Forecasting future returns / net worth
Forecasting future returns / net worth
In forecasting net worth, why do people use real ROR?
Next year , are people using real or nominal? What about the year after that?
It seems pointless to do anything other than forecast nominal and look at real in hindsight.
Having said that, maybe i am thinking about it wrong... please do tell if so.
Thanks
Next year , are people using real or nominal? What about the year after that?
It seems pointless to do anything other than forecast nominal and look at real in hindsight.
Having said that, maybe i am thinking about it wrong... please do tell if so.
Thanks
Re: Forrcasting future returns / net worth
What is ROR? Ruby on Rails? Return on Revenue? The second one is closer but not is not exactly on point.
Most people us Internal Rate of Return, or sometimes a Time Weighted Return.
Predicting next's year return is pretty hard. Oddly enough, long term forecasts tend to be better. I will point to the 10 Year Treasury for bonds and CAPE 10 for equities as quick and decent forecasting tools.
I would suggest using real returns. Easier to calculate, more robust, and tends to answer questions better.
Most people us Internal Rate of Return, or sometimes a Time Weighted Return.
Predicting next's year return is pretty hard. Oddly enough, long term forecasts tend to be better. I will point to the 10 Year Treasury for bonds and CAPE 10 for equities as quick and decent forecasting tools.
I would suggest using real returns. Easier to calculate, more robust, and tends to answer questions better.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Re: Forecasting future returns / net worth
To use an extreme example, it’s not very useful to project that my $100,000 today is going to be worth a nominal $100 million in 100 years, because a lot of that growth is due to inflation and hard to easily understand its true purchasing power in today’s terms.
It’s easier to think about future expenses in today’s $’s and likewise future net worth in today’s $’s. To calculate future net worth in today’s $’s, you use real ROI rather than nominal.
It’s easier to think about future expenses in today’s $’s and likewise future net worth in today’s $’s. To calculate future net worth in today’s $’s, you use real ROI rather than nominal.
Last edited by Gufomel on Tue Apr 02, 2019 2:37 pm, edited 1 time in total.
Re: Forecasting future returns / net worth
All of my planning is in real dollars.
 dogagility
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Re: Forecasting future returns / net worth
I take the historical return for a given investment and divide that by half.
All children spill milk. Learn to smile and wipe it up.  A Farmer's Wife
Re: Forecasting future returns / net worth
To me, it is pointless to use nominal.
Without knowing the level of inflation, estimates of a future account balance are meaningless.
Without knowing the level of inflation, estimates of a future account balance are meaningless.
 Portfolio7
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Re: Forecasting future returns / net worth
I think you can do it either way.
I prefer nominal, with an after the fact conversion to real. To me, this seems more direct; and you don't get confused by whether all of your assumptions are consistent... you just convert the results.
Using real converts up front, so all the calcs are in constant dollars, which a lot of people prefer. It's especially valued in high inflation environments, because inflation can distort your perceptions of the numbers so greatly, it messes with people's sense of magnitude. One just has to be careful to be consistent... in complex analysis, it's easy to forget to convert a variable or component.
I prefer nominal, with an after the fact conversion to real. To me, this seems more direct; and you don't get confused by whether all of your assumptions are consistent... you just convert the results.
Using real converts up front, so all the calcs are in constant dollars, which a lot of people prefer. It's especially valued in high inflation environments, because inflation can distort your perceptions of the numbers so greatly, it messes with people's sense of magnitude. One just has to be careful to be consistent... in complex analysis, it's easy to forget to convert a variable or component.
"An investment in knowledge pays the best interest"  Benjamin Franklin
Re: Forecasting future returns / net worth
What does a future net worth mean to you? Why do you want to know it? Depending on those things you would choose real or nominal results.
But, as pointed out in another post, it is probably more direct to do calculations using nominal returns and then adjust the result for estimated inflation if one wants to interpret the result as spending power.
But, as pointed out in another post, it is probably more direct to do calculations using nominal returns and then adjust the result for estimated inflation if one wants to interpret the result as spending power.

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Re: Forecasting future returns / net worth
OP, it is an interesting question.
if you look at the most basic and popular stock valuation ratio........ basically dividend discount...
P now = Dividend year 1 divided by (long term bond rate + risk premium  growth forecast)..... and let's simply by assuming it's D now as numerator.
so there are only 3 key variable. long term bond rates (very low by historical standards). 3%ish. say growth forecast is 4%. that means for 2.5% dividend yield, you need 3.5 % risk premium.......... a bit low by historical standards............. explaining the math: 2.5% dividend yield = 40x price/dividend. means denominator (bond + risk  growth) must equal 2.5%, and we have (3% BY + RP  4% growth)
basically growth and risk premium are not observable............... i think economists like schiller suggest to a reasonably large degree that market bull and bear markets are basically that risk premium going up and down with investor confidence/fear.
another thing to keep in mind is that the amazing 38 year bond bull market has been extremely favourable for stock returns. and will not be remotely repeatable.
if you look at the most basic and popular stock valuation ratio........ basically dividend discount...
P now = Dividend year 1 divided by (long term bond rate + risk premium  growth forecast)..... and let's simply by assuming it's D now as numerator.
so there are only 3 key variable. long term bond rates (very low by historical standards). 3%ish. say growth forecast is 4%. that means for 2.5% dividend yield, you need 3.5 % risk premium.......... a bit low by historical standards............. explaining the math: 2.5% dividend yield = 40x price/dividend. means denominator (bond + risk  growth) must equal 2.5%, and we have (3% BY + RP  4% growth)
basically growth and risk premium are not observable............... i think economists like schiller suggest to a reasonably large degree that market bull and bear markets are basically that risk premium going up and down with investor confidence/fear.
another thing to keep in mind is that the amazing 38 year bond bull market has been extremely favourable for stock returns. and will not be remotely repeatable.

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