Average return for US stock market for the next 10-20 years to use for planning purpose

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raveon
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Average return for US stock market for the next 10-20 years to use for planning purpose

Post by raveon » Sun Dec 01, 2019 10:51 pm

I started investing around 2006/7. For retirement planning purposes, I have used 7% annual return post-inflation (so 9% return with 2% inflation) for my portfolio (AA: 20% large cap, 20% mid/small cap, 18% international, 6% REIT, 28 % bond, 8% company stock). I max 401k, IRAs, HSA for both spouse and I, etc. I am a buy/hold investor. I think the US returns have been significantly higher (15-16%?) than 7%/year conservative estimate I have been using over the last decade. However, I recall reading some commentary from Vanguard where they were forecasting a 5% annual return (I forget if that accounts for inflation or not) for the coming decade. Of course, it is just a prediction

I am curious. What number do you use for average annual return (post-inflation) for planning purpose? I have about 25 more years before retirement.

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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by Grt2bOutdoors » Sun Dec 01, 2019 10:57 pm

Search the forum, there are a couple of threads on this topic.
I use a range of 1%-4% real, that way there are no surprises except if returns are 0% real. Conservative, I know.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

stocknoob4111
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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by stocknoob4111 » Sun Dec 01, 2019 10:59 pm

US Total market has returned 8.5% nominal 2007 to date, not even close to 15%!!

I have 35% Large, 28% Small, 19% Total International, 16.5% Total bond, 1.5% cash

I use 5.5% nominal as a conservative estimate for the next 10 years. Just my wild guess.

My fear is crazy inflation coming up ala 70s due to all the money printing. If this deficit/debt trajectory continues I can't see how it ends any other way.
Last edited by stocknoob4111 on Sun Dec 01, 2019 11:02 pm, edited 1 time in total.

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Cubicle
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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by Cubicle » Sun Dec 01, 2019 11:00 pm

One money podcast I listen to says use half of the historical returns. I always see 10% annualized returns over the past 90-130 years for the broad markets, so I always use 5% for any future projections.

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HomerJ
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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by HomerJ » Sun Dec 01, 2019 11:01 pm

I used 5% nominal returns (so 2%-3% real) most of the time when I was playing around with the numbers.

I feel it's best to plan for low historical numbers, so you will still be okay even if the low numbers show up (and if even lower numbers show up, it's not a huge adjustment). The odds are very high that one will be pleasantly surprised, and so far I have been.

Much easier to adjust to the upside than the downside. Retire earlier or spend more in retirement is a much easier adjustment than work longer or spend less in retirement.
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EnjoyIt
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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by EnjoyIt » Sun Dec 01, 2019 11:04 pm

If my memory serves me right, a 60/40 portfolio returned 8.7% over long term on average. Inflation was 3% that would bring it down to 5.7% average. I hedge my bets and use 5%. I also do the same calculations at 4% just to see if the future is far worse than the past.

There are some people who think returns will be very very very low such as the 1-2% crowd. They have been saying it for the last 5+ years and so far have been wrong. They may be right in the future, they may be wrong in the future. They may be correct for the next 5-10 years but I doubt anyone can predict the next 30 years. I suspect if the next 10 years returns are below average, then the following 10 years returns will be above average as I believe Mr. Bogle's reversion to the mean philosophy.

Dave Ramsey is predicting 12% returns which is far above historic averages

Unfortunately you will need to decide for yourself what to use. Historic averages, something slightly less, or some people's prediction for the future.
Last edited by EnjoyIt on Sun Dec 01, 2019 11:30 pm, edited 1 time in total.

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dmcmahon
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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by dmcmahon » Sun Dec 01, 2019 11:27 pm

I use the nominal interest rate on intermediate term bonds to estimate the yield on the bond portion, which is about 2% nominal, 0% real. On stocks, I assume a baseline of 2% real GDP growth, 2% dividends, and 2% inflation, for a total of a 6% nominal yield. I tweak that based on the P/E multiple of the market, because there's a component (multiple expansion) that I purposely left out of the foregoing. I use a P/E of 15 as the baseline, i.e. if the market is at 15 P/E, then 6% nominal it is. At the current P/E of 18+ this suggests sub-par returns of just 4% nominal for a decade (that's the number that smoothly lowers the P/E to 15 over 10 years if there's 2% real growth). Yes, it's pessimistic. Yes, equity valuations are more likely to undergo wrenching corrections than to smoothly transition to reasonable levels. JMHO.

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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by Hydromod » Sun Dec 01, 2019 11:49 pm

I started a thread called "Now is a good time to be an accumulator" in October. It points to some analyses of future returns based on starting overall allocations of investments among equities and other investments. It appears that a nominal cagr between -3 and +5 for the next 10 years is consistent with the available data, and it would be unprecedented to be outside that range. Typically in the past it would have started picking up afterwards.

Of course, the market could easily gyrate around the long term average.

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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by averagedude » Sun Dec 01, 2019 11:56 pm

My assumptions:
Stocks. 3.5% real return
Bonds. 0.5% real return
Cash. 0.0% real return

Noone really knows, but I tend to take a conservative approach also. At the start of my investing (1990), everyone was saying it was going to be low returns due to high PE ratios, but the market has been kind. I read somewhere where institution investors (pension funds) are projecting 7% nominal returns from a moderate asset allocation. They have been more accurate than individual investors in the past, but I wonder if they really believe this because alot of the pension funds in the present seem to be mitigating risk by offering lump sums to pension holders.

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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by dmcmahon » Mon Dec 02, 2019 12:01 am

To get 7%+ returns stocks would have to do a lot of heavy lifting to make up for the crummy prospective returns on bonds from current levels. Like turn in 10% average nominal returns in an aggressive 70/30 portfolio. Color me skeptical. Where's the 10% going to come from, with 2% inflation and new-normal GDP growth of 2%?

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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by rich126 » Mon Dec 02, 2019 12:35 am

dmcmahon wrote:
Mon Dec 02, 2019 12:01 am
To get 7%+ returns stocks would have to do a lot of heavy lifting to make up for the crummy prospective returns on bonds from current levels. Like turn in 10% average nominal returns in an aggressive 70/30 portfolio. Color me skeptical. Where's the 10% going to come from, with 2% inflation and new-normal GDP growth of 2%?
Based on your estimates a 50/50 portfolio would return 1% real. Not disputing that.

minimalistmarc
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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by minimalistmarc » Mon Dec 02, 2019 12:41 am

Grt2bOutdoors wrote:
Sun Dec 01, 2019 10:57 pm
Search the forum, there are a couple of threads on this topic.
I use a range of 1%-4% real, that way there are no surprises except if returns are 0% real. Conservative, I know.
You mean if returns are less than 0% real.

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JoMoney
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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by JoMoney » Mon Dec 02, 2019 12:42 am

For "planning purposes" I look at my present marked to market balance, and then look at what guaranteed returns could be had from various bond portfolios amortized over my expected lifespan, or just get a SPIA quote (which is usually about the same). I then consider that stocks have tended to do better, and hope they will continue to do so.
Sometimes I'll play around with Monte Carlo Simulators like https://www.portfoliovisualizer.com/mon ... simulation
Sometimes I'll play around with a trend chart that looks at "average returns" from past historical peaks and troughs and see what returns would like if such growth trends continued....
Image
If 10 years out (from the end of October 2019) the growth from an investment in the S&P 500 (total return) inflation adjusted is touching the top red line it would represent a 13.5% annualized return, if touching the bottom red line a 2.4% annualized return.
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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by MoonOrb » Mon Dec 02, 2019 12:45 am

Grt2bOutdoors wrote:
Sun Dec 01, 2019 10:57 pm
I use a range of 1%-4% real, that way there are no surprises except if returns are 0% real. Conservative, I know.
I do the same and plan out scenarios with real returns from 1-4%. Then I see how these would play out if I keep contributing at the same amount I am for the next n years, the next n + 1 years, etc., or if my contributions drop off, and so on.

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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by Trader Joe » Mon Dec 02, 2019 1:03 am

raveon wrote:
Sun Dec 01, 2019 10:51 pm
I started investing around 2006/7. For retirement planning purposes, I have used 7% annual return post-inflation (so 9% return with 2% inflation) for my portfolio (AA: 20% large cap, 20% mid/small cap, 18% international, 6% REIT, 28 % bond, 8% company stock). I max 401k, IRAs, HSA for both spouse and I, etc. I am a buy/hold investor. I think the US returns have been significantly higher (15-16%?) than 7%/year conservative estimate I have been using over the last decade. However, I recall reading some commentary from Vanguard where they were forecasting a 5% annual return (I forget if that accounts for inflation or not) for the coming decade. Of course, it is just a prediction

I am curious. What number do you use for average annual return (post-inflation) for planning purpose? I have about 25 more years before retirement.
At least the historical average of around 10% per year.

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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by JoMoney » Mon Dec 02, 2019 1:03 am

dmcmahon wrote:
Mon Dec 02, 2019 12:01 am
To get 7%+ returns stocks would have to do a lot of heavy lifting to make up for the crummy prospective returns on bonds from current levels. Like turn in 10% average nominal returns in an aggressive 70/30 portfolio. Color me skeptical. Where's the 10% going to come from, with 2% inflation and new-normal GDP growth of 2%?
Strong skepticism is warranted, but <shrug> not impossible to dream of-
Stocks: 2% nominal growth + 2% inflation + (2% dividend + 2% buybacks) + 2% (P/E multiple markup from current 23 to 28 ten years out)= 10%
:mrgreen:
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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by dmcmahon » Mon Dec 02, 2019 1:16 am

JoMoney wrote:
Mon Dec 02, 2019 1:03 am
dmcmahon wrote:
Mon Dec 02, 2019 12:01 am
To get 7%+ returns stocks would have to do a lot of heavy lifting to make up for the crummy prospective returns on bonds from current levels. Like turn in 10% average nominal returns in an aggressive 70/30 portfolio. Color me skeptical. Where's the 10% going to come from, with 2% inflation and new-normal GDP growth of 2%?
Strong skepticism is warranted, but <shrug> not impossible to dream of-
Stocks: 2% nominal growth + 2% inflation + (2% dividend + 2% buybacks) + 2% (P/E multiple markup from current 23 to 28 ten years out)= 10%
:mrgreen:
Certainly, there are reasons to believe the stock market could grow at a faster rate than the economy through mechanisms other than multiple expansion.

Buybacks, takeovers, and the like may reduce the supply of shares. But those have to be funded somehow, meaning they have to come out of retained E or be borrowed. But yes, a lot of businesses have returns in excess of the rate at which they can borrow in today's environment, and so for a while they have some capacity to expand the return on shareholder equity that way. This runs in the opposite direction if rates go up, of course. If purchased out of E, it could seem to work only if the market doesn't account for the fact that reported E isn't actually the net E; otherwise, it seems to be a form of double-counting.

There is also the possibility of capitalizing more economic activity. As an example, the large investment banks were giant partnerships in the 1980s but many of them eventually went public. Or consider large chains putting small mom-and-pop stores out of business. Even with zero actual economic growth, the size of the public market would expand. Now, this sort of thing adds both to the earnings and market cap, so only if the higher-growth parts of the economy are capitalized while morbiund parts aren't, or if there are economies of scale, would this tend to make the equity market grow faster than the economy as a whole. And, obviously, it has to end at some point short of 100% so it can't go on forever.

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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by Independent George » Mon Dec 02, 2019 1:21 am

In my spreadsheets, I plan around 3.5% real growth.

In practice, my portfolio has earned me roughly 8.5% nominal from 2000 to 2019 (which includes my early days as a market timer and sector picker). I haven't checked the inflation calculator for that period, but I believe that comes to around 5.5% real.

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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by Valuethinker » Mon Dec 02, 2019 3:40 am

raveon wrote:
Sun Dec 01, 2019 10:51 pm
I started investing around 2006/7. For retirement planning purposes, I have used 7% annual return post-inflation (so 9% return with 2% inflation) for my portfolio (AA: 20% large cap, 20% mid/small cap, 18% international, 6% REIT, 28 % bond, 8% company stock). I max 401k, IRAs, HSA for both spouse and I, etc. I am a buy/hold investor. I think the US returns have been significantly higher (15-16%?) than 7%/year conservative estimate I have been using
7% is not conservative.
over the last decade. However, I recall reading some commentary from Vanguard where they were forecasting a 5% annual return (I forget if that accounts for inflation or not) for the coming decade. Of course, it is just a prediction

I am curious. What number do you use for average annual return (post-inflation) for planning purpose? I have about 25 more years before retirement.
Over the last decade is a dangerous number, because the market bottomed from the 2008 Crash in c. March 2009. So 10 years looks bloody brilliant right now, but back it up to say March 2008 it does not look so great.

Long run average for US equities is 6.0% real. For international equities 5% real. Expected returns from REITs will be similar or less, bonds (nominal) 1-2%, for TIPS (real return) less than 1.0%.

Any assumption above 6% real for a 100% equity portfolio is too ambitious. There's no reason to think US equities will perform better than they have in long run historical average, from here (valuations are a heck of a lot higher so they should perform worse).

A reasonable assumption is 3-5% real for equities.

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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by Valuethinker » Mon Dec 02, 2019 3:48 am

averagedude wrote:
Sun Dec 01, 2019 11:56 pm
My assumptions:
Stocks. 3.5% real return
Bonds. 0.5% real return
Cash. 0.0% real return

Noone really knows, but I tend to take a conservative approach also. At the start of my investing (1990), everyone was saying it was going to be low returns due to high PE ratios, but the market has been kind. I read somewhere where institution investors (pension funds) are projecting 7% nominal returns from a moderate asset allocation. They have been more accurate than individual investors in the past, but I wonder if they really believe this because alot of the pension funds in the present seem to be mitigating risk by offering lump sums to pension holders.
There are actuarial rules and government laws regarding projections of returns. I believe US public sector funds operate on looser rules?

In a very low interest rate environment, the impact of future liabilities on present PF valuations is magnified. If you are in a deficit position, it gets worse (liabilities are discounted to more than assets).

Thus for a Defined Benefit PF, it pays to buy out future liabilities.

For plan sponsors, who have to show the deficit on their balance sheets, it's a no brainer (down to some quite expensive buyouts). You are derisking the company against an uncertain future liability - that's better than paying off a (certain) outstanding debt.

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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by Valuethinker » Mon Dec 02, 2019 3:52 am

stocknoob4111 wrote:
Sun Dec 01, 2019 10:59 pm
US Total market has returned 8.5% nominal 2007 to date, not even close to 15%!!

I have 35% Large, 28% Small, 19% Total International, 16.5% Total bond, 1.5% cash

I use 5.5% nominal as a conservative estimate for the next 10 years. Just my wild guess.

My fear is crazy inflation coming up ala 70s due to all the money printing. If this deficit/debt trajectory continues I can't see how it ends any other way.
It's right to think about inflation. Because it is not something markets are worrying about right now.

But consider Japan - its public sector debt is far worse, its national deficit is worse. The Central Bank is pursuing explicitly inflationary policies, targetting an increase of inflation to 2% long run.

And still due to demographic and structural factors, they do not have inflation.

The US is experiencing inflation but it is asset inflation. Housing prices are returning to their pre Crash highs (in some areas). Stocks and every other asset has been bid up. That's not, so far, translating into CPI inflation.

The US is in a period of lax fiscal and monetary policy. History says at some point that will turn and the deficit will be reduced - think Bush Snr after Reagan, Ford and Carter after Johnson and Nixon, etc.

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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by lazyday » Mon Dec 02, 2019 6:39 am

These two sites make estimates of future returns either every year or month, and show detailed "methodology" for how they form their estimates. I've found both of them helpful.

https://interactive.researchaffiliates. ... e=Equities

https://www.aqr.com/Insights/Research/A ... et-Classes

Those are the only two I know of that show detailed methodology, update at least once a year on a schedule, and largely avoid assuming that future returns = past returns, as if stock returns are caused by past returns instead of corporate profits.

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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by mjb » Mon Dec 02, 2019 7:16 am

So a rough approximation is stocks tend to have a 4% risk premium over the 10 year treasury yield when looking out 10 years. However, that premium has been trending downward. That puts you at between 5 and 7%

Alternatively, assuming GDP growth plus 2% tends to be relatively accurate as well. With inflation between 1 and 2%, labor force growth between 0 and 1%, and productivity growth between 0 and 2%, expected nominal returns are between 3 and 7.

Both are bad assumptions and assume stocks are currently at fair value. However, they are about as good as all the other bad methods.

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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by inferno9898 » Mon Dec 02, 2019 8:57 am

Here is a link to JPMorgan's 2020 capital market outlook. Toward the end they have a 10-15 year forecast for all asset classes.

Roughly, they're estimating 6% future compound returns for US equities.



https://am.jpmorgan.com/gb/en/asset-man ... /adv/ltcma

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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by mbasherp » Mon Dec 02, 2019 9:22 am

In my planning/projection spreadsheet, which runs 30+ years into the future, I typically use 4% real returns for stocks and 0% for everything else.

I routinely update it to reflect everything from 0% across the board, to historical past returns. I feel like this gives a good range of possible outcomes.

I never understood taking these official 10 year predictions from investment advisors and applying them for longer than that.

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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by jebmke » Mon Dec 02, 2019 9:29 am

mbasherp wrote:
Mon Dec 02, 2019 9:22 am
In my planning/projection spreadsheet, which runs 30+ years into the future, I typically use 4% real returns for stocks and 0% for everything else.
I don't really do projections anymore but that is about what I used to use. Using 0% for bonds makes it easy to calculate my future RMD since all our IRAs are in bonds.
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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by JoMoney » Mon Dec 02, 2019 9:34 am

lazyday wrote:
Mon Dec 02, 2019 6:39 am
These two sites make estimates of future returns either every year or month, and show detailed "methodology" for how they form their estimates. I've found both of them helpful.

https://interactive.researchaffiliates. ... e=Equities

https://www.aqr.com/Insights/Research/A ... et-Classes

Those are the only two I know of that show detailed methodology, update at least once a year on a schedule, and largely avoid assuming that future returns = past returns, as if stock returns are caused by past returns instead of corporate profits.
Most investment firms/funds put something out.
BlackRock has a tool that lets you pick a date range from 5 to 25 years out:
https://www.blackrock.com/institutions/ ... ssumptions
or a report https://blackrockblog-blanktemplate-ass ... _USD_5.pdf

Vanguard puts out a report at least annually with their economic outlook https://institutional.vanguard.com/iam/ ... O_2019.pdf

JP Morgan https://am.jpmorgan.com/ie/institutiona ... ssumptions

Lots and lots of active fund managers and investment advisers write something up with their expectations and why, sometimes in the funds annual report, sometimes on a blog page.
"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: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by msk » Mon Dec 02, 2019 9:46 am

Shiller has published data going back to 1871. If you spent 6.5% of your SP500 equivalent portfolio balance including dividends each year from 1871 to the present, the real value of your portfolio balance would have remained the same in 2018 as it was in 1871. But of course you have some frictional costs, so I tried a 15% tax on the dividends. Your spend rate would then have had to be 6% of portfolio balance (inclusive of dividends). But of course, following some crisis or other, at times your portfolio balance would have dipped below what you started with in 1871. Panic? Hence I think 5% withdrawal of portfolio balance is reasonably sober to maintain your portfolio balance indefinitely, in real terms.

Nevertheless what was the real return if you simply reinvested all dividends at nil cost and paying nil tax between 1871 and 2018? Answer=6.9% in real terms, using Shiller's reconstituted data over the 147 years. I would view that as an "imaginary" max since it would have been unachievable at zero cost and zero taxes. 5% p.a. real terms is reasonably sober and looks achievable if the next 147 years are similar to the last 147.

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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by MathWizard » Mon Dec 02, 2019 10:00 am

Morningstar has a collection of estimates:

Code: Select all

https://www.morningstar.com/articles/907378/experts-forecast-long-term-stock-and-bond-returns-2019-edition

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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by dmcmahon » Mon Dec 02, 2019 10:00 am

How relevant is that data from 100+ years ago? The Industrial Revolution and the transition of the USA from an agrarian country to a developed one won’t happen again.

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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by lazyday » Mon Dec 02, 2019 10:00 am

JoMoney wrote:
Mon Dec 02, 2019 9:34 am
Most investment firms/funds put something out.
BlackRock has a tool that lets you pick a date range from 5 to 25 years out:
https://www.blackrock.com/institutions/ ... ssumptions
or a report https://blackrockblog-blanktemplate-ass ... _USD_5.pdf

Vanguard puts out a report at least annually with their economic outlook https://institutional.vanguard.com/iam/ ... O_2019.pdf

JP Morgan https://am.jpmorgan.com/ie/institutiona ... ssumptions
Thanks. I think I’ve looked at all three of those and none included detailed methodology. Blackrock in one of the predictions also may have used too much “future=past” for my taste.

Reading and trying to understand methodology helps me to learn more about predicting returns. And of course I'll have more faith in a prediction if I understand where it came from, and believe in the methodology.

I think Damadoran sometimes goes into detail, but I don’t know that there’s a regular schedule of updates: http://aswathdamodaran.blogspot.com/

One I forgot to mention earlier is StarCapital. When I last checked, they offered a prediction based on a historical regression of CAPE and returns. As I recall, the methodology paper was thorough.

We can also make our own simple prediction just using earnings yield. For example, future return = 1/CAPE. I think it’s appropriate to use that for both US and for developed ex-US.

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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by msk » Mon Dec 02, 2019 10:12 am

dmcmahon wrote:
Mon Dec 02, 2019 10:00 am
How relevant is that data from 100+ years ago? The Industrial Revolution and the transition of the USA from an agrarian country to a developed one won’t happen again.
I think it is highly relevant. Humans have been as inventive technologically, and as stupid (world wars) since the dawn of time. We always feel that this time it's different. Thomas Piketty has done an enormous amount of research going back centuries in various countries. His conclusions? Over 300 years productive real estate returned around 4% in real terms while trade and industry returned 1 to 2% more. That 5 to 6% looks like a genetic imprint on humanity :shock:

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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by siamond » Mon Dec 02, 2019 10:26 am

JoMoney wrote:
Mon Dec 02, 2019 9:34 am
BlackRock has a tool that lets you pick a date range from 5 to 25 years out:
https://www.blackrock.com/institutions/ ... ssumptions
or a report https://blackrockblog-blanktemplate-ass ... _USD_5.pdf
First time I've seen this tool. Nice colorful displays with appropriate error bands. Scrolling down shows data in a more synthetic manner than the first graph. Assumptions seem rather optimistic to me, but well, to each their own. Thanks for the pointer.

Personally, I use real (inflation-adjusted) expected returns, with a simple 1/CAPE model for stocks (10 to 15 years horizon) and SEC Yield minus inflation for bonds (5 to 10 years horizon). Nowadays, it is... a little dispiriting... But well, we had such a good time in the past decade that one should not complain. I only use such numbers in a very coarse probabilistic manner. This is by no mean a forecast, it is just an average of a wide cloud of possibilities.

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JoMoney
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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by JoMoney » Mon Dec 02, 2019 10:35 am

lazyday wrote:
Mon Dec 02, 2019 10:00 am
... And of course I'll have more faith in a prediction if I understand where it came from, and believe in the methodology...
Yes, we like stories, and reasons (especially if they harmonize with feelings we already had or wanted to do). Sometimes that's useful in making us feel-good and giving confidence to move forward, or in selling/marketing... But when it comes to stock market predictions any confidence or 'faith' put in them is really unfounded.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

Ferdinand2014
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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by Ferdinand2014 » Mon Dec 02, 2019 10:36 pm

dmcmahon wrote:
Mon Dec 02, 2019 1:16 am
JoMoney wrote:
Mon Dec 02, 2019 1:03 am
dmcmahon wrote:
Mon Dec 02, 2019 12:01 am
To get 7%+ returns stocks would have to do a lot of heavy lifting to make up for the crummy prospective returns on bonds from current levels. Like turn in 10% average nominal returns in an aggressive 70/30 portfolio. Color me skeptical. Where's the 10% going to come from, with 2% inflation and new-normal GDP growth of 2%?
Strong skepticism is warranted, but <shrug> not impossible to dream of-
Stocks: 2% nominal growth + 2% inflation + (2% dividend + 2% buybacks) + 2% (P/E multiple markup from current 23 to 28 ten years out)= 10%
:mrgreen:
Certainly, there are reasons to believe the stock market could grow at a faster rate than the economy through mechanisms other than multiple expansion.

Buybacks, takeovers, and the like may reduce the supply of shares. But those have to be funded somehow, meaning they have to come out of retained E or be borrowed. But yes, a lot of businesses have returns in excess of the rate at which they can borrow in today's environment, and so for a while they have some capacity to expand the return on shareholder equity that way. This runs in the opposite direction if rates go up, of course. If purchased out of E, it could seem to work only if the market doesn't account for the fact that reported E isn't actually the net E; otherwise, it seems to be a form of double-counting.

There is also the possibility of capitalizing more economic activity. As an example, the large investment banks were giant partnerships in the 1980s but many of them eventually went public. Or consider large chains putting small mom-and-pop stores out of business. Even with zero actual economic growth, the size of the public market would expand. Now, this sort of thing adds both to the earnings and market cap, so only if the higher-growth parts of the economy are capitalized while morbiund parts aren't, or if there are economies of scale, would this tend to make the equity market grow faster than the economy as a whole. And, obviously, it has to end at some point short of 100% so it can't go on forever.
40+% of S&P 500 revenues coming from outside U.S. borders will also contribute to organic growth exceeding U.S. growth.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

CoastalWinds
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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by CoastalWinds » Mon Dec 02, 2019 11:54 pm

2.56% real. Nobody knows nothing.

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JoMoney
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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by JoMoney » Tue Dec 03, 2019 12:00 am

Ferdinand2014 wrote:
Mon Dec 02, 2019 10:36 pm
dmcmahon wrote:
Mon Dec 02, 2019 1:16 am
JoMoney wrote:
Mon Dec 02, 2019 1:03 am
dmcmahon wrote:
Mon Dec 02, 2019 12:01 am
To get 7%+ returns stocks would have to do a lot of heavy lifting to make up for the crummy prospective returns on bonds from current levels. Like turn in 10% average nominal returns in an aggressive 70/30 portfolio. Color me skeptical. Where's the 10% going to come from, with 2% inflation and new-normal GDP growth of 2%?
Strong skepticism is warranted, but <shrug> not impossible to dream of-
Stocks: 2% nominal growth + 2% inflation + (2% dividend + 2% buybacks) + 2% (P/E multiple markup from current 23 to 28 ten years out)= 10%
:mrgreen:
Certainly, there are reasons to believe the stock market could grow at a faster rate than the economy through mechanisms other than multiple expansion.

Buybacks, takeovers, and the like may reduce the supply of shares. But those have to be funded somehow, meaning they have to come out of retained E or be borrowed. But yes, a lot of businesses have returns in excess of the rate at which they can borrow in today's environment, and so for a while they have some capacity to expand the return on shareholder equity that way. This runs in the opposite direction if rates go up, of course. If purchased out of E, it could seem to work only if the market doesn't account for the fact that reported E isn't actually the net E; otherwise, it seems to be a form of double-counting.

There is also the possibility of capitalizing more economic activity. As an example, the large investment banks were giant partnerships in the 1980s but many of them eventually went public. Or consider large chains putting small mom-and-pop stores out of business. Even with zero actual economic growth, the size of the public market would expand. Now, this sort of thing adds both to the earnings and market cap, so only if the higher-growth parts of the economy are capitalized while morbiund parts aren't, or if there are economies of scale, would this tend to make the equity market grow faster than the economy as a whole. And, obviously, it has to end at some point short of 100% so it can't go on forever.
40+% of S&P 500 revenues coming from outside U.S. borders will also contribute to organic growth exceeding U.S. growth.
Other than the "2% P/E multiple expansion" there's nothing in the (admittedly pipe dream) scenario I suggested that even requires business/stock growth to outpace U.S. GDP to reach 10% total return. I used the suggested 2% (real GDP) number as the "growth", then added inflation (+2%), and income payout (+4% half dividend, half buyback)...and buybacks shrink the public floated equity on a per-share basis relative to the broader economy so if one is trying to compare the broad stock index market-cap growth relative to GDP growth be sure to note that the index divisor has been shrinking considerably in recent times (while in decades past it was expanding), so aggregate market cap growth has been positive even while share holders have seen even larger returns with increased stake in equity and dividend received.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

protagonist
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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by protagonist » Tue Dec 03, 2019 12:23 am

raveon wrote:
Sun Dec 01, 2019 10:51 pm


I am curious. What number do you use for average annual return (post-inflation) for planning purpose? I have about 25 more years before retirement.
I don't.

If you are lucky the stock market will quadruple in value every decade as it has in the last decade.
If you are unlucky it will crash by the end of the year, lose 70% of its value by 2021 and not recover over your 25 year working period.

If you are lucky you will inherit a fortune, get a series of lucrative job promotions and remain madly in love....if you are unlucky you will lose half your assets to divorce, lose your job, and lose half of what is left to unexpected health care emergencies.

Guessing is futile. The best thing to do is forget about projections and models based on past performance and limited data. Invest sensibly, don't worry about what you can't control, and let the chips fall as they may.

"There are more things in Heaven and Earth, Horatio, than are dreamt of in your philosophy".

Scooter57
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Re: Average return for US stock market for the next 10-20 years to use for planning purpose

Post by Scooter57 » Tue Dec 03, 2019 5:02 pm

Protagonist just nailed it.

You have no way of knowing what the return will be. You are gambling in a casino where, though the house still makes more than you do, the odds are better than scratch tickets. But the market is rigged so that corporate execs and their billionaire friends who own the guys who write the laws are always one step ahead of you. The simple sounding hype about how you are buying shares in companies and their profits is way out of date.

Invest what you can afford to see fluctuate dramatically in the understanding that markets don't always go up. Develop alternate income streams in your middle years if possible. Find a mate who will help you save and contribute to the family's savings. And don't get greedy

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