It's certainly possible that returns are 4% or lower, but I have very little faith in the ability of "experts" to predict such a thing. Even if they turn out to be right, they will probably be right for the wrong reasons. Humans are terrible at predicting things. predicting something over 10 years is amazingly hard. There have been periods, I assume, where stocks returned 4% over 10 years, and there will be again. But trying to predict it is next to impossible.

Stay the course.

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by Cyclesafe » Fri Mar 16, 2018 4:32 am

The predictions are almost certainly wrong. Equity returns will most certainly be less than or greater than 4%.

In the shorter term, equity returns are a function of demand and supply for those equities. Investors who are optimistic about prospects are investing on the margin, IOW's the last investor to make a buy sets the return - for that moment in time. Now that marginal investor could be a Nobel prize winning genius (or insider trader) who through superior analytical skills (and/or superior to the market access to information) determines an opportunity or it could be somebody who, casino-style, lets it ride for no special reason on 22 black. Or it could be an investor that automatically plows a sum every month into equity no matter what. All determine the return - for that moment.

Either the genius, gambler, or plodder could have - in hindsight - made the right decision for themselves, but the hindsight explanation for their success is likely not related to their original rationale for making the investment. And the later they are applying hindsight analysis, the less likely they were right in the first place. They were lucky. Or if things didn't turn out well, they were unlucky.

In the longer term, IMHO, fundamentals matter. If the economy is humming along, if prospects for the economy are rosy, investors become less risk adverse and bid up equity in those companies doing well and are expected to continue dong so. But unexpected good and bad things are just over the horizon - always.

An accumulator should save as much as possible and invest acceptable (for them) proportions in both equity and fixed. There is no guarantee that at the end there will be enough to retire on, but if money is NOT saved and invested, there surely will not be enough.

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by david1082b » Fri Mar 16, 2018 5:24 am

Returns in the last ten years have been average rather than abnormally high. Not all Bogleheads subscribe to 4% predictions. The future is not ours to see.

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by craimund » Fri Mar 16, 2018 5:40 am

david1082b wrote:
Fri Mar 16, 2018 5:24 am
Returns in the last ten years have been average rather than abnormally high. Not all Bogleheads subscribe to 4% predictions. The future is not ours to see.
Correct. And the stock market was terrible from 2000-2008. Since 2000, the market has underperformed significantly (7% vs 11%). You could view that as indicating higher than average returns going forward (reversion to mean). Stock prediction is like fortune telling or palm reading.
"When you ain't got nothing, you got nothing to lose"-Bob Dylan 1965. "When you think that you've lost everything, you find out you can always lose a little more"-Dylan 1997

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by F150HD » Fri Mar 16, 2018 5:45 am

TheBogleWay wrote:
Fri Mar 16, 2018 3:05 am
The obvious answer is yes (lol I know that will get quoted) but I'm just wondering, as much as BHs are "anti market time" they all seem to subscribe to the recent predictions that suggest the next 10 years might have 4% returns on average or so.


What are the chances that's entirely wrong?

Or, here's some food for thought. What if... for the first time in recorded human history, computer programs have become so advanced that efficiency at companies has increased to never before seen levels with logistics programs/statistics/AI/etc. Therefore, these abnormally good company returns are actually the new norm.


Maybe it doesn't work like that?
Recall what 'they' were predicting for LAST year? doom and gloom. Its hard to believe anything I read anymore??

Wall Street's consensus S&P 500 forecast calls for a little more than a 5 percent gain in 2017, the smallest increase predicted since a 2.8 percent forecast heading into 2005...

Despite euphoria, Wall Street's 2017 forecast is the most bearish annual outlook in 12 years
John Melloy | @johnmelloy
Published 2:44 PM ET Tue, 3 Jan 2017
CNBC.com


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nisiprius
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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by nisiprius » Fri Mar 16, 2018 6:52 am

Therefore, since the world has still
Much good, but much less good than ill,
And while the sun and moon endure
Luck’s a chance, but trouble’s sure,
I’d face it as a wise man would,
And train for ill and not for good.
--A. E. Housman

A life problem we all face is that optimists are happier and more successful, but pessimists are more accurate.
Or, here's some food for thought. What if... for the first time in recorded human history, computer programs have become so advanced that efficiency at companies has increased to never before seen levels with logistics programs/statistics/AI/etc. Therefore, these abnormally good company returns are actually the new norm.

Maybe it doesn't work like that?
Well, what you just said is exactly what "everybody" was saying in the late 1990s. The New Economy. The old criteria for valuing stocks no longer applied. "This time it's different." It wasn't true then, but maybe it's true now.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by azanon » Fri Mar 16, 2018 7:04 am

TheBogleWay wrote:
Fri Mar 16, 2018 3:05 am
What are the chances that's entirely wrong?
Zero chance. The expected returns for bonds and stocks, done correctly, is being calculated mathematically and rationally. If we turn out having, say, a 2 standard deviation event on the upside, that wouldn't me that the original calculation is "wrong".

It's critically important to understand that these are estimates, based on rational calculations. As long as that's true, they could never be wrong.

Ok, I get what you're saying, but I just think it's so important to not equate an estimate with a prediction. People who do this carefully, like Jack Bogle, are usually carefully-enough worded to not call it a prediction. Even sites like Research Affiliates are well aware of statistical deviation, and that 2+ standard deviation events in either direction are possible.

Before everyone gets too energized to throw future long-term estimates of stocks and bonds under the bus, please first remember that this is one of Jack Bogle's favorite things to do is to estimate both any time he's given the chance.

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by JAFFX2 » Fri Mar 16, 2018 7:28 am

What is it they say.....Past Performance Is Not Indicative Of Future Results. Performance is a random variable....it has a historical average that some folks are trying to predict. Furthermore it is based on underlying assumptions that it is driven by other historical key variables and associated trends, which they also are attempting to predict. Too many variables with significant deviations. The unpredictable deviations can vary so wildly that for the most part these predictions are very broad. 50% chance of this or 50% chance of that......no better than most weather forecasts! Might as well invest in a Crystal ball, might have a better chance at forecasting market performance.

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by KlangFool » Fri Mar 16, 2018 7:33 am

TheBogleWay wrote:
Fri Mar 16, 2018 3:05 am
The obvious answer is yes (lol I know that will get quoted) but I'm just wondering, as much as BHs are "anti market time" they all seem to subscribe to the recent predictions that suggest the next 10 years might have 4% returns on average or so.
TheBogleWay,

The correct answer is it won't matter what the average return is. A real investor will not be getting the average return. You should learn to understand this. Then, you will learn to ignore all those noises.

Look at your own portfolio. Is it getting the average return of 2017?

KlangFool

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by nisiprius » Fri Mar 16, 2018 7:48 am

azanon wrote:
Fri Mar 16, 2018 7:04 am
TheBogleWay wrote:
Fri Mar 16, 2018 3:05 am
What are the chances that's entirely wrong?
Zero chance. The expected returns for bonds and stocks, done correctly, is being calculated mathematically and rationally...
Not quite. I'm too lazy to refresh my understanding of the Gordon Equation, but the way the "low expected returns" are presented is that, in order for the expected returns over the next ten years to match the "historic returns of the stock market"--say 10% nominal, 6.5% real--you have to assume dividends that are literally unbelievably high. Which in turn means corporate earnings that are literally unbelievably high.

But TheBogleWay is asking whether "computer programs have become so advanced that efficiency at companies has increased to never before seen levels with logistics programs/statistics/AI/etc. Therefore, these abnormally good company returns are actually the new norm." That is, we are in the New Economy. I mean, of course, a new New Economy, not the tired old New Economy of the late 1990s and the Wired index that collapsed in 2000-2002.

It's not impossible. We do seem to be putting more and more dollars, the economy seems to be more and more concerned with service and intangibles than it was fifty years ago. If human concepts of what is valuable shift to something that's easier to produce than neodymium or jet engines, the rules could change. The whole basis of cryptocurrency is that people have successfully created a belief in the value of something that wasn't believed valuable before.

I remember back in the late 1990s saying to a friend, "I just don't get it. I know GE and IBM are great companies and all that, but they're big, mature companies. They can't possibly really be growing at 20% per year and they can't possibly sustain it. They're already in every country on earth. What on earth are they doing that is all that wonderful? They aren't building power plants based on cold fusion or anything." And my friend, who had a subscription to the Wall Street Journal, shrugged and said, "Earnings. The earnings numbers justify it."

Well, I don't believe it for an instant, but certainly it is possible that something has happened that enables companies to make far higher earnings than ever before in human history, in which case one of the inputs to the Gordon equation would be far higher than ever before.

I don't believe it for an instant, though. And, did I mention that I don't believe it?
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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by Morse Code » Fri Mar 16, 2018 7:58 am

I have been hearing predictions that future stock market returns will be lower than average for the last 15-20 years (since I've been paying attention). I didn't start tracking my personal annualized portfolio ROR until 2005, but it has averaged 9.3% through 2017. Below average perhaps, but higher than my planning estimation and sufficient to reach my goals. I suspect the future will be the same.
Last edited by Morse Code on Fri Mar 16, 2018 8:03 am, edited 1 time in total.
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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by staythecourse » Fri Mar 16, 2018 8:01 am

Boy shows how much of a contrarian or cynic I am I just ASSUME all the predictions are wrong. Herd mentality is strong EVEN in experts.

Good luck.
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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by magicrat » Fri Mar 16, 2018 8:27 am

JAFFX2 wrote:
Fri Mar 16, 2018 7:28 am
What is it they say.....Past Performance Is Not Indicative Of Future Results. Performance is a random variable....it has a historical average that some folks are trying to predict. Furthermore it is based on underlying assumptions that it is driven by other historical key variables and associated trends, which they also are attempting to predict. Too many variables with significant deviations. The unpredictable deviations can vary so wildly that for the most part these predictions are very broad. 50% chance of this or 50% chance of that......no better than most weather forecasts! Might as well invest in a Crystal ball, might have a better chance at forecasting market performance.
Meteorologists are actually some of the best professional forecasters out there. The problem is the 95% of people who can't understand and interpret probabilities. They see a forecast like "there's a 20% chance of rain tomorrow", and if it rains they curse the weatherman.

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by carguyny » Fri Mar 16, 2018 8:38 am

staythecourse wrote:
Fri Mar 16, 2018 8:01 am
Boy shows how much of a contrarian or cynic I am I just ASSUME all the predictions are wrong. Herd mentality is strong EVEN in experts.

Good luck.
I'm in your camp and I have work on wall street for the last 20 years and have 7 years education in quantitative methods and stats.

Fundamental models are just run to make sure you're not missing anything obvious in an investment decision.

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by JAFFX2 » Fri Mar 16, 2018 9:22 am

magicrat wrote:
Fri Mar 16, 2018 8:27 am
JAFFX2 wrote:
Fri Mar 16, 2018 7:28 am
What is it they say.....Past Performance Is Not Indicative Of Future Results. Performance is a random variable....it has a historical average that some folks are trying to predict. Furthermore it is based on underlying assumptions that it is driven by other historical key variables and associated trends, which they also are attempting to predict. Too many variables with significant deviations. The unpredictable deviations can vary so wildly that for the most part these predictions are very broad. 50% chance of this or 50% chance of that......no better than most weather forecasts! Might as well invest in a Crystal ball, might have a better chance at forecasting market performance.
Meteorologists are actually some of the best professional forecasters out there. The problem is the 95% of people who can't understand and interpret probabilities. They see a forecast like "there's a 20% chance of rain tomorrow", and if it rains they curse the weatherman.
You are correct about meteorologists, and the reality about weather forecasts. When it comes to market performance and 50/50 numbers being bantered about, how can you have any real confidence in that? Anyone can forecast 50/50 and have just as much chance at being right as wrong.....

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by magicrat » Fri Mar 16, 2018 9:24 am

JAFFX2 wrote:
Fri Mar 16, 2018 9:22 am
magicrat wrote:
Fri Mar 16, 2018 8:27 am
JAFFX2 wrote:
Fri Mar 16, 2018 7:28 am
What is it they say.....Past Performance Is Not Indicative Of Future Results. Performance is a random variable....it has a historical average that some folks are trying to predict. Furthermore it is based on underlying assumptions that it is driven by other historical key variables and associated trends, which they also are attempting to predict. Too many variables with significant deviations. The unpredictable deviations can vary so wildly that for the most part these predictions are very broad. 50% chance of this or 50% chance of that......no better than most weather forecasts! Might as well invest in a Crystal ball, might have a better chance at forecasting market performance.
Meteorologists are actually some of the best professional forecasters out there. The problem is the 95% of people who can't understand and interpret probabilities. They see a forecast like "there's a 20% chance of rain tomorrow", and if it rains they curse the weatherman.
You are correct about meteorologists, and the reality about weather forecasts. When it comes to market performance and 50/50 numbers being bantered about, how can you have any real confidence in that? Anyone can forecast 50/50 and have just as much chance at being right as wrong.....
What do you mean by 50/50 numbers?

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by thangngo » Fri Mar 16, 2018 9:27 am

TheBogleWay wrote:
Fri Mar 16, 2018 3:05 am
The obvious answer is yes (lol I know that will get quoted) but I'm just wondering, as much as BHs are "anti market time" they all seem to subscribe to the recent predictions that suggest the next 10 years might have 4% returns on average or so.


What are the chances that's entirely wrong?

Or, here's some food for thought. What if... for the first time in recorded human history, computer programs have become so advanced that efficiency at companies has increased to never before seen levels with logistics programs/statistics/AI/etc. Therefore, these abnormally good company returns are actually the new norm.


Maybe it doesn't work like that?
Who cares?

But you don't want to be on the wrong side of this prediction 10 years down the road. Have low expectation in your planning and save more.

I'm ok with being wrong and have more money. I'm NOT ok with being wrong and don't have enough money.

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by 220volt » Fri Mar 16, 2018 9:36 am

See my signature.
"If I had only followed the advice of financial analysts in 2008, I'd have a million dollars today, provided I started with a hundred million dollars" - Jon Stewart

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by grayfox » Fri Mar 16, 2018 9:54 am

It looks like I accidentally deleted this post.
Last edited by grayfox on Sat Mar 17, 2018 12:35 pm, edited 5 times in total.

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by Nate79 » Fri Mar 16, 2018 10:07 am

I don't invest for only 10 years, so who cares.

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by lostdog » Fri Mar 16, 2018 10:09 am

Utahdogowner wrote:
Fri Mar 16, 2018 3:33 am
I sure hope they're wrong, because I'm just at the beginning really of the investing end of my career, and you're right, there are a lot of really smart people who are saying that the future looks awful; but if it does my future doesn't look as awful as most of the rest of America that can't save anything from a paycheck . . . But that doesn't make me feel any better. So, I just hope they're wrong.

62% of Americans save little or nothing. You're doing well just by saving.


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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by DC3509 » Fri Mar 16, 2018 10:53 am

In 2002, a financial writer who is very well respected on these boards (and for good reason) predicted that the real return on U.S. large stocks on a going forward basis would be .... 3.5%. He was dead wrong. The return has been closer to 10% since that time -- and that was with the great recession.

Who was the financial writer? Bill Bernstein. Look at the top of pg. 72 in the Four Pillars of Investing.

I say this as no criticism of Bill Bernstein, or the Four Pillars of Investing. It is a terrific book, overall. But I read it well after it was originally published, and when I got the part about his "future predictions," and this 3.5% prediction, I was astounded because he was clearly wrong about this. You can come up with a lot of different reasons for why, but the proof is in the pudding -- the return for large stocks has been almost 3X what Bernstein thought it would be 15 years ago.

Financial writers are at their best when they explain things in novel ways -- that is why I loved the Four Pillars of Investing, If You Can, etc. They are at their weakest when they are trying to predict the future.

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by jimmyq » Fri Mar 16, 2018 10:58 am

Yes, most experts estimate lower expected returns over the next 10 years. But if this holds true, then after 10 years, does this mean that things should go back to normal so that the NEXT 10 or 20 years would revert back to historical averages? Sure, there are a lot of unknowns, but I was just wondering if one of their underlying assumptions was that returns would be low for 10 years until some benchmark improves (such as valuations), and then average returns would expect to rise again.

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by JAFFX2 » Fri Mar 16, 2018 11:11 am

magicrat wrote:
Fri Mar 16, 2018 9:24 am
JAFFX2 wrote:
Fri Mar 16, 2018 9:22 am
magicrat wrote:
Fri Mar 16, 2018 8:27 am
JAFFX2 wrote:
Fri Mar 16, 2018 7:28 am
What is it they say.....Past Performance Is Not Indicative Of Future Results. Performance is a random variable....it has a historical average that some folks are trying to predict. Furthermore it is based on underlying assumptions that it is driven by other historical key variables and associated trends, which they also are attempting to predict. Too many variables with significant deviations. The unpredictable deviations can vary so wildly that for the most part these predictions are very broad. 50% chance of this or 50% chance of that......no better than most weather forecasts! Might as well invest in a Crystal ball, might have a better chance at forecasting market performance.
Meteorologists are actually some of the best professional forecasters out there. The problem is the 95% of people who can't understand and interpret probabilities. They see a forecast like "there's a 20% chance of rain tomorrow", and if it rains they curse the weatherman.
You are correct about meteorologists, and the reality about weather forecasts. When it comes to market performance and 50/50 numbers being bantered about, how can you have any real confidence in that? Anyone can forecast 50/50 and have just as much chance at being right as wrong.....
What do you mean by 50/50 numbers?
Exactly as it was written in the post above.....

Just taking Vanguard as an example, this is what they are actually saying:

There is a 50% chance that US equity returns are between 2% and 7% nominal returns. And a 50% chance it isn't.
Last edited by JAFFX2 on Fri Mar 16, 2018 11:12 am, edited 1 time in total.

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by HomerJ » Fri Mar 16, 2018 11:11 am

azanon wrote:
Fri Mar 16, 2018 7:04 am
TheBogleWay wrote:
Fri Mar 16, 2018 3:05 am
What are the chances that's entirely wrong?
Zero chance. The expected returns for bonds and stocks, done correctly, is being calculated mathematically and rationally. If we turn out having, say, a 2 standard deviation event on the upside, that wouldn't mean that the original calculation is "wrong".
This is correct and wrong at the same time.

It is indeed possible that the expected return calculations are correct. If the 1% chance occurs, I agree that doesn't prove the calculation was wrong.

However, nobody knows if the expected return formula is actually correct. You say it's rational and mathematical. I say there may be unknown variables.

I am not saying I know the formula is wrong, but you can't say you know the formula is right either.

For example, it is certainly possible that flood calculations are correct, and the fact that we got three "1 in 100 years" floods over a decade recently is just bad bad luck. I submit it's ALSO rational to wonder if maybe, just maybe, the flood calculations are wrong, or if a variable has changed.

The fact that valuations have been at historical highs for 26 years straight means it's rational to wonder if maybe, just maybe, something has changed. And it's not like we haven't had opportunities for valuations to revert. We've gone through two major bear markets, one of which was nearly a full blown collapse of the entire financial system.

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by HomerJ » Fri Mar 16, 2018 11:13 am

jimmyq wrote:
Fri Mar 16, 2018 10:58 am
Yes, most experts estimate lower expected returns over the next 10 years. But if this holds true, then after 10 years, does this mean that things should go back to normal so that the NEXT 10 or 20 years would revert back to historical averages? Sure, there are a lot of unknowns, but I was just wondering if one of their underlying assumptions was that returns would be low for 10 years until some benchmark improves (such as valuations), and then average returns would expect to rise again.
Yes, this has always been my point. Stock market has cycles.

The next 10 years may indeed have low returns, but then it will probably be followed by a decade of extra large returns.

The historical 7% real stock market return INCLUDES all the "lost decades" and the bear markets and the crashes.

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by JAFFX2 » Fri Mar 16, 2018 11:16 am

HomerJ wrote:
Fri Mar 16, 2018 11:11 am
azanon wrote:
Fri Mar 16, 2018 7:04 am
TheBogleWay wrote:
Fri Mar 16, 2018 3:05 am
What are the chances that's entirely wrong?
Zero chance. The expected returns for bonds and stocks, done correctly, is being calculated mathematically and rationally. If we turn out having, say, a 2 standard deviation event on the upside, that wouldn't mean that the original calculation is "wrong".
This is correct and wrong at the same time.

It is indeed possible that the expected return calculations are correct. If the 1% chance occurs, I agree that doesn't prove the calculation was wrong.

However, nobody knows if the expected return formula is actually correct. You say it's rational and mathematical. I say there may be unknown variables.

I am not saying I know the formula is wrong, but you can't say you know the formula is right either.

For example, it is certainly possible that flood calculations are correct, and the fact that we got three "1 in 100 years" floods over a decade recently is just bad bad luck. I submit it's ALSO rational to wonder if maybe, just maybe, the flood calculations are wrong, or if a variable has changed.

The fact that valuations have been at historical highs for 26 years straight means it's rational to wonder if maybe, just maybe, something has changed. And it's not like we haven't had opportunities for valuations to revert. We've gone through two major bear markets, one of which was nearly a full blown collapse of the entire financial system.
Completely agree with HomerJ

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Alexa9
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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by Alexa9 » Fri Mar 16, 2018 11:24 am

Lower taxes/regulations are good for the economy. Things could really take off. I wouldn't go 100% equities though.

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by Jon H » Fri Mar 16, 2018 11:28 am

I've been trying to figure out why this matters.

On the day after ten years elapses, are we all going to remove our money from the market having gotten X% average annual return? Certainly not all of us or even most of us.

It would matter if I was withdrawing from funds today and over the next ten years at >X%. If <X%, the growth rate would be less than the "expected" return. Sequence of returns risk?

Is this the point, or am I missing something?
Consider gain and loss, but never be greedy and everything will be alright (fortune cookie)

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by grayfox » Fri Mar 16, 2018 11:38 am

DC3509 wrote:
Fri Mar 16, 2018 10:53 am
In 2002, a financial writer who is very well respected on these boards (and for good reason) predicted that the real return on U.S. large stocks on a going forward basis would be .... 3.5%. He was dead wrong. The return has been closer to 10% since that time -- and that was with the great recession.

Who was the financial writer? Bill Bernstein. Look at the top of pg. 72 in the Four Pillars of Investing.
I have the book. Sure enough, on page 72

Table 2-2. Expected Long-Term Real Returns
.....Asset Class.......Expected Real Return
Large U.S. Stocks................3.5%

How did Large U.S. Stocks actually do in the 16 years 2002 to 2018?
I'll use Vanguard S&P 500 (VFINX) for Large U.S. Stocks.
Portfolio visualizer shows CAGR=7.50%

But that's nominal return. BLS Inflation calculator shows $1.00 in Jan-2002 now requires $1.40 in Feb-2018. So that is annual inflation rate i = 1.40^(1/16) = 2.17% per annum.

If I adjust the 7.50% nominal return for inflation using formula real return = (1 + r)/(1+i) - 1 = 5.22% per annum real return

Bernstein wrote Expected Real Return = 3.5%.
Actual Real Return(2002-2018) = 5.2%
Actual Real Return was +172 basis points higher than expected return.

That's well within the variance I would expect** over 16 years.

** Expected Range of Outcomes:
10-years: +/- 800 bps
20-years: +/- 400 bps
Last edited by grayfox on Fri Mar 16, 2018 11:52 am, edited 1 time in total.

getrichslowly
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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by getrichslowly » Fri Mar 16, 2018 11:52 am

TheBogleWay wrote:
Fri Mar 16, 2018 3:05 am
The obvious answer is yes (lol I know that will get quoted) but I'm just wondering, as much as BHs are "anti market time" they all seem to subscribe to the recent predictions that suggest the next 10 years might have 4% returns on average or so.


What are the chances that's entirely wrong?
There is always a chance the bubble can get even bigger. No one knows when exactly a bubble will pop. If they could, they would have already traded on that information, therefore deflating the bubble efficiently. Markets can always be irrational over indeterminate lengths of time.
TheBogleWay wrote:
Fri Mar 16, 2018 3:05 am
Or, here's some food for thought. What if... for the first time in recorded human history, computer programs have become so advanced that efficiency at companies has increased to never before seen levels with logistics programs/statistics/AI/etc. Therefore, these abnormally good company returns are actually the new norm.


Maybe it doesn't work like that?
This is absolutely possible, it's just a matter of probabilities and quantities. Many of the companies anticipating rapid growth are already trading at enormously inflated valuations. AMZN is trading at PE=343. This is reminscient of the dot-com crash where investors believed "computer programs have become so advanced". Maybe this time it will actually happen, but its not really predictable. I definitely wouldn't be basing my investment strategy on the assumption that we hit a singularity in my lifetime.

To summarize the only real actionable advice is to increase your savings rate. Asset allocation remains the same.

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by HomerJ » Fri Mar 16, 2018 11:54 am

grayfox wrote:
Fri Mar 16, 2018 11:38 am
** Expected Range of Outcomes:
10-years: +/- 800 bps
20-years: +/- 400 bps
The whole exercise is pointless with a +/- of 8%.

And no one even knows if it's a true normal distribution.

getrichslowly
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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by getrichslowly » Fri Mar 16, 2018 11:58 am

azanon wrote:
Fri Mar 16, 2018 7:04 am

It's critically important to understand that these are estimates, based on rational calculations. As long as that's true, they could never be wrong.
If you're flipping a coin, then its rational to estimate a 50% chance of heads or tails.

If you're dropping a brick off the top of a skyscraper, then its rational to estimate the elapsed time before it hits the ground based measurements of gravity, air resistance, and the height of the building, incorporating standard engineering confidence intervals on each of those measurements and carrying them through to the final result.

But the stock market is a nonergodic process. It does not obey well-defined laws of physics. The exact mechanism of how returns are generated is not well understood. There are an infinite number of variables with unknown values and movements.

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grayfox
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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by grayfox » Fri Mar 16, 2018 12:06 pm

HomerJ wrote:
Fri Mar 16, 2018 11:54 am
grayfox wrote:
Fri Mar 16, 2018 11:38 am
** Expected Range of Outcomes:
10-years: +/- 800 bps
20-years: +/- 400 bps
The whole exercise is pointless with a +/- of 8%.

And no one even knows if it's a true normal distribution.
Unless someone has a secret weapon that can predict what the average earnings growth will be over time period and what the PE Multiple will be at the end of the period, you can't get much more accuracy than that.

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by Valuethinker » Fri Mar 16, 2018 12:20 pm

DC3509 wrote:
Fri Mar 16, 2018 10:53 am
In 2002, a financial writer who is very well respected on these boards (and for good reason) predicted that the real return on U.S. large stocks on a going forward basis would be .... 3.5%. He was dead wrong. The return has been closer to 10% since that time -- and that was with the great recession.

Who was the financial writer? Bill Bernstein. Look at the top of pg. 72 in the Four Pillars of Investing.

I say this as no criticism of Bill Bernstein, or the Four Pillars of Investing. It is a terrific book, overall. But I read it well after it was originally published, and when I got the part about his "future predictions," and this 3.5% prediction, I was astounded because he was clearly wrong about this. You can come up with a lot of different reasons for why, but the proof is in the pudding -- the return for large stocks has been almost 3X what Bernstein thought it would be 15 years ago.

Financial writers are at their best when they explain things in novel ways -- that is why I loved the Four Pillars of Investing, If You Can, etc. They are at their weakest when they are trying to predict the future.
Was that not 3.5% real return?

Note that the book would have gone to the publisher in finished form c. 18 months before, so as a prediction from mid 2000, that looks a lot more prescient?

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HomerJ
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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by HomerJ » Fri Mar 16, 2018 12:23 pm

getrichslowly wrote:
Fri Mar 16, 2018 11:52 am
AMZN is trading at PE=343.
How much of the S&P 500 PE ratio is caused by Amazon alone?

Amazon is like what, close to 3% of the S&P 500? So even if it dropped to zero, the S&P 500 would only drop 3% right?

S&P 500 current PE ratio is 25.76.

If Amazon was removed, what would it be?

2576 - (3*343) = 1547

1547/97 means the rest of the S*P 500 companies have average valuations of 16?

Have I discovered some amazing new truth?

Are valuations actually quite reasonable, and whole over-valuation narrative is caused solely by Amazon?

Or is my math completely wrong? (I'm guessing the latter) :)

Still, Amazon alone must skew valuations quite a bit.

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by Grt2bOutdoors » Fri Mar 16, 2018 12:26 pm

HomerJ wrote:
Fri Mar 16, 2018 12:23 pm
getrichslowly wrote:
Fri Mar 16, 2018 11:52 am
AMZN is trading at PE=343.
How much of the S&P 500 PE ratio is caused by Amazon alone?

Amazon is like what, close to 3% of the S&P 500? So even if it dropped to zero, the S&P 500 would only drop 3% right?

S&P 500 current PE ratio is 25.76.

If Amazon was removed, what would it be?

2576 - (3*343) = 1547

1547/97 means the rest of the S*P 500 companies have average valuations of 16?

Have I discovered some amazing new truth?

Are valuations actually quite reasonable, and whole over-valuation narrative is caused solely by Amazon?

Or is my math completely wrong? (I'm guessing the latter) :)

Still, Amazon alone must skew valuations quite a bit.
You must have read yesterday's WSJ which noted the same, and again in today's journal they note that most of the market is being moved by tech. Tech is trading at near perfect, nosebleed levels. The rest of the market is trading at historical norms if not below them. Since technology is about 25% of the market, figure the S&P 500 might decline about 10-15% but that likely will not be on a sustainable basis especially if growth is higher than the rest of economy, so let's call it 7.5% give or take.
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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by Valuethinker » Fri Mar 16, 2018 12:27 pm

TheBogleWay wrote:
Fri Mar 16, 2018 3:05 am


Or, here's some food for thought. What if... for the first time in recorded human history, computer programs have become so advanced that efficiency at companies has increased to never before seen levels with logistics programs/statistics/AI/etc. Therefore, these abnormally good company returns are actually the new norm.
An economist has an easy answer for that: fallacy of composition.

Individual companies may become more efficient. But that just means they grab sales and profits from other, less efficient ones.

If all companies become more efficient, they can only become more profitable if the total pool of profits increases. I.e. if the gains from efficiency are not passed on in terms of lower prices to consumers and/or higher wages to employees. i.e. if capital is the only winner.

Look at Amazon. Yes it is growing at a huge rate. But it doesn't make much money. It is clearly stealing business from older bricks and mortar companies, but not expanding the total profit pool.

Or Google and Facebook. They are taking 80%+ of the digital advertising market, which in turn is causing a meltdown in the conventional advertising markets.

Vanguard. Application of new technology (indexation) leads to wholesale reduction of profit margins of incumbent industry (asset management). That's not good for corporate profits in aggregate (especially since VG is not a listed company).

Technology benefits society as a whole-- technological progress, higher standard of living from the same inputs. But there is no reason to think it necessarily advantages capital against everything else. Indeed, if it makes enough people unemployed or afraid of being unemployed, then we have a slump-- shortfall of demand.

The big moneyspinner sector for investors the last 30 years? Tobacco. An industry with slow technological change and declining demand (in developed countries). But prodigious Free Cash Flow, far above what it can conceivably spend, so it returns it to shareholders.

You can't argue for higher equity returns simply on the basis of higher productivity.

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by CurlyDave » Fri Mar 16, 2018 12:30 pm

TheBogleWay wrote:
Fri Mar 16, 2018 3:05 am
The obvious answer is yes (lol I know that will get quoted) but I'm just wondering, as much as BHs are "anti market time" they all seem to subscribe to the recent predictions that suggest the next 10 years might have 4% returns on average or so.

What are the chances that's entirely wrong?

Or, here's some food for thought. What if... for the first time in recorded human history, computer programs have become so advanced that efficiency at companies has increased to never before seen levels with logistics programs/statistics/AI/etc. Therefore, these abnormally good company returns are actually the new norm.

Maybe it doesn't work like that?
I have been reading about "lower expectations" for several years now. Those gloomy predictions about "the next 10 years" started about 3 years ago.

Based on actual results, they were and still are wrong. My own belief is that the "tech revolution" is nearly as important as the industrial revolution. What we are seeing is the natural growth rate of the economy boosted by the efficiency increase brought about by technology. And, in the past year the removal of regulations has further boosted the economy.

But, what does that change if it is true? My retirement is quite a bit nicer because of the recent returns, but does that change my investing philosophy? My withdrawal strategy? I just keep plodding along with my index funds and being thankful that we started saving many long years ago.

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by DC3509 » Fri Mar 16, 2018 12:31 pm

grayfox wrote:
Fri Mar 16, 2018 11:38 am
DC3509 wrote:
Fri Mar 16, 2018 10:53 am
In 2002, a financial writer who is very well respected on these boards (and for good reason) predicted that the real return on U.S. large stocks on a going forward basis would be .... 3.5%. He was dead wrong. The return has been closer to 10% since that time -- and that was with the great recession.

Who was the financial writer? Bill Bernstein. Look at the top of pg. 72 in the Four Pillars of Investing.
I have the book. Sure enough, on page 72

Table 2-2. Expected Long-Term Real Returns
.....Asset Class.......Expected Real Return
Large U.S. Stocks................3.5%

How did Large U.S. Stocks actually do in the 16 years 2002 to 2018?
I'll use Vanguard S&P 500 (VFINX) for Large U.S. Stocks.
Portfolio visualizer shows CAGR=7.50%

But that's nominal return. BLS Inflation calculator shows $1.00 in Jan-2002 now requires $1.40 in Feb-2018. So that is annual inflation rate i = 1.40^(1/16) = 2.17% per annum.

If I adjust the 7.50% nominal return for inflation using formula real return = (1 + r)/(1+i) - 1 = 5.22% per annum real return

Bernstein wrote Expected Real Return = 3.5%.
Actual Real Return(2002-2018) = 5.2%
Actual Real Return was +172 basis points higher than expected return.

That's well within the variance I would expect** over 16 years.

** Expected Range of Outcomes:
10-years: +/- 800 bps
20-years: +/- 400 bps
Or he was off by about 1/3. I guess it depends how you look at it. I don't think though we can say this is a rounding error when you convert it into real numbers however. If you invest $250K today and have a 5.2% return -- it turns into $1.14 million. If you have a 3.5% return, it is $701,000. That's a huge difference.

I was looking at the past ten years where nominal return was closer to 10% but agree with your math if you are looking from 2002 to now.

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by JoeRetire » Fri Mar 16, 2018 12:36 pm

TheBogleWay wrote:
Fri Mar 16, 2018 3:05 am
Or, here's some food for thought. What if... for the first time in recorded human history, computer programs have become so advanced that efficiency at companies has increased to never before seen levels with logistics programs/statistics/AI/etc.
Pretty much by definition, since computer programs have existed, they have become advanced to levels never before seen.
Just because programs are better, that doesn't mean that efficiency at companies is better. (At least not in my long software career).
Therefore, these abnormally good company returns are actually the new norm.
This does follow from the prior statement.

Nobody knows what the future holds. I don't expect the past 10 years to be repeated. But I'm not sure I agree with "low returns for 10 years".
I guess it depends on how one defines "low returns".
Last edited by JoeRetire on Fri Mar 16, 2018 12:45 pm, edited 1 time in total.

DC3509
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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by DC3509 » Fri Mar 16, 2018 12:38 pm

grayfox wrote:
Fri Mar 16, 2018 12:06 pm
HomerJ wrote:
Fri Mar 16, 2018 11:54 am
grayfox wrote:
Fri Mar 16, 2018 11:38 am
** Expected Range of Outcomes:
10-years: +/- 800 bps
20-years: +/- 400 bps
The whole exercise is pointless with a +/- of 8%.

And no one even knows if it's a true normal distribution.
Unless someone has a secret weapon that can predict what the average earnings growth will be over time period and what the PE Multiple will be at the end of the period, you can't get much more accuracy than that.
And I agree with this too, but that's why all of this prediction business is so silly, and actually undermines people like Bill Bernstein when he takes a stab at it. Nobody knows where things are ultimately headed.

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by wrongfunds » Fri Mar 16, 2018 12:47 pm

With the +/- 8 range (for nominal value of 4), isn't the prediction pretty much useless? If the range itself is twice the nominal value, what good is it?

Would you ever buy any real physical thing if the purchase spec allowed +/- 200% variation?

Sometimes I just feel that all this theoretical discussion is solely being done to show how somebody is smarter than the audience.

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by DC3509 » Fri Mar 16, 2018 1:09 pm

grayfox wrote:
Fri Mar 16, 2018 11:38 am
DC3509 wrote:
Fri Mar 16, 2018 10:53 am
In 2002, a financial writer who is very well respected on these boards (and for good reason) predicted that the real return on U.S. large stocks on a going forward basis would be .... 3.5%. He was dead wrong. The return has been closer to 10% since that time -- and that was with the great recession.

Who was the financial writer? Bill Bernstein. Look at the top of pg. 72 in the Four Pillars of Investing.
I have the book. Sure enough, on page 72

Table 2-2. Expected Long-Term Real Returns
.....Asset Class.......Expected Real Return
Large U.S. Stocks................3.5%

How did Large U.S. Stocks actually do in the 16 years 2002 to 2018?
I'll use Vanguard S&P 500 (VFINX) for Large U.S. Stocks.
Portfolio visualizer shows CAGR=7.50%

But that's nominal return. BLS Inflation calculator shows $1.00 in Jan-2002 now requires $1.40 in Feb-2018. So that is annual inflation rate i = 1.40^(1/16) = 2.17% per annum.

If I adjust the 7.50% nominal return for inflation using formula real return = (1 + r)/(1+i) - 1 = 5.22% per annum real return

Bernstein wrote Expected Real Return = 3.5%.
Actual Real Return(2002-2018) = 5.2%
Actual Real Return was +172 basis points higher than expected return.

That's well within the variance I would expect** over 16 years.

** Expected Range of Outcomes:
10-years: +/- 800 bps
20-years: +/- 400 bps
I should also add --

You don't need a degree in anything to know that the average market return over the long run has been 7-8%, and inflation runs at 2-3%. So the expected real return is 5-6% -- which is exactly what happened since 2002. The section of the Four Pillars of Investing where these predictions appear is a long discussion about why the future will likely have lower returns than the historical average. Thus, I feel like offering a prediction which is in fact lower than the historical averages and then having the historical average actually occur shows how useless your prediction was in the first place. If Bernstein would have just said the historical average is likely to occur over the long run in the future then he would have been right. As it is, his prediction and the theory behind his prediction was not right.

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by 2015 » Fri Mar 16, 2018 1:30 pm

staythecourse wrote:
Fri Mar 16, 2018 8:01 am
Boy shows how much of a contrarian or cynic I am I just ASSUME all the predictions are wrong. Herd mentality is strong EVEN in experts.

Good luck.
Especially in "experts". There are many books on the hidden incentives within such circles, in all fields.

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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by 3funder » Fri Mar 16, 2018 1:32 pm

I believe that there will be lower returns over the intermediate term. Whether that means 8 years, 10 years, or 12 years, who knows?

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