Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bogle

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alex123711
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Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bogle

Post by alex123711 » Sat Apr 13, 2019 9:20 pm

Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns of recent decades.
Bogle believes the U.S. stock market will enter a period of relatively low returns. He reached his estimate by looking at 2 percent dividend yield, a “deadweight loss from the 4.4 percent it has been historically,” and earnings growth of about 4 percent, which matches typical economic growth, to predict future investment return of 6 percent. He also looked at the difference between today’s price/earnings ratio of about 24, and the historic P/E ratio to estimate the speculative return.

Legendary investor Jack Bogle weighs in on the record rally
“My guess — an informed guess, but still a guess — is that by decade’s end the P/E ratio might ease down to, say, 20 times or even less. Such a revaluation would reduce the market’s return by about 2 percentage points per year, resulting in an annual rate of return of 4 percent for the U.S. stock market,” he wrote in the Little Book of Common Sense Investing.

https://www.cnbc.com/2017/11/20/jack-bo ... eyond.html

Bogle’s dour view on stocks, bonds. What if he was right?
https://www.financial-planning.com/opin ... nd-returns

https://www.morningstar.com/videos/8857 ... arket.html



What to do in this situation? He also mentions he thinks international returns will be even lower..

trueblueky
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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by trueblueky » Sat Apr 13, 2019 9:31 pm

https://mail.google.com/mail/mu/mp/881/ ... l_personal

From this article, "Over the past 50 years, nominal U.S. economic growth averaged 6.4% a year, per share profits for the companies in the S&P 500 rose 6.5%, and the S&P 500 climbed 6.6%, excluding dividends. Meanwhile inflation ran at 4%."

So, if the U.S.economy grows at 4% over the next ten years, we should generally expect the stock market to grow 4%.

I expect nominal growth and inflation to be lower than the 50-year average going forward.

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by arcticpineapplecorp. » Sat Apr 13, 2019 9:36 pm

if correct, the only things to do are:
1. increase your savings rate
2. cut your spending
3. work longer

As for international investments, I've heard the expected returns for international are supposed to be higher than U.S. because their prices are cheaper. Generally buying shares at cheaper prices leads to higher returns. Buying shares at higher prices leads to lower returns. Penny stocks not included.

Jack used to say the market gives what it gives. Control what you can control and don't worry about what you can't (The Dalai Lama has said something very similar in the context of worrying). You can control your savings rate, your spending, perhaps working longer (not always under your control), making sure the costs you pay for your investments are low and keeping an eye on taxes (look at tax efficiency when possible). These all can help.

These issues have been discussed many times at bogleheads over the past few years. A search for "expected U.S. returns" at the search link (upper right corner) yields this:

https://www.google.com/search?sitesearc ... s.+returns

let the search bar be your friend.
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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by onthecusp » Sat Apr 13, 2019 10:17 pm

That stock market prediction, and it is exactly that, is about a year and a half old now. Returns, despite a short sharp bear have been well over 5.5%. I'm not saying he will be proven wrong over the next 7.5 years, but such predictions don't seem any more actionable than the yield inversion hypothesis.

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alex123711
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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by alex123711 » Sat Apr 13, 2019 10:27 pm

onthecusp wrote:
Sat Apr 13, 2019 10:17 pm
That stock market prediction, and it is exactly that, is about a year and a half old now. Returns, despite a short sharp bear have been well over 5.5%. I'm not saying he will be proven wrong over the next 7.5 years, but such predictions don't seem any more actionable than the yield inversion hypothesis.
The two other links are from November last year:

https://www.morningstar.com/videos/8857 ... arket.html

https://www.financial-planning.com/opin ... nd-returns

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by unclescrooge » Sat Apr 13, 2019 10:33 pm

Shouldn't we also consider that the economy moved from manufacturing to technology, and the gross margins went from 30% to 80%?

Thus a lot of these predictions based on historic data are going to be pessimist compared to the reality of the current situation.

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by willthrill81 » Sat Apr 13, 2019 10:38 pm

If you consider that in the past, Bogle consistently predicted that stocks would have lower returns than they actually did, this could be interpreted as good news.

But in this case, I believe that Jack was close to the mark. Over the next 10 years from right now, I'm predicting that the S&P 500 will return 4.28% real.
Last edited by willthrill81 on Sat Apr 13, 2019 10:59 pm, edited 1 time in total.
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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by FrugalInvestor » Sat Apr 13, 2019 10:47 pm

alex123711 wrote:
Sat Apr 13, 2019 9:20 pm
What to do in this situation? He also mentions he thinks international returns will be even lower..
Jack would have told you "just don't do something, stand there" and that "nobody knows nothing," including him.
IGNORE the noise! | Our life is frittered away by detail... simplify, simplify. - Henry David Thoreau

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alex123711
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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by alex123711 » Sat Apr 13, 2019 11:22 pm

unclescrooge wrote:
Sat Apr 13, 2019 10:33 pm
Shouldn't we also consider that the economy moved from manufacturing to technology, and the gross margins went from 30% to 80%?

Thus a lot of these predictions based on historic data are going to be pessimist compared to the reality of the current situation.
Wouldn't that be speculating?

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by AlohaJoe » Sat Apr 13, 2019 11:44 pm

alex123711 wrote:
Sat Apr 13, 2019 9:20 pm
What to do in this situation?
I think the best thing to do in this situation is to see if "news" that is a year and a half old has already been discussed on Bogleheads, since it seems unlikely that somehow nobody has heard of this Bogle guy or what he said back in 2017.

(How's his prediction turning out so far, out of curiosity? We're already, what?, 20% of the way done, right?)

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by andrew99999 » Sat Apr 13, 2019 11:52 pm

alex123711 wrote:
Sat Apr 13, 2019 9:20 pm
Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bogle
Each year, the Fed prints or creates more money.
The collective value of all the money does not increase, so what happens is that each unit of money drops in value so that the total remains the same.
For this reason, money devalues.
This devaluing is called inflation.
If inflation is 3% and you had 1,000,000 last year, then this year it will be worth about 970,000 of what it was worth last year.
If your investments return 80,000, then you are really only ahead 50,000.

You are ahead 80,000 (or 8%) in "NOMINAL" terms.
You are ahead 50,000 (or 5%) in "REAL" (or inflation adjusted) terms

The 4% you are quoting is REAL
The 10% you are quoting is NOMINAL.

Historically inflation has been around 4%, which means the real gains of the stock market have been 10-4 = 6%

So instead of saying it will be 4% vs 10%, you should say 4% vs 6%
Or if you want to add current inflation of around 2%, then it is 6% vs 8%

https://www.google.com/search?q=what+is+inflation


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ankonaman
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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by ankonaman » Sun Apr 14, 2019 6:32 am

I have a question. In Bogle's scenario how "safe" are the corporate bonds in the Wellington & Wellesly funds.

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by tennisplyr » Sun Apr 14, 2019 6:46 am

New headline:

"Stocks MIGHT return about 4% annually over the next decade or so rather than the 10% average annual returns of recent decades."

Different reaction??
Those who move forward with a happy spirit will find that things always work out.

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by SovereignInvestor » Sun Apr 14, 2019 7:03 am

Many issues with assumptions some are using.


First the US stock market has firms that get over 40% of sales overseas. The IMF projects global GDP growth at around 3.0% in long run and Fed uses 1.8% for US long run real GDP growth. US is a little over 20% of global GDP so non US global GDP is inplied in the 3.2% range.

So 40% of sales overseas tied to global non US 3.2% growing ral GDP and 60% at 1.8% US growth blends to around 2.4% projected real growth. The fed inflation target is 2.0%, so nominal GDP growth can reasonably be expected to rise 4.4% or let's say 4.0% to be safe.

Again this is not US nominal GDP but the nominal GDP that is pertinent to S&P earnings.

Second the buyback run rate as a percent of market cap has been 3% since 2005. There is equity dilution from issuance for compensation but it's below 1%/year on average. Issuance for acqusitions shouldn't be discounted since it leads to earnings growth generally.

So nominal earnings for SPX may only grow at 4.0% per year but Earings per share would grow at 6.0% under those assumptions adding in 2.0% annual share reduction.

Everyone seems to be forgetting buybacks.

Like in 2018 and what's projected in 2019 the current buyback yield actually is closer to.4.0%. The dividend payout ratios are the lowest ever as buybacks have surged so we need to include buyback in raising expected earnings per share growth. If the stocks instead paid out more in dividends the yield would be a lot higher and counted towards total return that way but it's in form of.more growth or capital appreciation.

Dividend plus buyback yield is currently over 5%, actually near 5%. Net of dilution it is likely in the 4% range so calling for 4% nominal returns means the economy never grows for 10 years. This seems absolute unlikely. Or it assumes massive PE contraction. Forward PE is 17ish now...not screaming cheap but it is line with averages since early 1990s, how many contraction can there really be?

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by columbia » Sun Apr 14, 2019 7:13 am

From January, Morningstar’s annual roundup of forecasted returns:
https://www.morningstar.com/articles/90 ... rns-2.html

Your mileage may vary. :)

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by -ryan- » Sun Apr 14, 2019 7:50 am

alex123711 wrote:
Sat Apr 13, 2019 11:22 pm
unclescrooge wrote:
Sat Apr 13, 2019 10:33 pm
Shouldn't we also consider that the economy moved from manufacturing to technology, and the gross margins went from 30% to 80%?

Thus a lot of these predictions based on historic data are going to be pessimist compared to the reality of the current situation.
Wouldn't that be speculating?
Yes, in exactly the same way the material in your original post is speculating.

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by vineviz » Sun Apr 14, 2019 8:01 am

SovereignInvestor wrote:
Sun Apr 14, 2019 7:03 am
So nominal earnings for SPX may only grow at 4.0% per year but Earings per share would grow at 6.0% under those assumptions adding in 2.0% annual share reduction.

Everyone seems to be forgetting buybacks.
Sorry, but no. Where do you think the cash for dividends and buybacks comes from?

You can’t count it twice.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by Beliavsky » Sun Apr 14, 2019 9:39 am

arcticpineapplecorp. wrote:
Sat Apr 13, 2019 9:36 pm
if correct, the only things to do are:
1. increase your savings rate
2. cut your spending
3. work longer
No, if asset returns are predicted to be low, some people may rationally choose to save less, because the rewards of deferring consumption have fallen. Of course, consuming more now means consuming less in retirement.

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by willthrill81 » Sun Apr 14, 2019 9:46 am

Beliavsky wrote:
Sun Apr 14, 2019 9:39 am
arcticpineapplecorp. wrote:
Sat Apr 13, 2019 9:36 pm
if correct, the only things to do are:
1. increase your savings rate
2. cut your spending
3. work longer
No, if asset returns are predicted to be low, some people may rationally choose to save less, because the rewards of deferring consumption have fallen. Of course, consuming more now means consuming less in retirement.
Assuming that the person was saving enough to meet their existing goals, those following that path would be giving themselves a double whammy: lower returns and less savings. That doesn't seem very rational to me unless they're planning on delaying retirement (i.e. working longer).

Most of us aren't saving because it's profitable to do so. We're saving in order to fund our goals.
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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by midareff » Sun Apr 14, 2019 9:53 am

If stocks return 4% and fixed income 2% to 2.5%, you have about a 3.25% average, less 2% to 2.5% inflation and you have a real return of the neighborhood of 1%. The best advice is be prepared for that scenario, you can always find things to spend more on if you have too much.

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by willthrill81 » Sun Apr 14, 2019 9:57 am

midareff wrote:
Sun Apr 14, 2019 9:53 am
If stocks return 4% and fixed income 2% to 2.5%, you have about a 3.25% average, less 2% to 2.5% inflation and you have a real return of the neighborhood of 1%. The best advice is be prepared for that scenario, you can always find things to spend more on if you have too much.
I believe that the 4% prediction was real, not nominal.

If I thought that stocks would only return 1% over the next decade, I'd own something else.
“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: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by SovereignInvestor » Sun Apr 14, 2019 10:05 am

vineviz wrote:
Sun Apr 14, 2019 8:01 am
SovereignInvestor wrote:
Sun Apr 14, 2019 7:03 am
So nominal earnings for SPX may only grow at 4.0% per year but Earings per share would grow at 6.0% under those assumptions adding in 2.0% annual share reduction.

Everyone seems to be forgetting buybacks.
Sorry, but no. Where do you think the cash for dividends and buybacks comes from?

You can’t count it twice.
Please explain how is that counting buybacks twice.

Under your logic we shouldn't count dividends towards total return.

Dividends and buybacks are the same thing...returned capital to shareholders from earnings.

Dividends flow through to total return via the yield. Buybacks flow through via greater than otherwise growth.

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by H-Town » Sun Apr 14, 2019 10:09 am

alex123711 wrote:
Sat Apr 13, 2019 9:20 pm
Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns of recent decades.
Bogle believes the U.S. stock market will enter a period of relatively low returns. He reached his estimate by looking at 2 percent dividend yield, a “deadweight loss from the 4.4 percent it has been historically,” and earnings growth of about 4 percent, which matches typical economic growth, to predict future investment return of 6 percent. He also looked at the difference between today’s price/earnings ratio of about 24, and the historic P/E ratio to estimate the speculative return.

What to do in this situation? He also mentions he thinks international returns will be even lower..
The thing about stock market is that it plays off investors' emotions. When things are going good, people put more money in, increase their leverage and debt so that they feel they're not missing out. When things are going bad, people pull money out, no matter what the consequences in the fear that they will lose everything.

With such ups and downs driven by irrational emotion and behavior, I am confident that as a long-term investor, I will get good return from the market. In other words, people mistakes in timing the market will be the gain for buy-and-hold investors.

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by SovereignInvestor » Sun Apr 14, 2019 10:11 am

If I was using earnings yield as the "yield" then yes it would be counting buybacks twice because then they contribute to both yield and to the growth. But the "yield" I used was dividend yield. There was no double counting since earnings paid as divisend is not earnings used as a buyback. I urge you to check the math again...

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by F150HD » Sun Apr 14, 2019 10:47 am

its interesting that the premise of this board is 'lump sum' as one cannot predict the market, then a thread like this is essentially attempting to 'predict the market'. :greedy

If one had asked this question during the financial crisis in 2008, what would responses have been? Probably doom and gloom. Look what has occurred since. :beer

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by fortyofforty » Sun Apr 14, 2019 12:05 pm

Beliavsky wrote:
Sun Apr 14, 2019 9:39 am
arcticpineapplecorp. wrote:
Sat Apr 13, 2019 9:36 pm
if correct, the only things to do are:
1. increase your savings rate
2. cut your spending
3. work longer
No, if asset returns are predicted to be low, some people may rationally choose to save less, because the rewards of deferring consumption have fallen. Of course, consuming more now means consuming less in retirement.
Some might conclude that if they save less now, they will have less in retirement and thereby qualify for more public assistance of one sort or another down the road. That's as close to politics as I'll stray.
"In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell | There are many roads to doublin'. | Original Vanguard Diehard

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by DB2 » Sun Apr 14, 2019 12:44 pm

The 4% return issue I think is mostly for those investors who prefer to stay 100% U.S. Most organizations, including Vanguard, are predicting higher returns for international stocks. I'm not concerned about this because I think there will be good opportunities abroad and will not be 100% invested in the U.S.

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by JBTX » Sun Apr 14, 2019 12:50 pm

willthrill81 wrote:
Sun Apr 14, 2019 9:57 am
midareff wrote:
Sun Apr 14, 2019 9:53 am
If stocks return 4% and fixed income 2% to 2.5%, you have about a 3.25% average, less 2% to 2.5% inflation and you have a real return of the neighborhood of 1%. The best advice is be prepared for that scenario, you can always find things to spend more on if you have too much.
I believe that the 4% prediction was real, not nominal.

If I thought that stocks would only return 1% over the next decade, I'd own something else.
If you are referring to Bogle I think it was nominal.

https://www.financial-planning.com/opin ... nd-returns

Just guessing here:
2.0%real gdp growth + 2.0% inflation + 2.0% dividend = 6% less 1/2 cape mean reversion (2.0% per year)= 4.0%

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by garlandwhizzer » Sun Apr 14, 2019 12:59 pm

columbia wrote:

From January, Morningstar’s annual roundup of forecasted returns:
https://www.morningstar.com/articles/90 ... rns-2.html
I read this article in full and there are several points that essentially all listed sources agree on over the next 10 years or so. US equities will produce considerably less in both real and nominal terms than in the past. INTL equities especially EM will outperform US equities going forward. Bonds will not produce the higher returns that they did during the 1982 - 2017 bond bull market and will likely produce low positive real returns going forward. Bogle's 4% nominal returns for bonds prediction going forward is likely based on the fact that he invests heavily in LT corporate bonds which have substantially higher yields but more risk than ST or Treasuries. All in all, these experts do not paint a pretty picture for investors in the accumulation phase but as always predictions cannot be counted on to deliver future truth. It may be wise however for the purposes of financial planning that investors do not assume historical returns of stocks and bonds over the next ten years or so. It these predictions prove correct or even close to it, investor options to deal with it include to working longer, spending less, saving and investing more, and increasing equity exposure to INTL especially EM which most expect to substantially outperform US equity going forward.

Garland Whizzer

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by Thesaints » Sun Apr 14, 2019 1:46 pm

Well, if the picture is not pretty for those in the accumulation phase, it is certainly worse for those selling.

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by midareff » Sun Apr 14, 2019 2:31 pm

willthrill81 wrote:
Sun Apr 14, 2019 9:57 am
midareff wrote:
Sun Apr 14, 2019 9:53 am
If stocks return 4% and fixed income 2% to 2.5%, you have about a 3.25% average, less 2% to 2.5% inflation and you have a real return of the neighborhood of 1%. The best advice is be prepared for that scenario, you can always find things to spend more on if you have too much.
I believe that the 4% prediction was real, not nominal.

If I thought that stocks would only return 1% over the next decade, I'd own something else.
Well... predictions are just that, predictions. With a Friday Shiller of 31.28 and the mean being 16.61 and the median 15.70 the market could easily get up 50% to get to historic norms. If you assume a straight decline over the decade that's a 5% decline a year, pre inflation. I like to be more conservative with predictions since I would be the fellow with the money issue, if I had one. ... hopefully you wouldn't.

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by arcticpineapplecorp. » Sun Apr 14, 2019 5:18 pm

willthrill81 wrote:
Sun Apr 14, 2019 9:46 am
Beliavsky wrote:
Sun Apr 14, 2019 9:39 am
arcticpineapplecorp. wrote:
Sat Apr 13, 2019 9:36 pm
if correct, the only things to do are:
1. increase your savings rate
2. cut your spending
3. work longer
No, if asset returns are predicted to be low, some people may rationally choose to save less, because the rewards of deferring consumption have fallen. Of course, consuming more now means consuming less in retirement.
Assuming that the person was saving enough to meet their existing goals, those following that path would be giving themselves a double whammy: lower returns and less savings. That doesn't seem very rational to me unless they're planning on delaying retirement (i.e. working longer).

Most of us aren't saving because it's profitable to do so. We're saving in order to fund our goals.
sure but many people are assuming they'll fund their goals based on an earnings rate that may wind up being lower than they assumed. That's why the savings rate would have to increase...to compensate for lower returns.
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by DonIce » Sun Apr 14, 2019 5:23 pm

arcticpineapplecorp. wrote:
Sun Apr 14, 2019 5:18 pm
sure but many people are assuming they'll fund their goals based on an earnings rate that may wind up being lower than they assumed. That's why the savings rate would have to increase...to compensate for lower returns.
Most people on this forum already seem to assume very pessimistic return rates going forward. Personally my assumptions are based on 5% nominal returns and 2.5% inflation (so 2.5% real returns) over the next 40 years. Part of the general very conservative mindset here.

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by midareff » Sun Apr 14, 2019 5:28 pm

midareff wrote:
Sun Apr 14, 2019 2:31 pm
willthrill81 wrote:
Sun Apr 14, 2019 9:57 am
midareff wrote:
Sun Apr 14, 2019 9:53 am
If stocks return 4% and fixed income 2% to 2.5%, you have about a 3.25% average, less 2% to 2.5% inflation and you have a real return of the neighborhood of 1%. The best advice is be prepared for that scenario, you can always find things to spend more on if you have too much.
I believe that the 4% prediction was real, not nominal.

If I thought that stocks would only return 1% over the next decade, I'd own something else.
Well... predictions are just that, predictions. With a Friday Shiller of 31.28 and the mean being 16.61 and the median 15.70 the market could easily get up 50% to get to historic norms. If you assume a straight decline over the decade that's a 5% decline a year, pre inflation. I like to be more conservative with predictions since I would be the fellow with the money issue, if I had one. ... hopefully you wouldn't.


amd 4% instead of 10% is nominal. $5 less 2% inflation is 2% before tax.

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by DonIce » Sun Apr 14, 2019 5:30 pm

midareff wrote:
Sun Apr 14, 2019 2:31 pm
Well... predictions are just that, predictions. With a Friday Shiller of 31.28 and the mean being 16.61 and the median 15.70 the market could easily get up 50% to get to historic norms. If you assume a straight decline over the decade that's a 5% decline a year, pre inflation. I like to be more conservative with predictions since I would be the fellow with the money issue, if I had one. ... hopefully you wouldn't.
The reasoning behind the Shiller CAPE is to filter out the earnings drops during recessions so you can have a "stable" indicator. The fundamental underlying metric is P/E, and current year P/E makes the most sense to use when you are in a stable period of growth. Current (TTM) P/E is ~21. Far less overvalued than CAPE would suggest. CAPE right now is still averaging in earnings from 2009 which are hardly relevant to the current situation. CAPE will fall a lot over the next 2 years as the 2009 and 2010 numbers are removed from the average.

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midareff
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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by midareff » Sun Apr 14, 2019 5:43 pm

DonIce wrote:
Sun Apr 14, 2019 5:30 pm
midareff wrote:
Sun Apr 14, 2019 2:31 pm
Well... predictions are just that, predictions. With a Friday Shiller of 31.28 and the mean being 16.61 and the median 15.70 the market could easily get up 50% to get to historic norms. If you assume a straight decline over the decade that's a 5% decline a year, pre inflation. I like to be more conservative with predictions since I would be the fellow with the money issue, if I had one. ... hopefully you wouldn't.
The reasoning behind the Shiller CAPE is to filter out the earnings drops during recessions so you can have a "stable" indicator. The fundamental underlying metric is P/E, and current year P/E makes the most sense to use when you are in a stable period of growth. Current (TTM) P/E is ~21. Far less overvalued than CAPE would suggest. CAPE right now is still averaging in earnings from 2009 which are hardly relevant to the current situation. CAPE will fall a lot over the next 2 years as the 2009 and 2010 numbers are removed from the average.
Is that a statement of fact? A statement of hope? or a statement of assumptions?

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by Grt2bOutdoors » Sun Apr 14, 2019 5:58 pm

Buy low p/e equities and stop worrying about CAPE. Aka value equities. :wink:
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by Trader Joe » Sun Apr 14, 2019 6:03 pm

alex123711 wrote:
Sat Apr 13, 2019 9:20 pm
Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns of recent decades.
Bogle believes the U.S. stock market will enter a period of relatively low returns. He reached his estimate by looking at 2 percent dividend yield, a “deadweight loss from the 4.4 percent it has been historically,” and earnings growth of about 4 percent, which matches typical economic growth, to predict future investment return of 6 percent. He also looked at the difference between today’s price/earnings ratio of about 24, and the historic P/E ratio to estimate the speculative return.

Legendary investor Jack Bogle weighs in on the record rally
“My guess — an informed guess, but still a guess — is that by decade’s end the P/E ratio might ease down to, say, 20 times or even less. Such a revaluation would reduce the market’s return by about 2 percentage points per year, resulting in an annual rate of return of 4 percent for the U.S. stock market,” he wrote in the Little Book of Common Sense Investing.

https://www.cnbc.com/2017/11/20/jack-bo ... eyond.html

Bogle’s dour view on stocks, bonds. What if he was right?
https://www.financial-planning.com/opin ... nd-returns

https://www.morningstar.com/videos/8857 ... arket.html



What to do in this situation? He also mentions he thinks international returns will be even lower..
No one can predict the future. No one!

I invest in either VFIAX or VTSAX and I am very happy with my results. Good luck.

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by DonIce » Sun Apr 14, 2019 6:32 pm

midareff wrote:
Sun Apr 14, 2019 5:43 pm
DonIce wrote:
Sun Apr 14, 2019 5:30 pm
midareff wrote:
Sun Apr 14, 2019 2:31 pm
Well... predictions are just that, predictions. With a Friday Shiller of 31.28 and the mean being 16.61 and the median 15.70 the market could easily get up 50% to get to historic norms. If you assume a straight decline over the decade that's a 5% decline a year, pre inflation. I like to be more conservative with predictions since I would be the fellow with the money issue, if I had one. ... hopefully you wouldn't.
The reasoning behind the Shiller CAPE is to filter out the earnings drops during recessions so you can have a "stable" indicator. The fundamental underlying metric is P/E, and current year P/E makes the most sense to use when you are in a stable period of growth. Current (TTM) P/E is ~21. Far less overvalued than CAPE would suggest. CAPE right now is still averaging in earnings from 2009 which are hardly relevant to the current situation. CAPE will fall a lot over the next 2 years as the 2009 and 2010 numbers are removed from the average.
Is that a statement of fact? A statement of hope? or a statement of assumptions?
Which part? The numbers I mentioned are facts, including the fact that, all else being equal, CAPE will drop over the next 2 years as the 2009 and 2010 numbers are removed from the calculation. That P/E of 21 is less overvalued than 31 is also a statement of fact, inasmuch as one assigns any significance at all to P/E (many on this forum don't). The main assumption in all of this is that P/E has any relevance at all.

As for hope... I'm early in accumulation so personally my biggest hope is we see a huge market crash so I get to buy in cheap.

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by SovereignInvestor » Sun Apr 14, 2019 7:07 pm

CAPE is dangerous to use. It is not accounting for buybacks driving earnings growth rates well above inflation in revent years when comparing to data from 100 years ago.

It also doesn't account for the CPI being different THan decades ago and leading to reduced inflation adjustments.

CAPE says the S&P should be around 1500, so it would have a forward PE of under 9 or earnings yield of 11%, so if there is never any growth ever in economy that means 11% long term return. That is just absurd.

CAPE Is Leading Bears Astray https://seekingalpha.com/article/4207295?source=ansh

Have yet to see any actual rebuttal of the point CAPE has serious issues for not reflecting buybacks or CPI. Even Shiller himself acknowledged the buyback issue by having a new column in his public Excel spreadsheet that includes buybacks in a total return proxy.

CAPE says the market has been overvalued for 7 years now. Seems ridiculous.

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by siriusblack » Sun Apr 14, 2019 7:58 pm

SovereignInvestor wrote:
Sun Apr 14, 2019 7:07 pm
CAPE is dangerous to use. It is not accounting for buybacks driving earnings growth rates well above inflation in revent years when comparing to data from 100 years ago.

It also doesn't account for the CPI being different THan decades ago and leading to reduced inflation adjustments.

CAPE says the S&P should be around 1500, so it would have a forward PE of under 9 or earnings yield of 11%, so if there is never any growth ever in economy that means 11% long term return. That is just absurd.

CAPE Is Leading Bears Astray https://seekingalpha.com/article/4207295?source=ansh

Have yet to see any actual rebuttal of the point CAPE has serious issues for not reflecting buybacks or CPI. Even Shiller himself acknowledged the buyback issue by having a new column in his public Excel spreadsheet that includes buybacks in a total return proxy.

CAPE says the market has been overvalued for 7 years now. Seems ridiculous.
I think you are spot on regarding CPI. I personally like Vanguard's "fair value CAPE" range (which today they say is ~22-23 to ~28 or so)-- in other words, based on low inflation and low prevailing interest rates, one should expect P/E's to be inflated accordingly. Vanguard's recent 2019 market forecast clearly agrees with you on this.

So, at today's CAPE of 31 (keeping in mind the 2009 earnings data will be rolling out of range throughout the year, which should push the CAPE down as another poster mentioned higher in the thread)-- we are in "moderately overvalued" territory -- not a bubble by any means -- but also not in a place where we should be expecting forward returns to match historic levels. I think it's very likely that forward returns (from today's valuation) are indeed below historic norms.

(Not sure about buybacks... I haven't really considered how or why that would change the nature of P/E as a valuation metric. If a company has capital to deploy, they can deploy in the form of buyback or dividend or internal investment... in all cases, such action would be in shareholder's interest, presumably, in similar ways.)

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by Jeff Albertson » Sun Apr 14, 2019 8:20 pm

Mark Hulbert has an interesting article concerning economic growth and stock performance, "A Surprising Connection Between the Bull Market and Stock Buybacks "
They found that net buybacks -- the number of shares that companies repurchased across the entire stock market, less the number of new shares issued -- explain the bulk of the intermediate- and longer-term differences in stock-market returns around the world.

This comes as a surprise, because the conventional wisdom is that economic growth is by far the most important factor in the outperformance of certain countries' stock markets in recent decades. The researchers found little support for this belief.

Take China, whose economy over the past decade has grown at one of the fastest rates of any major country. China's real GDP, in U.S. dollars, grew at an 8.0% annualized rate over the 10 years through year-end 2018, versus a 2.1% annualized rate for U.S. GDP. And yet U.S. equities' annualized return over this decade was more than double that of China's.

This was not a fluke. In an analysis of 43 countries' stock markets between 1997 and 2017, the researchers found those that performed best were, on average, those with lower economic growth rates. Similarly, the researchers found that the variances in countries' equity returns had little to do with any of the other usual suspects to which analysts often turn when trying to account for countries' varying equity returns, such as inflation, currency fluctuations and profit margins.
https://www.morningstar.com/news/dow-jo ... eport.html
note: article also in the WSJ

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by Thesaints » Sun Apr 14, 2019 9:04 pm

CAPE does not account for interest rates, therefore it must be useless by itself.

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by SovereignInvestor » Sun Apr 14, 2019 9:31 pm

siriusblack wrote:
Sun Apr 14, 2019 7:58 pm
SovereignInvestor wrote:
Sun Apr 14, 2019 7:07 pm
CAPE is dangerous to use. It is not accounting for buybacks driving earnings growth rates well above inflation in revent years when comparing to data from 100 years ago.

It also doesn't account for the CPI being different THan decades ago and leading to reduced inflation adjustments.

CAPE says the S&P should be around 1500, so it would have a forward PE of under 9 or earnings yield of 11%, so if there is never any growth ever in economy that means 11% long term return. That is just absurd.

CAPE Is Leading Bears Astray https://seekingalpha.com/article/4207295?source=ansh

Have yet to see any actual rebuttal of the point CAPE has serious issues for not reflecting buybacks or CPI. Even Shiller himself acknowledged the buyback issue by having a new column in his public Excel spreadsheet that includes buybacks in a total return proxy.

CAPE says the market has been overvalued for 7 years now. Seems ridiculous.
I think you are spot on regarding CPI. I personally like Vanguard's "fair value CAPE" range (which today they say is ~22-23 to ~28 or so)-- in other words, based on low inflation and low prevailing interest rates, one should expect P/E's to be inflated accordingly. Vanguard's recent 2019 market forecast clearly agrees with you on this.

So, at today's CAPE of 31 (keeping in mind the 2009 earnings data will be rolling out of range throughout the year, which should push the CAPE down as another poster mentioned higher in the thread)-- we are in "moderately overvalued" territory -- not a bubble by any means -- but also not in a place where we should be expecting forward returns to match historic levels. I think it's very likely that forward returns (from today's valuation) are indeed below historic norms.

(Not sure about buybacks... I haven't really considered how or why that would change the nature of P/E as a valuation metric. If a company has capital to deploy, they can deploy in the form of buyback or dividend or internal investment... in all cases, such action would be in shareholder's interest, presumably, in similar ways.)
The link I posted has examples why buybacks distort the CAPE.

Buybacks lead to recent earnings being much greater than EPS from 10 years ago, in sustainable manner...not just cyclicality.

Buybacks are only new to 1982-present and really took off since 2005.

So readings after 2005 really will see a sharper growth in inflation adjusted EPS that CAPE before 2005.

This is an issue because CAPE users generally insist on comparing the current CAPE to that of the 150 year average and make relative comparison...like if current CAPE is above long term average then market is over valued. But as long as there is buyback all else equal, the CAPE will be larger...the actual real stock market only cares about recent real earnings per share power but CAPE is blending the recent real earnings with those from 10 years ago and the 10year ago real EPS will diverge more from recent EPS when buybacks exist...buybacks magnify the difference.

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by SovereignInvestor » Sun Apr 14, 2019 9:46 pm

1) Say there's no inflation ever and gross earnings never grow. If EPS was 1.00 every year from 2009-2018 and then the S&p buys back 50% of shares before at end of 2018, then the EPS becomes say 2.000 for 2019.

The true nominal gross earnings for SPX say never changes but because 50% share reduction into 2018, it becomes 2.00 going forward instead of 1, then CAPE will give huge divergence from reality.

CAPE averages last 10 years real earnings which are all 1.00. But pro forma earnings power is 2.00...if the same old earnings occurred again in future due to new share count it would be 2.00.

So CAPE says EPS is 1.00, but going forward that is really 2.00.

If market trades at price of 30, CAPE says it is PE of 30 and forward PE says 15.0. Now say before 2005 when buybacks never really occured the pro forma EPS would be closer to the average of last 10 years.

2) Say in 1980 to 1989, the EPS would all be 1.00, and then for 1990 it can also be expected to be 1.00, there's no massive buyback...because all retained earnings thst would be used for buyback is paid in dividend. So at end of 1989 if market trades at price of 30, it reflects both a forward PE of 30 and a CAPE of 30.


This is unrealistic extreme example shows that in first example in 2019, the CAPE would be 30, and in 2nd example it is also 30 and CAPE worshippers say the market is as overvalued in 2019 as it was in 1989. But this is crazy becase in 1989 the market was trading at 30 x what would be EPS in the next year if nothing change but in 2019, it was at only 15 times the next year EPS power.

This comparison never is as clear cut bevause in reality there is inflation and real earnings growth and buybacks are never as large, but I exaggerated to illustrate the point.

Buybacks allow EPS to grow faster than inflation so comparing CAPE from period when dividends domimated to a CAPE from a period with more buybacks is not like to like comparison. The same is true of CPI adjustment changing.

Interest rate changes are also an issue but this is present for regular forward PE too.

CAPE adherents will continue to understate the returns of the stock market. They've been saying SPX is overvalued since 2012.

The regression theyre using may have worked from 186p to 1980 but it won't work in the future bevause the underlying data has changed and the comparison isn't like to like.

The Buffett indicator people are making the same mistake with apples to oranges comparison of the stock market market cap, to US Only GDP. When the stock market gets nearly half of profits from overseas economies which grow much faster. It is a ridiculpis comparison but no one questions it because it supports a good narrative everyone likes to agree with that stocks are over valued.

It is scary that many mention that every expert thinks the market is grossly overvalued and no one ever questions it. It's not much different from saying every expert thought the Nasdaq was cheap in 1999 because of the new economy. Having everyone on the same side doesn't make analysis any more correct, it has to be a sound process and anything using inconsistent data across time has a process issue.

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by Dominic » Sun Apr 14, 2019 9:57 pm

Returns = dividend yield + buyback yield + earnings growth +/- change in valuation

The newest figures for US market shareholder yield I've seen (2016) are 5%. Earnings growth is roughly equal to GDP growth. Call it 2%, to arrive at 7% nominal, plus or minus any changes in valuation due to sentiment. Valuations are currently a bit high relative to the historical mean, but the historical mean is irrelevant. Past valuations do not predict future valuations.

And considering that international valuations are quite low, and emerging markets can grow much faster than developed ones, I do not expect international markets to return worse than US markets, let alone worse than 4%.

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by SovereignInvestor » Sun Apr 14, 2019 10:06 pm

Dominic wrote:
Sun Apr 14, 2019 9:57 pm
Returns = dividend yield + buyback yield + earnings growth +/- change in valuation

The newest figures for US market shareholder yield I've seen (2016) are 5%. Earnings growth is roughly equal to GDP growth. Call it 2%, to arrive at 7% nominal, plus or minus any changes in valuation due to sentiment. Valuations are currently a bit high relative to the historical mean, but the historical mean is irrelevant. Past valuations do not predict future valuations.

And considering that international valuations are quite low, and emerging markets can grow much faster than developed ones, I do not expect international markets to return worse than US markets, let alone worse than 4%.
Yes

returns = dividend yield + buyback yield + earnings growth + valuation change

But you aren't including inflation by only using real GDP growth.

The earnings here would be aggregate and not per share. They growth with nominal GDP not real. Real growth is around 2%, but that is US only. Global is around 3.0%, and almost half of earnings are overseas. As I noted above the relevant Real GDP growth to US stocks is closer to 2.5%.

That is real growth. To get nominal we need inflation thrown on..say 2.0%. Then you have nominal GDP of 4.5%..or say 4.0% to be safe.

Yes dividend and buyback yield has been 5.0% in 2016 hit it was running higher in 2018 at near 6.0%...but let's use 5.0%. But it must account for share issuance dilution negating some of buybacks which is maybe 1% dilution.

Then you get net shareholder yield of say 4.0%.

Return = 4.0% nominal earnings growth Plus 4.0% shareholder return + valuation change.

That is 8.0% before any valuation change...using haircutting values for shareholder return and nominal GDP.

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by heyyou » Sun Apr 14, 2019 10:54 pm

With the nuances of so many predictions being argued here, I hope to just muddle through whatever does occur in the future, while expecting to adapt as necessary. Trying to peer into the future has not worked well in the past. We are keeping our necessary expenses low and spending a somewhat fixed % (longevity adjusted) of each recent annual portfolio balance or less, thus continuing to live within our means, same as before retiring.

It is a good life if you think it is, feeling grateful for what you have, instead of lamenting about lost opportunities for more money.

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Re: Stocks will return about 4% annually over the next decade or so rather than the 10% average annual returns - John Bo

Post by SovereignInvestor » Mon Apr 15, 2019 6:15 am

heyyou wrote:
Sun Apr 14, 2019 10:54 pm
With the nuances of so many predictions being argued here, I hope to just muddle through whatever does occur in the future, while expecting to adapt as necessary. Trying to peer into the future has not worked well in the past. We are keeping our necessary expenses low and spending a somewhat fixed % (longevity adjusted) of each recent annual portfolio balance or less, thus continuing to live within our means, same as before retiring.

It is a good life if you think it is, feeling grateful for what you have, instead of lamenting about lost opportunities for more money.
Yes indeed. There is so much error around any forecast bevause the growth of earnings and valuation are both cyclical.

But some of the comments using menthods like CAPE or assuming earnings grow at only real GDP not nominal GDP will be low biased estimates of returns because they're ignoring bup backs and inflation, respectively.

Eve if we get a forecast with minimal bias...the error can still be great.

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