Has the range of expected stock market returns ever been larger than today?

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MrBeaver
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Has the range of expected stock market returns ever been larger than today?

Post by MrBeaver » Sun Jul 15, 2018 8:38 am

In future plannng, expected stock market returns are a huge variable, though they are also the one variable we have zero control over. I’ve seen expected future total stock market real returns quoted as little as 2% real in threads here in this forum, a lot of links to professional analysts expecting 2.5-4% real, and some people still sticking to historical returns as a guide, at around 7-8% real.

This seems like a huge discrepancy to me, and while the professional prognosticators always qualify with a time period (usually 10 years), many individual forum posters do not.

Questions:
  1. when people around here quote low (2% real) future returns, what time period is that usually attached to?
  2. has there ever been a wider range of typically expected returns? (Assuming 2-8% over 10 years)
  3. while I see many quoting historically low returns over the next ten years, would these same people be more comfortable quoting a closer-to-historical number for a longer time horizon, like 20 years?
In general, I guess I feel like the demographics of the frequent posters on this forum tend toward near-retirement age, and those people are likely to be more risk-averse, more pessimistic about future returns, and more focused on shorter time periods (next decade). Some perspective on future returns out to 20 or 30 years might help those of us who are still 20+ years from retirement.
Last edited by MrBeaver on Sun Jul 15, 2018 4:48 pm, edited 1 time in total.

jebmke
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Re: Has the range of expected stock market returns ever been larger than today?

Post by jebmke » Sun Jul 15, 2018 8:48 am

MrBeaver wrote:
Sun Jul 15, 2018 8:38 am
Some perspective on future returns out to 20 or 30 years might help those of us who are still 20+ years from retirement.
In my opinion this is not a productive exercise. Do you really want to change your savings habits if you think the real return is 4% vs 2%? My personal approach was to create a savings and investment plan and let the future take care of itself.
When you discover that you are riding a dead horse, the best strategy is to dismount.

david1082b
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Re: Has the range of expected stock market returns ever been larger than today?

Post by david1082b » Sun Jul 15, 2018 9:06 am

Every year there are predictions of negative returns or zero returns for the next ten years. Jeremy Grantham and others have often done this. This is from March 2005 from John Hussman:
Grantham estimates that the probable real return on stocks over the coming decade is likely to be about -2.2%, with nominal returns averaging about -0.6% annually.

Using our optimistic version of the dividend discount model, if we assume that the current overvaluation is relieved gradually over a period of 10 years, and that the required return on stocks continues to decline (resulting in higher justified valuations) the probable real return over the coming decade still works out to roughly zero, and the probable nominal total return on the S&P 500 over the coming decade is approximately 2-3%. https://www.hussmanfunds.com/wmc/wmc050321.htm
From March 2014 in TheReformedBroker:
Jeremy Grantham just admitted to Barron’s this weekend that even though the stock market is “65% overvalued” and has an almost nil expected return over the next seven years, he’s 49% long equities in the fund he runs at the moment. http://thereformedbroker.com/2014/03/17 ... t-blow-up/
Using these thoughts from Grantham, we should "expect" around zero returns from March 2005 to March 2021. March 2005 to March 2015 saw the market double including dividends: http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

One prediction was wrong. We still need to wait nearly three years for the other one. I don't know when it became trendy to predict returns for the next ten years (or seven years, which seems to be Grantham's preferred cycle now). It goes back at least the summer of 1996 when Robert Shiller published a paper with these quotes:
Looking at the diagram, it is hard to come away without a feeling that the market is quite likely to decline substantially in value over the succeeding ten years; it appears that long run investors should stay out of the market for the next decade.
[...]
The fitted value for today of the regression is –.479, implying an expected decline in the real Standard and Poor Index over the next 10 years of 38.07%. http://www.econ.yale.edu/~shiller/data/peratio.html
The market more than doubled in total return in the next ten years. These predictions never stop, since I imagine people like to play the Cassandra, hoping to make a name for themselves for a "good call", no matter how many other times they were wrong. Predicting bad returns is essentially a stopped clock industry.

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JoMoney
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Re: Has the range of expected stock market returns ever been larger than today?

Post by JoMoney » Sun Jul 15, 2018 9:44 am

Since 1926, historical 20 year periods of real inflation adjusted returns have ranged between
0% (1962 through 1981) and
13% (1980 through 1999)
...incidentally, the returns from 1962-1999 were 7% , and from 1980-2008 were 7%

Here are the real inflation adjusted returns over other 20 year periods, the median and average were around 7% :

Code: Select all

1926 - 1945 7%
1927 - 1946 5.1%
1928 - 1947 3.1%
1929 - 1948 1.4%
1930 - 1949 2.8%
1931 - 1950 5.1%
1932 - 1951 8.4%
1933 - 1952 9.2%
1934 - 1953 6.8%
1935 - 1954 9.3%
1936 - 1955 8.8%
1937 - 1956 7.5%
1938 - 1957 9.2%
1939 - 1958 9.4%
1940 - 1959 10%
1941 - 1960 10.5%
1942 - 1961 13.1%
1943 - 1962 11.9%
1944 - 1963 11.8%
1945 - 1964 11.8%
1946 - 1965 10.7%
1947 - 1966 11.3%
1948 - 1967 12.5%
1949 - 1968 12.7%
1950 - 1969 10.8%
1951 - 1970 9.5%
1952 - 1971 9.2%
1953 - 1972 9.1%
1954 - 1973 7.9%
1955 - 1974 3.4%
1956 - 1975 3.3%
1957 - 1976 4%
1958 - 1977 4%
1959 - 1978 2.1%
1960 - 1979 1.8%
1961 - 1980 2.7%
1962 - 1981 0.8%
1963 - 1982 2.2%
1964 - 1983 2%
1965 - 1984 1.4%
1966 - 1985 2.2%
1967 - 1986 3.7%
1968 - 1987 2.8%
1969 - 1988 3.1%
1970 - 1989 5%
1971 - 1990 4.6%
1972 - 1991 5.3%
1973 - 1992 4.8%
1974 - 1993 6.5%
1975 - 1994 8.7%
1976 - 1995 8.9%
1977 - 1996 9%
1978 - 1997 11.2%
1979 - 1998 12.7%
1980 - 1999 13.3%
1981 - 2000 11.7%
1982 - 2001 11.7%
1983 - 2002 9.3%
1984 - 2003 9.7%
1985 - 2004 9.9%
1986 - 2005 8.7%
1987 - 2006 8.5%
1988 - 2007 8.5%
1989 - 2008 5.4%
1990 - 2009 5.3%
1991 - 2010 6.5%
1992 - 2011 5.2%
1993 - 2012 5.6%
1994 - 2013 6.7%
1995 - 2014 7.4%
1996 - 2015 5.9%
1997 - 2016 5.4%
1998 - 2017 4.9%
None of this is predictive of the next 20 years....
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

Random Walker
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Re: Has the range of expected stock market returns ever been larger than today?

Post by Random Walker » Sun Jul 15, 2018 10:16 am

This is at the limits of my understanding, but I’ll give it a shot. Expected returns are unconditional: meaning they are long term independent of time horizon. It’s an expected return for next year and 10,20,30 years from now. The estimate is always a mean with a big distribution around it. The historic SD for equities is about 20%. When a mean estimate changes, the whole potential distribution of returns shifts left or right with it. I strongly believe historical returns are much less useful than estimates based on current valuations. Obviously anything can happen over one year to a few years.

You note the difference between someone 30 years from retirement and us Pre retirees. I agree that the issue is biggest for the people close to retirement and in early retirement. For us sequence of returns is huge, and it’s very important to appreciate that given current valuations, the Mean is lower and the whole potential distribution is shifted left. Good outcomes are less good and bad outcomes are more bad. Somewhat ironically, for a younger investor, given high current valuations and lower future expected returns, he maybe should consider increased equity allocation to meet goals. More likely, for the younger investor, this just means sticking with a pretty aggressive AA.

Dave

Dottie57
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Re: Has the range of expected stock market returns ever been larger than today?

Post by Dottie57 » Sun Jul 15, 2018 10:37 am

jebmke wrote:
Sun Jul 15, 2018 8:48 am
MrBeaver wrote:
Sun Jul 15, 2018 8:38 am
Some perspective on future returns out to 20 or 30 years might help those of us who are still 20+ years from retirement.
In my opinion this is not a productive exercise. Do you really want to change your savings habits if you think the real return is 4% vs 2%? My personal approach was to create a savings and investment plan and let the future take care of itself.
+1

I put in 15% a year for a long time. As income increased I added Roth. Finally taxable.

You can only do so much. If returns are bad, work longer.

warner25
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Re: Has the range of expected stock market returns ever been larger than today?

Post by warner25 » Sun Jul 15, 2018 11:32 am

1. I think the most conservative numbers like 2% are often cited for whole portfolios that are not just 100% stocks, which a surprising number of people seem to miss. Few of us will keep a 100% stock portfolio our whole life, but a lot of people talk about planning as if they will. And this number is lower than it used to be because interest rates are so low, so it seems unreasonable to think a balanced portfolio will be juiced by bond returns as it was from 1980-2010.

2. I'm not old enough to have precise memories of it, but I'd bet the spread of predictions was even larger in the late 1990s with total euphoria for the dot-com revolution on one side, and people like Shiller on the other side looking at a 40+ PE10.

3. Yeah, this is maddening, sort of a paradox. The problem is end-point sensitivity, as nisiprius always notes. We can make a reasonable sounding forecast based on current valuations, but that only makes sense until valuations change, which we know they will, daily, but not how. However, a change in valuations (i.e. market crash) does not occur without impacting the portfolio's total return. So what good is a ten year forecast of X% if year 11 or 12 includes a crash? Then there's the paradoxical question: if valuations are high (or low), so forecasts are low (or high), do you save more (or less) to reach your goals, or is that just buying high and selling low? But clearly we need to pencil in some assumption in order to draft the rest of a plan. In the end, I've gone with the 2% camp as described above, and I intend to treat that as a constant regardless of valuation and interest rate changes. I just don't know a better way.

Wakefield1
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Re: Has the range of expected stock market returns ever been larger than today?

Post by Wakefield1 » Sun Jul 15, 2018 1:03 pm

As individuals most of us indeed have no control over future stock market returns but as a society I think we have a great deal of such control depending on what we do as a society
In the event of low future market returns maybe it would be good to have fed the pig something (bank accounts, Credit Union certificates of deposit etc.)

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Blueskies123
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Re: Has the range of expected stock market returns ever been larger than today?

Post by Blueskies123 » Sun Jul 15, 2018 1:20 pm

To me the most frightening aspect of this question is what expected returns all the pension funds are using for calculating current and future benefits. Most are in 7-8%. Can you imagine if all Bogleheads were counting on 7.5% stock returns for the next 30 years.

https://www.wsj.com/articles/pension-fu ... 1525775400
https://www.nasra.org/returnassumptionsbrief

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galeno
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Re: Has the range of expected stock market returns ever been larger than today?

Post by galeno » Sun Jul 15, 2018 1:30 pm

I assume a 4% REAL CAGR for the TWSM (total world stock market)

I assume a 0% REAL CAGR for the TBM (total bond market).

So the expected REAL CAGR for our 40/60 port is 1.6%.

The historical REAL CAGR of a 40/60 port is 4.4%.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.13%. Term = 34 yr. FI Duration = 6.2 yr. Portfolio survival probability = 95%.

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FIREchief
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Re: Has the range of expected stock market returns ever been larger than today?

Post by FIREchief » Sun Jul 15, 2018 2:11 pm

Random Walker wrote:
Sun Jul 15, 2018 10:16 am
I strongly believe historical returns are much less useful than estimates based on current valuations.
The problem is that we can't even agree on how to define current valuations:

CAPE10 P/E = 32.6
Actual trailing twelve month reported earnings (1st qtr 2018) P/E = 22.9
Actual trailing twelve month operating earnings (1st qtr 2018) P/E = 20.0
Forecast 2018 reported earnings P/E = 19.2
Forecast 2018 operating earnings P/E = 17.7

So earnings yield based upon CAPE10 = 3%, and earnings yield based upon 2018 operating earnings = 5.6%. That's a pretty wide range, and likely some of what's behind what the OP has observed. There is also the background of forecasted double digit earnings growth.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

delamer
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Re: Has the range of expected stock market returns ever been larger than today?

Post by delamer » Sun Jul 15, 2018 2:20 pm

First, I have to ask the OP — what is an “individual deformity poster”!? :wink:

Second, and more to the point, based on our retirement portfolio over the last 26 years, we have had an annual average real return of 5.3%. We were never 100% stocks, so this reflects investments in bonds and cash too. Allocation has been adjusted over time as we’ve become more knowledgeable about risk, return, volatility, etc. I think we were probably halfway through the 26 years before we added international stocks, for example.

And before I ever had any money in the stock market, I owned a 1-year CD that paid 12% interest when inflation was 11.3%.

My point is that there are many, many unknowns in projecting stock, bond, and even cash returns — not to mention the inflation rate. And that isn’t even accounting for changes in your own investing behavior and personal financial situation.

So develop estimates using a few different real projections, and revise as needed. And follow the Boglehead principles.

As someone else on the forum frequently says “nobody knows nothin’.”

MrBeaver
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Re: Has the range of expected stock market returns ever been larger than today?

Post by MrBeaver » Sun Jul 15, 2018 4:02 pm

delamer wrote:
Sun Jul 15, 2018 2:20 pm
First, I have to ask the OP — what is an “individual deformity poster”!? :wink:
Haha, oops. Autocorrect bit me. ‘forum poster’ was the intention. I’ll fix it.
warner25 wrote:
Sun Jul 15, 2018 11:32 am
3. Yeah, this is maddening, sort of a paradox. The problem is end-point sensitivity, as nisiprius always notes. We can make a reasonable sounding forecast based on current valuations, but that only makes sense until valuations change, which we know they will, daily, but not how. However, a change in valuations (i.e. market crash) does not occur without impacting the portfolio's total return. So what good is a ten year forecast of X% if year 11 or 12 includes a crash?
Great points. Perhaps for planning purposes, what matters is something like the expected returns for period of the period/4 moving average? So for example, the expected total return of the 5 year moving average 20 years from now. But I still have yet to really grasp sequence of returns risk, beyond the fact that it can harm those who are near or in retirement with more aggressive allocations than they would like (in hindsight, of course).
JoMoney wrote:
Sun Jul 15, 2018 9:44 am
Since 1926, historical 20 year periods of real inflation adjusted returns have ranged between
0% (1962 through 1981) and
13% (1980 through 1999)
None of this is predictive of the next 20 years....
Hugely instructive. Thanks!
jebmke wrote:
Sun Jul 15, 2018 8:48 am
MrBeaver wrote: Some perspective on future returns out to 20 or 30 years might help those of us who are still 20+ years from retirement.
In my opinion this is not a productive exercise. Do you really want to change your savings habits if you think the real return is 4% vs 2%? My personal approach was to create a savings and investment plan and let the future take care of itself.
Excellent question. Personally, I’m at the point where I just finally started maxing my tax-deferred (including 401k) space a few years ago due to a later career start, but was diligent to max our IRA space since I was about 20 years old. That gives me a pretty decent base, but now that we have kids and a good but not high income by bogleheads standards, I do have to make decisions between beefing up taxable savings for security for future retirement in the case of low returns, and investing in education and experiences now during our children’s upbringing.

Hence, the expected return (if at all accurate) helps me know how much to tuck away for the future and how much to splurge now on providing the best future we can for our kids. That’s a tough decision when so much uncertainty is thrown in.
Last edited by MrBeaver on Sun Jul 15, 2018 6:08 pm, edited 3 times in total.

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vitaflo
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Re: Has the range of expected stock market returns ever been larger than today?

Post by vitaflo » Sun Jul 15, 2018 4:38 pm

MrBeaver wrote:
Sun Jul 15, 2018 8:38 am
In future plannng, expected stock market returns are a huge variable, though they are also the one variable we have zero control over.

...

Some perspective on future returns out to 20 or 30 years might help those of us who are still 20+ years from retirement.
You had the right idea from the beginning of your post. Focus on the variables you do have control over. At 20+ years from retirement, worrying about future return expectations is useless. Instead you should be worrying about increasing your own sweat equity. This will have a much larger influence on your ending balance than whatever the markets do or don't do (and like you said you don't have control over it anyway).

As an example, 15 years ago I was able to afford to invest $100 per month. I've gotten a 6.46% rate of return over that time. Which means that $100 is worth $262 today. Not bad! Except, because I've focused on my career more than on worrying about the return on my investments I was able to afford to put $3,000 into investments last month. Which is a savings rate increase of 23% per year over that 15 years. Kinda makes that $262 seem inconsequential.

Now I'm still a big believer in "save early, save often" but focusing on increasing your income and reducing your spending will have a much larger effect on your portfolio than whatever the market ends up doing.

BogleBike
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Re: Has the range of expected stock market returns ever been larger than today?

Post by BogleBike » Sun Jul 15, 2018 5:26 pm

New-ish here, take my words with the grain of salt they deserve.

Tough call - unknowns on both sides, with with your future and your kids' future at stake!

Personally, I think thrift is a lesson that pays for itself. What you do as a parent is a lesson, as much as whatever you buy for them. If you are thrifty in your own behavior, and intelligent as you presumably are, the kids will probably grow up fine regardless.

Kids thrive with parental attention. My personal guess is if you use a low expected return (2-4%) and it makes you put off a costly choice that sounds great for a cheap one that sounds good, you will still be able to have healthy kids and good experiences. Whichever choice gives you the most freedom to be a secure and responsible parent is best IMHO. That said, at some point there may be choices that cost money but feel like extraordinary values. Maybe you should do them!

One further idea: consider limiting the costly choices to ones that you and the kids and your spouse all feel are SUPER. "Just good is not good enough for our dollars, when we can spend time together for free" could be your family motto.

Vague, I know. But best wishes anyway.

PS. Some of my favorite times growing up were camping trips, community runs/potlucks, driving vacations, and fairly cheap pets. I bet you're already giving your kids more than you grew up with. Congrats to you, I bet you're doing great.

MrBeaver
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Re: Has the range of expected stock market returns ever been larger than today?

Post by MrBeaver » Sun Jul 15, 2018 6:04 pm

BogleBike wrote:
Sun Jul 15, 2018 5:26 pm
Kids thrive with parental attention. My personal guess is if you use a low expected return (2-4%) and it makes you put off a costly choice that sounds great for a cheap one that sounds good, you will still be able to have healthy kids and good experiences. Whichever choice gives you the most freedom to be a secure and responsible parent is best IMHO. That said, at some point there may be choices that cost money but feel like extraordinary values. Maybe you should do them!

One further idea: consider limiting the costly choices to ones that you and the kids and your spouse all feel are SUPER. "Just good is not good enough for our dollars, when we can spend time together for free" could be your family motto.

Vague, I know. But best wishes anyway.

PS. Some of my favorite times growing up were camping trips, community runs/potlucks, driving vacations, and fairly cheap pets. I bet you're already giving your kids more than you grew up with. Congrats to you, I bet you're doing great.
Couldn’t agree more on the whole parental attention thing, which is why we made a conscious choice to be a single income family at least for a while. Luckily, the more ‘expensive’ things (music lessons, extra educational opportunities) won’t come for several years for us, so we are still able to at least max our tax advantaged space between now and then.

If it turns out that 10 years from now returns really have been 0-2% real, then these decisions will be made for us as we will have to keep dumping in a large amount for retirement and that will be fine. If real returns have been 6%, we will likely be able to be less aggressive and still start supporting more of those expensive opportunities if they really do seem great.

So I guess I should focus on what I can control now (continuing high savings rate, preventing too much cost of living expansion, not buying more house than we need, prioritizing and cherishing time in the young years). Maybe every year returns are below 4% real, I’ll do what I must to boost my savings rate up and just not worry about the future prognosticators who are probably wrong anyway. ;)

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