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

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Portfolio7
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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by Portfolio7 » Fri Mar 16, 2018 2:07 pm

I have very little faith in such outlooks. I don't know if it's really actionable in any case, to know. I'm not changing my allocations in any way.

If I did, I guess maybe I'd be a little more conservative with my Equity/Bond split - no point taking on risk when returns will be sub-par. Or, if bond returns don't rise above 3%, should I go 100% equities, knowing returns will be 3.5%? Well, I'd have to trust that extra half percent, and I don't.

As someone with a very modest bit of statistics training, and who makes simple forecasts as part of my job, I have a visceral understanding of just how unlikely it is that nearly randomized data yield aggregate results predictable enough to bet on. No thanks.
An investment in knowledge pays the best interest.

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

Post by MJW » Fri Mar 16, 2018 2:19 pm

If we separate ourselves from the premise that history is helpful for determining what to expect from future returns, I am not sure how useful or actionable these outlooks even are. What should one do differently in addition to what they should be already doing in the interest of prudence? Cut even more costs from their life? Invest more aggressively? I don't know what I can do other than shrug and continue to do the best I can.

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

Post by GibsonL6s » Fri Mar 16, 2018 2:59 pm

They could be be wrong for any number of reasons we can't know or right for reasons we did not think they would be right for. We don't even know what the components of the S &P 500 will be.

I think one place they could be really wrong is in earnings. In 2006 Apple earned less than a dollar a share, it now earns over $9 per share. We do not know what innovations may come along to drive the growth of the companies in the funds/ETFs we own. My bet is mostly US as I believe most of the innovation will be in the US. Again, I use the word bet as no one knows.

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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 4:37 pm

CurlyDave wrote:
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.
Since 2010 there have been repeated calls that economic and monetary policies would lead to hyperinflation and economic disaster. Ditto deficits (US and other).
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.
So far, the productivity numbers have not shown it, I don't think. Productivity growth does not look great compared to before the Great Financial Crisis. In the US case (but not only) coupled with very modest growth in labour force compared to historic, the outlook is not particularly robust for growth.

What you are seeing is the late phases of a 9 year economic expansion-- the 2nd longest on record (ie since the 1930s when records began to be kept). This will in time peter out, hopefully not to a brutal recession but some sort of economic slowdown is almost inevitable.
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.
Technology change does not necessarily benefit corporate profits and hence Earnings Per Share. Right now, stock buybacks are probably a more important factor. As interest rates rise, they will get less attractive.

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

Post by Johnnie » Fri Mar 16, 2018 8:59 pm

Me on an earlier thread about the same subject:

Re: Return expectations for the next 10 years
Post by Johnnie » Sun Jun 26, 2016 9:40 am
The explanations of why returns will remain sucky for years and years make ever so much sense - and yet the record of such long term predictions in the past is laughably bad, and perhaps never more so than it's what "everyone knows."
Eyeballing the VG Total World Stock Market Index Fund chart on Morningstar, looks like it's up 40 percent since then. (So I got lucky. :D )
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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by randomguy » Fri Mar 16, 2018 11:23 pm

TheBogleWay wrote:
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.
Ask how many of those people are buying Japanese stocks that have been on sale for the past 25 years.:). Or if you don't want that extreme how many are loading up on european stocks? The line between distressed good and sale is pretty thin.

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

Post by heyyou » Fri Mar 16, 2018 11:40 pm

"Don't know and don't care." Said by Jason Zweig but to a different reference.
"Who knows? Who cares?" Firesign Theater

The media is just noise. They have to have attention getting headlines everyday.

A portion of the Serenity Prayer: "to accept the things I cannot change; ........ and the wisdom to know the difference. Living one day at a time; enjoying one moment at a time;.....

Dear wife and I have enough to continue to happily live our lower middle class lifestyle in retirement in our low cost of living area. We can adapt our spending to each recent annual portfolio balance. We really do not care what our equity returns are over the next decade because we will still be okay with a decade of spending in our bond funds, and max SS starting in two years.
"What, me worry?" Alfred E. Neuman, Mad magazine

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

Post by Mingus » Sat Mar 17, 2018 1:01 am

F150HD wrote:
Fri Mar 16, 2018 5:45 am

Recall what 'they' were predicting for LAST year? doom and gloom. Its hard to believe anything I read anymore??
It's all lies to push a narrative and scare people.

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

Post by JoMoney » Sat Mar 17, 2018 2:15 am

Book value of S&P 500 was $817.82 as of Sep 2017, back in Sep 2000 it was $319.60 ( http://us.spindices.com/documents/addit ... s-est.xlsx ) annualized that represents a 5.7% growth in the internal assets over the 17 year period... and that's despite the Dot-Com bust, despite the great recession, over a period of lower than average growth (US GDP grew 3.8% annualized from 2000-2017, compared to 6.1% from 1983-2000 http://www.multpl.com/us-gdp/table/by-year )
This was not a stellar period of growth. I don't think it's unfeasible that a productivity spurt could occur, but I don't think it's prudent to expect it either.
+ On top of the growth, the S&P 500 distributed about 2% in cash dividends.
There's also the matter of market price multiples: From Sep 2000 to Sep 2017 Price/Book value went down from about 4.5x to about 3.1x , which shaved more than 2% off investors returns over the period.

Maybe if one was super optimistic one could dream of 6% growth/GDP + 4% in buyback+dividend yield + 2% boost in price multiple with people giddy and markets frothy from high expectations making for 12% total return annualized. I don't think that's the prudent or likely expectation, but it could happen and similar things have happened in the past.
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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by Utahdogowner » Sat Mar 17, 2018 2:39 am

TheBogleWay wrote:
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.
A crash isn't what I'm worried about, it's that Bernstein and others are projecting much lower returns over the next 20ish years. I don't know of an alternative, so I'm going to keep investing like they're wrong, but I've seen and heard some talks from "experts" that predict the future is much slower growth, and hence smaller returns, for the future. Again, I'm not changing what I'm doing, but I just worry that I'll have to have a ridiculous savings rate to compensate for poorer performance of securities.

Or did I misunderstand the original post?

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

Post by lazyday » Sat Mar 17, 2018 3:09 am

JoMoney wrote:
Sat Mar 17, 2018 2:15 am
Maybe if one was super optimistic one could dream of 6% growth/GDP + 4% in buyback+dividend yield + 2% boost in price multiple with people giddy and markets frothy from high expectations making for 12% total return annualized. I don't think that's the prudent or likely expectation, but it could happen and similar things have happened in the past.
The US market has also fallen by 80% real in the past, and it's more expensive now than it was then.

We should balance a super optimistic prediction with a super pessimistic one. To me, US equity returning 0% real for 10 years is not pessimistic, it is realistic.

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

Post by JoMoney » Sat Mar 17, 2018 3:31 am

lazyday wrote:
Sat Mar 17, 2018 3:09 am
JoMoney wrote:
Sat Mar 17, 2018 2:15 am
Maybe if one was super optimistic one could dream of 6% growth/GDP + 4% in buyback+dividend yield + 2% boost in price multiple with people giddy and markets frothy from high expectations making for 12% total return annualized. I don't think that's the prudent or likely expectation, but it could happen and similar things have happened in the past.
The US market has also fallen by 80% real in the past, and it's more expensive now than it was then.

We should balance a super optimistic prediction with a super pessimistic one. To me, US equity returning 0% real for 10 years is not pessimistic, it is realistic.
Well I did hedge that I didn't think it was a prudent or likely expectation, and I certainly haven't seen any deficit in the "balance" of realistic and/or pessimistic predictions.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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

Post by grayfox » Sat Mar 17, 2018 12:36 pm

Decompose the Total Return last year from the Vanguard 500 Index Fund Investor Shares (VFINX). Vanguard does this under Price & Performance tab, Annual Investment Returns

Capital Return......Income Return......Total Return
....19.48%..................2.18%.............21.67%

Rounding, VFINX had about 22% return. 2% came from dividends and 20% came from share prices increases. Price increases provided 10x as much return as dividends. That's the only two places returns can come from: cash dividends and share price increases. Further decompose the 20% share price increase. How much of share price increase was from earnings growth. In other words, if PE stayed the same, how much would the price have increased?

From S&P 500 Earnings by Year
9/2017 97.07 +6.1% I'm using September because 12/2017 is not available yet,
9/2016 91.47

So 6.1% of the Price increase was from actual earnings growth.
That means 15.57% of the return was expansion of PE.

Then you can look at how much of the earnings growth per share was from actual earnings growth and how much was from net buybacks, resulting in fewer shares. In words, the pie is cut into fewer slices. I don't know how to figure that out.

The problem I see is that the PE can't keep on expanding forever. CAPE was 24 in 2008. CAPE is now 33. To keep providing good returns, in ten years CAPE will have to be 43. Ten years later 53 and so on. 63, 73, 83. Is there a limit when PE can expand no more?

:idea: It sound like the Greater Fool Theory. Maybe it can go on for decades. I bet that 20 years from now, CAPE will be 53, Bernstein will be saying expect 2% real return, and people will be posting that the returns have been 7% per year for the past 20 years, and Bernstein was dead wrong.

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

Post by nedsaid » Sat Mar 17, 2018 12:49 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.
Your math is probably wrong but you have raised a good point. The average P/E of the S&P 500 is probably skewed higher by a few stocks. If you expanded your analysis to the FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google), you would probably see a bigger effect. On the other hand, these type of companies have an outsized proportion of the S&P 500 market cap. Which raises an interesting point, how average is average really if that average is skewed upwards by just a few stocks?

Hopefully, some quants can dig into this and come up with a more complete answer. If taking Amazon out of the S&P 500 takes the average P/E down to 16, then there wouldn't be much discussion of how overvalued the market is.

You have raised an interesting point.
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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by SB1234 » Sat Mar 17, 2018 1:07 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.
Unfortunately, I think the math is wrong in this case.
The relevant equation to solve would be,
(Price_amazon + Price_rest)/(earnings_amazon+earnings_rest)=25.76

earnings_amazon = 3/343 = 0.0087
Total earnings = 100/25.76 = 3.881
Therfore earnings_rest = total earnings - earnings_amazon = 3.873
Therfore Price_rest/earnings_rest = 97/3.873 = 25.041

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

Post by MotoTrojan » Sat Mar 17, 2018 1:28 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.


Maybe it doesn't work like that?
This is a fundamentally incorrect way to look at it. If price growth was similar to the norm but the companies returns (earnings) were growing faster than the past, we’d have a lower valuation situation and higher expected returns. Companies have not kept up with the growth people are attributing to them via price.

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

Post by randomguy » Sat Mar 17, 2018 3:33 pm

nedsaid wrote:
Sat Mar 17, 2018 12:49 pm


Your math is probably wrong but you have raised a good point. The average P/E of the S&P 500 is probably skewed higher by a few stocks. If you expanded your analysis to the FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google), you would probably see a bigger effect. On the other hand, these type of companies have an outsized proportion of the S&P 500 market cap. Which raises an interesting point, how average is average really if that average is skewed upwards by just a few stocks?

Hopefully, some quants can dig into this and come up with a more complete answer. If taking Amazon out of the S&P 500 takes the average P/E down to 16, then there wouldn't be much discussion of how overvalued the market is.

You have raised an interesting point.
I think the math is off but your logic also doesn't follow. You need to keep your samples the same. If you are taking out stocks like amazon now, you have to go back in history and also take out all the crazy outliers (and no they are not anything new) from the average.

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

Post by cfs » Sat Mar 17, 2018 3:37 pm

"If you are taking out stocks like amazon now, you have to go back in history and also take out all the crazy outliers (and no they are not anything new) from the average."

Concur with Mister Randomguy on this one.

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

Post by randomguy » Sat Mar 17, 2018 3:47 pm

MotoTrojan wrote:
Sat Mar 17, 2018 1:28 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.


Maybe it doesn't work like that?
This is a fundamentally incorrect way to look at it. If price growth was similar to the norm but the companies returns (earnings) were growing faster than the past, we’d have a lower valuation situation and higher expected returns. Companies have not kept up with the growth people are attributing to them via price.
The thing with stock prices is that they are all forward looking. What happened in the past doesn't matter as much as what will happen. If our GDP growth for the past decade was 2% but now I think it will be 4% (tax reform, less regulations, china and europe economies exploding, magic,...:)) I should be willing to pay a lot more for earnings now. People are paying now for growth they expect to happen. Obviously the more they pay, the higher their chances of being disappointed are.

As far as technology, who the heck knows how it will play out. You can have big winners but you will also have big losers. Imagine the self driving car is perfected. Some company will make 100's of billions. But where is that money coming from? Billions from lower auto insurance/medical costs from cutting the accident rate by 90%? Billions from all those unemployed drivers (Rigs, taxis, delivery services,...)? Billions from more people car sharing? How that all plays out is impossible to say. So far in history we tended to grow the economy to replace the lost work (i.e. compare the amount of math an accountant had to do in 1900 versus today. Or typing pools of the 60s). But that may or may not happen going forward.

And one thing to think about is the dot.com bust. A ton of those failed companies had ideas that are doing well today. I can order groceries/pet food, get things deliveried the same day, have video, and so on. The ideas were right. They were just 10-15 years early. Same thing could happen here. I wouldn't be shocked for all these autonomous cars to end up a lot more nichey (say high way only) that what we are dreaming of right now but then in 20 years they will have slowly expanded to take over the world.

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

Post by JoMoney » Sat Mar 17, 2018 3:54 pm

SB1234 wrote:
Sat Mar 17, 2018 1:07 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.
Unfortunately, I think the math is wrong in this case.
The relevant equation to solve would be,
(Price_amazon + Price_rest)/(earnings_amazon+earnings_rest)=25.76

earnings_amazon = 3/343 = 0.0087
Total earnings = 100/25.76 = 3.881
Therfore earnings_rest = total earnings - earnings_amazon = 3.873
Therfore Price_rest/earnings_rest = 97/3.873 = 25.041
I don't think that's the right equation either if you're simulating "index" earnings (which are done differently than how a mutual fund would do it for it's portfolio, and differs between companies on how they report it) i.e. The Inexact Business of Valuing ETFs
Part of the complication is that index providers like S&P use a methodology where all of the businesses earnings and losses are aggregated together and there is no good way to disentangle the losses from some companies, and the "price" needs to reflect the float-adjusted market-cap value of all the shares outstanding for the company and the "index divisor" worked into it. It can be a complicated mess to try to and work it backwards especially when looking at outlier situations like a particular stock or sector that's well outside the range of normal compared to the rest.
Last edited by JoMoney on Sat Mar 17, 2018 3:56 pm, edited 1 time in total.
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just frank
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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by just frank » Sat Mar 17, 2018 3:56 pm

Sure. But its just as likely right, and that means that in real terms, stocks go up 50%, down 30%, up 60%, and then down 40%.

In other words, almost flat. :D

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

Post by willthrill81 » Sat Mar 17, 2018 4:02 pm

HomerJ wrote:
Fri Mar 16, 2018 11:11 am
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.
:thumbsup

As the "Philosophical Economist" has said, valuations are only very crude tools when used to estimate future market returns. And over the long-term, even most of their proponents will argue that they largely don't matter.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by cfs » Sat Mar 17, 2018 4:11 pm

YES they could be totally wrong [again].

Have you wonder, how can so many "experts" be so [consistently] wrong?

Good luck with your investments, y gracias por leer ~cfs~
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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by getrichslowly » Sun Mar 18, 2018 12:23 am

JoeRetire wrote:
Fri Mar 16, 2018 12:36 pm
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).
I've noticed that as programs get better, workers get lazier. So productivity remains about the same.

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

Post by JBTX » Sun Mar 18, 2018 1:35 am

Anecdotally, It seems like more often than not, 10 year forecasts have been dramatically wrong. Nobody expected the late 90s bubble. Nobody expected the following crash. Nobody expected housing bubble and crash. Nobody expected equities to almost triple over the next 10 years.

It could be that the bull rages for another 10 years, with a few hiccups along the way. It could be that an unexpected event resets valuations to long term averages and we end up with one of the worst 10 year periods in recent history.

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

Post by Crushtheturtle » Sun Mar 18, 2018 4:34 am

The below is a link to a regular product from Yardeni Research, Inc.:

https://www.yardeni.com/pub/mscipe.pdf

At present, it indicates a Forward P/E for the US @ 17.3

This is consistent with the historical average of approx. 16, no?

Or is Forward P/E not as reliable as the backward-looking 10 Year CAPE, currently reading over 33, if the below link is correct?

http://www.multpl.com/shiller-pe/

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

Post by just frank » Sun Mar 18, 2018 6:17 am

Crushtheturtle wrote:
Sun Mar 18, 2018 4:34 am
The below is a link to a regular product from Yardeni Research, Inc.:

https://www.yardeni.com/pub/mscipe.pdf

At present, it indicates a Forward P/E for the US @ 17.3

This is consistent with the historical average of approx. 16, no?

Or is Forward P/E not as reliable as the backward-looking 10 Year CAPE, currently reading over 33, if the below link is correct?

http://www.multpl.com/shiller-pe/
I agree completely. This is my very issue with the utility of CAPE, that and Schiller saying to not use it as an investing tool!

It seems that CAPE fans would say that CAPE is based upon DATA, while forward PE is based upon projections that (given the history of downward revisions) are often biased. Correct me if I'm wrong.

I would say that we look forward when we are driving, not in the rearview....that would seem to reinforce the whole 'fighting the last war' problem.

And of course forward projections are rose-colored....everyone who uses Forward PE for earning projections derates them by a nominal amount.

The other difference is the 10 year horizon (into the future for CAPE) or the 1 year projection for forward. So much can happen in 10 years, I don't find a statistical prediction of where the market will be in 10 years actionable at all. An accounting prediction of where it might be a year with some positive assumptions....very actionable.

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

Post by Cosmo » Sun Mar 18, 2018 7:07 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.
Agreed. Unfortunately, the general public looks at a 50% rain probability, laughs and equates it to a coin flip. Wrong!

Cosmo

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

Post by sperry8 » Sun Mar 18, 2018 7:50 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?
I believe those predictions are for US equities. Not, for example, emerging markets or International. Stay diversified. Further if true, it matters more for those who are done investing. Those who are still accumulating will likely have an opportunity to buy low during the next crash which should raise their overall returns.
Humbling BH contest results: 2017: #516 of 647 | 2016: #121 of 610 | 2015: #18 of 552 | 2014: #225 of 503 | 2013: #383 of 433 | 2012: #366 of 410 | 2011: #113 of 369 | 2010: #53 of 282

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

Post by JoeRetire » Sun Mar 18, 2018 8:03 am

getrichslowly wrote:
Sun Mar 18, 2018 12:23 am
JoeRetire wrote:
Fri Mar 16, 2018 12:36 pm
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).
I've noticed that as programs get better, workers get lazier. So productivity remains about the same.
Workers get lazier? I guess we work in different domains.

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

Post by tibbitts » Sun Mar 18, 2018 8:27 am

TheBogleWay wrote:
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.
Which isn't comforting to say to someone near the end of his investing career, as is the OP.

Some young people emerge from a crash as you describe, and then show up on the Bogleheads forum. Others lose their job, and then after a long time find another one that pays half as much, and don't recover. Then they die. You never see them on the Bogleheads forum.

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

Post by Money Market » Mon Mar 19, 2018 4:10 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"
A lot of BH are market timers. Just look at the sudden influx of supporters of nternational investing after it's 2017 outperformance over domestic stocks. Another example would be REIT investing during 2010-2014. Now, only few talk about it.

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

Post by cherijoh » Mon Mar 19, 2018 4:51 pm

b.lock wrote:
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.
I don't think anyone is predicting that the stock market will return only "4% over 10 years". I think they are suggesting a compound annual growth rate (CAGR) of 4%/year over 10 years.

This made-up string of returns (10%, 10%, 10%,-30%, -10%, 10%, 10%, 10%, 10%, and 10%) is equivalent to a CAGR of ~4%/year - even though in 8 of the 10 years the return was 10%!

Personally I think we are overdue for a negative year, so I am planning my retirement spending based on "low expected returns".

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

Post by MathWizard » Mon Mar 19, 2018 7:26 pm

Crushtheturtle wrote:
Sun Mar 18, 2018 4:34 am
The below is a link to a regular product from Yardeni Research, Inc.:

https://www.yardeni.com/pub/mscipe.pdf

At present, it indicates a Forward P/E for the US @ 17.3

This is consistent with the historical average of approx. 16, no?

Or is Forward P/E not as reliable as the backward-looking 10 Year CAPE, currently reading over 33, if the below link is correct?

http://www.multpl.com/shiller-pe/
The P in the backward looking P/E and the forward looking P/E is the same.
The backward looking P/E for the SP500 is 25.3 now. For the forward looking P/E to be 17.2, we must expect earning
to be 25.3/17.3 as much this coming year as last, but that means 46% gain in earnings in a single year. I do not see
that happening.

The yardeni reference just shows graphs, but no justification for the expected future earnings.

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

Post by youngpleb » Mon Mar 19, 2018 7:50 pm

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.
I hear ya. I started my career six months ago. As much as it sucks to think things could drop to 4-5% or worse, it's still not that bad. Even if that's the case, gains will still be made and you and I will have more of a nest egg waiting ready to go for when things finally pick up again, be it in 10 years or 30!
27. Always learning.

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

Post by willthrill81 » Mon Mar 19, 2018 8:40 pm

For what it's worth, the so-called "single greatest predictor of future stock market returns," which predicts the next decade's returns on the basis of investors' current stock allocation (it's R-square for the last 72 years is .83), is currently predicting returns of 2.90% nominal for the next decade from here.

Image
http://financial-charts.effingapp.com/

If you really buy into this line of thinking, the 'dangerous' element to this is that a little over four years ago, this metric was predicting subsequent ten year returns of 6%. Since then, the market has grown at 11.22% through the end of last month. So to the extent that this metric is accurate, we can only expect about 15% cumulative growth in stocks over the next six years. On the high side of this prediction, 9% nominal growth, stocks would grow as much as 52% cumulatively (around 7% annually) over the next six years. On the low side of this prediction, about 5% nominal, stocks would only grow by a measly 5% cumulatively (less than 1% annually) over the next six years. A range of 1%-7% for six years doesn't sound promising.
Last edited by willthrill81 on Mon Mar 19, 2018 8:55 pm, 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 » Mon Mar 19, 2018 8:53 pm

cherijoh wrote:
Mon Mar 19, 2018 4:51 pm
Personally I think we are overdue for a negative year, so I am planning my retirement spending based on "low expected returns".
The trick is to ALWAYS plan on "low expected returns". That's what 4% represents.

Then you don't have to change your plan based on if you "think we're due for a negative year".

One should always pick an AA based on the assumption the market could drop 50% tomorrow and stay down for years. Because it could.

It's like always carrying an umbrella around. You don't have to listen to forecasters anymore. If someone posts on this board "Oh my gosh, I read the chance of rain is much higher than yesterday!", you can say "That prediction doesn't affect me whatsoever, BECAUSE I'M ALREADY CARRYING AN UMBRELLA".
Last edited by HomerJ on Mon Mar 19, 2018 8:55 pm, 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 2015 » Mon Mar 19, 2018 8:54 pm

Money Market wrote:
Mon Mar 19, 2018 4:10 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"
A lot of BH are market timers. Just look at the sudden influx of supporters of nternational investing after it's 2017 outperformance over domestic stocks. Another example would be REIT investing during 2010-2014. Now, only few talk about it.
Actually, no. You're simply hearing a lot from the overconfident. A reading of Taylor's Gems demonstrates that so-called "experts" and "professionals" have repeatedly failed at forecasting the future accurately. I would ask myself, if these individuals, who do this sort of thing for a living, fail repeatedly at forecasting, how wise would it be to put stock in forecasts or predictions you read here?

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

Post by willthrill81 » Mon Mar 19, 2018 8:57 pm

2015 wrote:
Mon Mar 19, 2018 8:54 pm
Money Market wrote:
Mon Mar 19, 2018 4:10 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"
A lot of BH are market timers. Just look at the sudden influx of supporters of nternational investing after it's 2017 outperformance over domestic stocks. Another example would be REIT investing during 2010-2014. Now, only few talk about it.
Actually, no. You're simply hearing a lot from the overconfident. A reading of Taylor's Gems demonstrates that so-called "experts" and "professionals" have repeatedly failed at forecasting the future accurately. I would ask myself, if these individuals, who do this sort of thing for a living, fail repeatedly at forecasting, how wise would it be to put stock in forecasts or predictions you read here?
One does not have to forecast the future to time the market. There's a big difference between prognostication and playing the odds.

I'm a trend follower, but I do not try to predict what the market will do when I make timing trades. I'm simply following the trend, knowing that, historically, I'm likely to be wrong at least half the time, probably more.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by cfs » Mon Mar 19, 2018 8:59 pm

Is there a chart anywhere with the experts' expected returns predictions for the past 10, 20, 30 years?

How closed to reality were these bunch, including Mister Bogle?

Gracias por leer ~cfs~
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Re: Could all of these "low expected returns over next 10 years" predictions be wrong?

Post by MJW » Mon Mar 19, 2018 9:00 pm

willthrill81 wrote:
Mon Mar 19, 2018 8:40 pm
For what it's worth, the so-called "single greatest predictor of future stock market returns," which predicts the next decade's returns on the basis of investors' current stock allocation (it's R-square for the last 72 years is .83), is currently predicting returns of 2.90% nominal for the next decade from here.
Well, hopefully I will be able to purchase a lot of shares. :wink:

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

Post by willthrill81 » Mon Mar 19, 2018 9:26 pm

MJW wrote:
Mon Mar 19, 2018 9:00 pm
willthrill81 wrote:
Mon Mar 19, 2018 8:40 pm
For what it's worth, the so-called "single greatest predictor of future stock market returns," which predicts the next decade's returns on the basis of investors' current stock allocation (it's R-square for the last 72 years is .83), is currently predicting returns of 2.90% nominal for the next decade from here.
Well, hopefully I will be able to purchase a lot of shares. :wink:
Me too! I'd be content with pitiful returns for the next decade. :D
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by tibbitts » Mon Mar 19, 2018 9:44 pm

youngpleb wrote:
Mon Mar 19, 2018 7:50 pm
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.
I hear ya. I started my career six months ago. As much as it sucks to think things could drop to 4-5% or worse, it's still not that bad. Even if that's the case, gains will still be made and you and I will have more of a nest egg waiting ready to go for when things finally pick up again, be it in 10 years or 30!
I read "beginning really of the investing end of my career" as being near being near the end - but I really have no idea what it means.

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

Post by HomerJ » Tue Mar 20, 2018 9:48 am

willthrill81 wrote:
Mon Mar 19, 2018 8:57 pm
There's a big difference between prognostication and playing the odds.
A possible mistake is that you think you know the odds.

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

Post by willthrill81 » Tue Mar 20, 2018 10:05 am

HomerJ wrote:
Tue Mar 20, 2018 9:48 am
willthrill81 wrote:
Mon Mar 19, 2018 8:57 pm
There's a big difference between prognostication and playing the odds.
A possible mistake is that you think you know the odds.
Very true. The only thing I am fairly confident of is that the odds, over the long-term, will work out in my favor. But as I said, I strongly believe going into it that the majority of my trades will be losses, and I'm okay with that. I'll take on a series of relatively small losses in order to probably avoid a few really big ones. It's not for everyone, but it's for me.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by munemaker » Tue Mar 20, 2018 10:25 am

Predictions of the stock & bond markets and interest rates are notoriously wrong.

Of course this bull run will eventually end, the stock market will drop and the "experts" will high five each other about how they predicted lower returns. Even a broken clock is right twice a day.

Nobody knows nuttin!

Stay the course.

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

Post by Valuethinker » Tue Mar 20, 2018 10:28 am

Money Market wrote:
Mon Mar 19, 2018 4:10 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"
A lot of BH are market timers. Just look at the sudden influx of supporters of nternational investing after it's 2017 outperformance over domestic stocks. Another example would be REIT investing during 2010-2014. Now, only few talk about it.
I must admit I had not noticed that one re international investing? International investing always seems a minority stance, here.

Rather, those pro and against just reiterate our stances. To those of us outside the USA of course the "USA only" camp seems nonsensical*. Doubtless the reverse, too.

I have definitely noticed the wave of threads around other sectors performing well. For example 4 months ago we seemed to be drowning in "Crypto currrency" threads. Now? Not so much. Gold at various moments. Yes re REITs. Commodities. Energy investors by their nature seem more contrarian.


* or rather, if it is about costs and about taxes, those can be good arguments, plus the relatively limited diversification gains that other Developed Markets now appear to provide a US investor. However the "US is best" because of various factors like governance, technology etc. (that somehow are not priced into the valuation of US stocks v other markets) seems nonsensical. And of course a non USA investor cannot afford to be out of the US stock market.

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

Post by munemaker » Tue Mar 20, 2018 10:37 am

Utahdogowner wrote:
Sat Mar 17, 2018 2:39 am
I've seen and heard some talks from "experts" that predict the future is much slower growth, and hence smaller returns, for the future.
My view is we are on the edge of another advance similar to the industrial revolution with Artificial Intelligence. Not only that, but new tax incentives enable companies to expense investments in equipment rather than depreciate as in the past. This sets the stage for increased automation and more advanced automation that is going to greatly increase productivity. To me, the future is bright!

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

Post by 2015 » Tue Mar 20, 2018 11:15 am

Of course they could. Every time I see the latest "Larry" ad (aka thread) on valuations predictions or some other overconfident gambling post I think of the many articles on the "failed to predict" financial crisis such as this one:

http://knowledge.wharton.upenn.edu/arti ... al-crisis/
There is a long list of professions that failed to see the financial crisis brewing. Wall Street bankers and deal-makers top it, but banking regulators are on it as well, along with the Federal Reserve. Politicians and journalists have shared the blame, as have mortgage lenders and even real estate agents.

But what about economists? Of all the experts, weren’t they the best equipped to see around the corners and warn of impending disaster?

Indeed, a sense that they missed the call has led to soul searching among many economists. While some did warn that home prices were forming a bubble, others confess to a widespread failure to foresee the damage the bubble would cause when it burst. Some economists are harsher, arguing that a free-market bias in the profession, coupled with outmoded and simplistic analytical tools, blinded many of their colleagues to the danger.
Emphasis added

Again, if these so-called experts, with their access to large amounts of information superior to that available to anyone here, failed to predict, what does that say about the validity of any forecast on this forum?

See this as well:

https://www.amazon.com/Wrong-us-Scienti ... 0316023787

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

Post by rudeboy » Tue Mar 20, 2018 11:23 am

Something to consider when thinking about the prospect of low future returns is that there could be wild swings in both directions during that time, because we are just talking about the average return over a number of years. There is still potential to do well if you can free up some extra cash when the buying is good (which is different from market timing).

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