So now stocks only return 3% over time?

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thelateinvestor43
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So now stocks only return 3% over time?

Post by thelateinvestor43 »

First Dave Ramsey says 10-12%, then I read on the internet that the average is 9% and then 7% and then someone here says the "historical return" is 6.9% and then I read in "If You Can" that stocks only return a real value of 3% over time.

Wow, now I'm confused! Now I'm disheartened! This guy paints a very pessimistic picture of investing.
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Schlabba
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Re: So now stocks only return 3% over time?

Post by Schlabba »

thelateinvestor43 wrote: Wed Jan 01, 2020 6:03 am First Dave Ramsey says 10-12%, then I read on the internet that the average is 9% and then 7% and then someone here says the "historical return" is 6.9% and then I read in "If You Can" that stocks only return a real value of 3% over time.

Wow, now I'm confused! Now I'm disheartened! This guy paints a very pessimistic picture of investing.
Don’t believe Dave Ramsey.
9% nominal might be the same as 6.9% real.
Noone can predict the future, focus on the things you can control instead of what you cannot control, if you really have to guess then take the vanguard 2020 markets outlook pdf to base your assumptions on.

And the final point: What is the alternative?
goblue100
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Re: So now stocks only return 3% over time?

Post by goblue100 »

thelateinvestor43 wrote: Wed Jan 01, 2020 6:03 am First Dave Ramsey says 10-12%, then I read on the internet that the average is 9% and then 7% and then someone here says the "historical return" is 6.9% and then I read in "If You Can" that stocks only return a real value of 3% over time.

Wow, now I'm confused! Now I'm disheartened! This guy paints a very pessimistic picture of investing.
The "real" return is computed as the return above the inflation rate, I believe. So if the inflation rate is 3% and you get 3% real return, you get 6%. And then there are years like last year, where you get 27% above the inflation rate. :moneybag
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Steve Reading
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Re: So now stocks only return 3% over time?

Post by Steve Reading »

thelateinvestor43 wrote: Wed Jan 01, 2020 6:03 am First Dave Ramsey says 10-12%, then I read on the internet that the average is 9% and then 7% and then someone here says the "historical return" is 6.9% and then I read in "If You Can" that stocks only return a real value of 3% over time.

Wow, now I'm confused! Now I'm disheartened! This guy paints a very pessimistic picture of investing.
Well but he’s not that wrong. The return of stocks over bonds has been historically about 4-5%. Bonds are currently yielding close to 0% real return so it’s reasonable to expect ~4% real return from stocks. 3% is perhaps a little on the pessimistic side but not unreasonable.
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firebirdparts
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Re: So now stocks only return 3% over time?

Post by firebirdparts »

And again, remember that yesterday the YTD return on USA large caps was about 30%. That really happened.

Don’t take it too seriously.
A fool and your money are soon partners
awval999
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Re: So now stocks only return 3% over time?

Post by awval999 »

The nominal CAGR of the SP500 including reinvested dividends over ~150 years is 9.12%
The real CAGR of the SP500 including reinvested dividends over ~150 years is 6.93%
This includes 2019 year end close data.
Past performance does not guarantee future results.
https://dqydj.com/sp-500-return-calculator/

I run two performances for my retirement planning, 4% real and 5% real.
H-Town
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Re: So now stocks only return 3% over time?

Post by H-Town »

thelateinvestor43 wrote: Wed Jan 01, 2020 6:03 am First Dave Ramsey says 10-12%, then I read on the internet that the average is 9% and then 7% and then someone here says the "historical return" is 6.9% and then I read in "If You Can" that stocks only return a real value of 3% over time.

Wow, now I'm confused! Now I'm disheartened! This guy paints a very pessimistic picture of investing.
It could be worse. You have a realistic chance of losing money in the stock market if you try market timing. That happened more often than you think.

Like other things in life, lower your expectations and you can be happy with the results.
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Re: So now stocks only return 3% over time?

Post by mptfan »

Schlabba wrote: Wed Jan 01, 2020 6:11 am 9% nominal might be the same as 6.9% real.
Exactly. Learn the difference between nominal returns and real returns and realize that in most cases returns are stated in nominal terms.
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Re: So now stocks only return 3% over time?

Post by deltaneutral83 »

6 hours into the year before a Dave bashing thread. :D :D
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David Jay
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Re: So now stocks only return 3% over time?

Post by David Jay »

thelateinvestor43 wrote: Wed Jan 01, 2020 6:03 amWow, now I'm confused!
You will always be confused if you are seeking certainty about the future. We control the things we can control (savings rate, asset allocation, etc) and take what the market gives.

3% real (5-6% nominal) is the low end of expectations, use that if you want a “safe” projection (and you will likely be pleasantly surprised). 5% real is perhaps a mid-range projection. 7% real is probably high and may lead to disappointment in the short term (say, 5-10 years).

But, see my first signature quote, below V V V
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Re: So now stocks only return 3% over time?

Post by David Jay »

deltaneutral83 wrote: Wed Jan 01, 2020 9:36 am6 hours into the year before a Dave bashing thread. :D :D
I have said this before, but to understand Dave Ramsey you need to understand where he comes from. He comes out of the real estate segment and that is his venue. He is very weak on portfolio management, so weak that he uses advisors. It is not bashing to recognize an individual’s strengths and weaknesses.

I listened regularly for two or three years. Watch what happens when someone asks a RE question. He pulls out his calculator and starts calculating the return-on-equity. Ask a question about portfolio management and he mumbles something about “growth mutual funds” and moves on.
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Re: So now stocks only return 3% over time?

Post by 02nz »

David Jay wrote: Wed Jan 01, 2020 10:19 am
deltaneutral83 wrote: Wed Jan 01, 2020 9:36 am6 hours into the year before a Dave bashing thread. :D :D
He is very weak on portfolio management, so weak that he uses advisors. It is not bashing to recognize an individual’s strengths and weaknesses.
One could question whether he is just weak in this area, or his incentives lead him to recommend advisors (i.e., they pay him!). But your point is correct, and OP really needs to focus on a plan rather than being distracted by every new thing he hears (and starting a thread about it).
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Re: So now stocks only return 3% over time?

Post by whodidntante »

firebirdparts wrote: Wed Jan 01, 2020 9:18 am And again, remember that yesterday the YTD return on USA large caps was about 30%. That really happened.

Don’t take it too seriously.
Yeah. So now future returns are lower. :twisted:
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JoMoney
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Re: So now stocks only return 3% over time?

Post by JoMoney »

They're all right but you have to understand the specifics of the terms they're using.

Since 1925 the U.S. stock market has averaged roughly 12% returns.
That's an arithmetic average, like ( +54% , -24%, +6% ) are 3 numbers that "average" to a 12, but does not necessarily equate to a total return of 12% annualized each year.

The stock market has had 10% geometric average returns, or compound average growth rate.
That's the actual annualized total return someone would have had if they bought the S&P index in at the end of 1925 and sold at the end of 2018.

Since inflation decreases the spending power of money, a dollar has less value now than in the past. Inflation in the U.S. has been roughly 3%, so that 10% return is closer to 7 or 6.9% at purchasing power parity.

Some people believe our current environment is one that will lead to lower future returns. Obviously the interest rates on bonds are much lower, and it's a similar situation for stocks. The future is only someone's guess, but it's not unreasonable to imagine stocks might return only half of what they did in the past, taking that 6.9% down to 3.4 or 3%.... but that's just someone's guess, but it has been the case for some other long periods of time, like from 1956 to 1978 the real inflation adjusted total return was only 2.9%.

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Re: So now stocks only return 3% over time?

Post by dharrythomas »

JoMoney wrote: Wed Jan 01, 2020 10:36 am They're all right but you have to understand the specifics of the terms they're using.

Since 1925 the U.S. stock market has averaged roughly 12% returns.
That's an arithmetic average, like ( +54% , -24%, +6% ) are 3 numbers that "average" to a 12, but does not necessarily equate to a total return of 12% annualized each year.

The stock market has had 10% geometric average returns, or compound average growth rate.
That's the actual annualized total return someone would have had if they bought the S&P index in at the end of 1925 and sold at the end of 2018.

Since inflation decreases the spending power of money, a dollar has less value now than in the past. Inflation in the U.S. has been roughly 3%, so that 10% return is closer to 7 or 6.9% at purchasing power parity.

Some people believe our current environment is one that will lead to lower future returns. Obviously the interest rates on bonds are much lower, and it's a similar situation for stocks. The future is only someone's guess, but it's not unreasonable to imagine stocks might return only half of what they did in the past, taking that 6.9% down to 3.4 or 3%.... but that's just someone's guess, but it has been the case for some other long periods of time, like from 1956 to 1978 the real inflation adjusted total return was only 2.9%.

Image
+1

In addition, you cannot control your returns, either quantity or timing. You can control two things, savings rate and risk level (by diversification). You can look at stuff about projected returns and macro trends (Vanguard has some pretty good stuff), over a decade some of the projections are pretty good, over a one year period nobody knows anything.

Control is an illusion. Control what you can control, accept the risk and randomness of returns, diversify, save and invest. In most scenarios where the world doesn’t collapse and the economy doesn’t implode, you’ll be better off than people who reached for immediate gratification. And if you are not, at least you tried. Good luck.
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Re: So now stocks only return 3% over time?

Post by MotoTrojan »

Real returns is the key. I think a lot of people look at the returns of the last 4-5 decades with awe, but forget that inflation was so high that bank accounts paid double digit returns.
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Re: So now stocks only return 3% over time?

Post by jeffyscott »

firebirdparts wrote: Wed Jan 01, 2020 9:18 am And again, remember that yesterday the YTD return on USA large caps was about 30%. That really happened.

Don’t take it too seriously.
Yes, and -4.4% happened in calendar year 2018. Both of those calendar year figures are somewhat distorted by the nearly 20% decline that happened to occur at the very end of 2018, which was then recovered in early 2019. It has been a good decade for US stocks, though, with the S&P 500 more than tripling in value (about a triple and a half, based on M* chart). Of course the prior decade was the opposite, featuring a cumulative return of -9.18%, per M*.
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Re: So now stocks only return 3% over time?

Post by stan1 »

I also think it is a very huge mistake to assume the last 50 years are relevant to the next 50 years. It may be a fallback assumption when you can't come up with one better, but we just saw what happens when the status quo is assumed to carry forward forever with the Stretch IRA under the SECURE Act. Be very careful about assumptions.

You can control your savings. You cannot control interest, tax or return rates. You can mitigate risk by saving more, spending less, working longer, and diversifying where ever you can, including asset location (taxable, Roth, Traditional). You get to decide whether you believe international or other factors will help you diversify or not. No one can predict the future.
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Re: So now stocks only return 3% over time?

Post by columbia »

Knowing the answer would be actionable because ______?
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Re: So now stocks only return 3% over time?

Post by F150HD »

This is a good reason to panic. :greedy
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Re: So now stocks only return 3% over time?

Post by Dottie57 »

Schlabba wrote: Wed Jan 01, 2020 6:11 am
thelateinvestor43 wrote: Wed Jan 01, 2020 6:03 am First Dave Ramsey says 10-12%, then I read on the internet that the average is 9% and then 7% and then someone here says the "historical return" is 6.9% and then I read in "If You Can" that stocks only return a real value of 3% over time.

Wow, now I'm confused! Now I'm disheartened! This guy paints a very pessimistic picture of investing.
Don’t believe Dave Ramsey.
9% nominal might be the same as 6.9% real.
Noone can predict the future, focus on the things you can control instead of what you cannot control, if you really have to guess then take the vanguard 2020 markets outlook pdf to base your assumptions on.

And the final point: What is the alternative?
+1.

If worried, up your savings rate.
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Re: So now stocks only return 3% over time?

Post by Clever_Username »

thelateinvestor43 wrote: Wed Jan 01, 2020 6:03 am First Dave Ramsey says 10-12%, then I read on the internet that the average is 9% and then 7% and then someone here says the "historical return" is 6.9% and then I read in "If You Can" that stocks only return a real value of 3% over time.

Wow, now I'm confused! Now I'm disheartened! This guy paints a very pessimistic picture of investing.
Dave Ramsey paints a pessimistic picture of investing because he's selling something: his advice and that of his paid endorsers.

They'll be happy to take a sizable chunk of change to get you in their approved funds -- funds that don't beat the index over time and charge an exorbitant (in my opinion) expense ratio.

Ramsey's advice about the psychology of getting out of debt is nice, but that's about it for good advice from him.
"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_ | | I survived my first downturn and all I got was this signature line.
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Re: So now stocks only return 3% over time?

Post by sperry8 »

thelateinvestor43 wrote: Wed Jan 01, 2020 6:03 am First Dave Ramsey says 10-12%, then I read on the internet that the average is 9% and then 7% and then someone here says the "historical return" is 6.9% and then I read in "If You Can" that stocks only return a real value of 3% over time.

Wow, now I'm confused! Now I'm disheartened! This guy paints a very pessimistic picture of investing.
Are they speaking about US stocks? US Stocks have had quite the run up this past decade. Perhaps returns have been pulled forward. Diversify! Int'l, Emerging, Frontier. Maybe they will lead this decade? Point is - stocks are the place to be... always, over a long time horizon.
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Re: So now stocks only return 3% over time?

Post by watchnerd »

3% PWR (nominal) is my portfolio goal, so 3% real would be fine.
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1130Super
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Re: So now stocks only return 3% over time?

Post by 1130Super »

Are those 9% nominal returns with dividends reinvested?
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Phineas J. Whoopee
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Re: So now stocks only return 3% over time?

Post by Phineas J. Whoopee »

Nobody can know in advance. Devise an investment strategy (you can start by doing all the homework from If You Can) that does not rely on knowing what stock returns will be.

There are so many people making so many predictions somebody will turn out to have been right, but that doesn't mean they will be able to do it again.

Anybody who tells you they know in advance is not your friend.

PJW
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Re: So now stocks only return 3% over time?

Post by watchnerd »

Phineas J. Whoopee wrote: Wed Jan 01, 2020 8:24 pm

Anybody who tells you they know in advance is not your friend.

PJW
I don't want friends who even try.

I like friends who tell me who is going to win the Super Bowl, instead.
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Re: So now stocks only return 3% over time?

Post by MathWizard »

Investopedia states that the real historical real total return of the stock market has been about 7% . You have to make sure that you are looking at total return , dividends matter a lot.

7% seems about right, though looking ahead, I only expect about 4% real total return. Total stock market dividends should provide about 2% , and the other 2% above my inflation will come from stock appreciation.
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JoMoney
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Re: So now stocks only return 3% over time?

Post by JoMoney »

MathWizard wrote: Wed Jan 01, 2020 8:49 pm Investopedia states that the real historical real total return of the stock market has been about 7% . You have to make sure that you are looking at total return , dividends matter a lot.

7% seems about right, though looking ahead, I only expect about 4% real total return. Total stock market dividends should provide about 2% , and the other 2% above my inflation will come from stock appreciation.
The classic chart from Prof. Jeremy Siegel going back to the early 19th century shows 7% real, it's varied a little bit depending on the specific end date used, but has generally rounded to 7%
Image
Jeremy Siegel's infamously ill-timed quote in early 2000 interview with Businessweek wrote: https://web.archive.org/web/20090226173 ... 683156.htm
(note: link may have to 'view source' to find text as may not render correctly in modern browsers)

"... Seven percent per year [average] real returns on stocks is what I find over nearly two centuries. I don't see persuasive reasons why it should be any different from that over the intermediate run. In the short run, it could be almost anything..."
:D
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thelateinvestor43
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Re: So now stocks only return 3% over time?

Post by thelateinvestor43 »

How do you find the annual average return if say you have 5 years of various returns? Do you just add them up and divide by 5?

for example:

Year1: 12%
year2: 8%
year3: -2%
year4: 5%
year5: 6%

What would be the "average" return for each of the 5 years?
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Re: So now stocks only return 3% over time?

Post by BrtH »

thelateinvestor43 wrote: Thu Jan 02, 2020 3:51 am How do you find the annual average return if say you have 5 years of various returns? Do you just add them up and divide by 5?

for example:

Year1: 12%
year2: 8%
year3: -2%
year4: 5%
year5: 6%

What would be the "average" return for each of the 5 years?
You need to use the geometric mean. I.e. (1.12*1.08*0.98*1.05*1.06)/5
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Re: So now stocks only return 3% over time?

Post by Stef »

It's not like that.

Arithmetric return: (12+8-2+5+6)/5 = 5.8%/year
Geometric return: (1.12*1.08*0.98*1.05*1.06)^(1/5) = 5.7%/year
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Re: So now stocks only return 3% over time?

Post by BrtH »

Stef wrote: Thu Jan 02, 2020 5:22 am It's not like that.

Arithmetric return: (12+8-2+5+6)/5 = 5.8%/year
Geometric return: (1.12*1.08*0.98*1.05*1.06)^(1/5) = 5.7%/year
Oh, duh, of course. Don't know why I put /5, needed more cafeine.
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Re: So now stocks only return 3% over time?

Post by Independent George »

Also keep in mind that Bogleheads tend to be a pretty pessimistic bunch. My own retirement spreadsheet projects based on 3.5% real growth; I've seen folks here talk about 3.5% nominal.

In practice, I've actually experienced roughly 9% nominal growth over the last 20ish years. That's not to say that we'll continue to get that, or that us bears are right - just that we seem to have a cultural mindset of always preparing for the bad times to come.
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Re: So now stocks only return 3% over time?

Post by ohai »

Stocks will probably return 7% real or something like that over the next decade. However, you should obviously make plans around a more conservative assumption. So, practically, you should pretend it's like 4% return or something.
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Re: So now stocks only return 3% over time?

Post by LilyFleur »

stan1 wrote: Wed Jan 01, 2020 11:26 am I also think it is a very huge mistake to assume the last 50 years are relevant to the next 50 years. It may be a fallback assumption when you can't come up with one better, but we just saw what happens when the status quo is assumed to carry forward forever with the Stretch IRA under the SECURE Act. Be very careful about assumptions.

You can control your savings. You cannot control interest, tax or return rates. You can mitigate risk by saving more, spending less, working longer, and diversifying where ever you can, including asset location (taxable, Roth, Traditional). You get to decide whether you believe international or other factors will help you diversify or not. No one can predict the future.
This is very good advice.
Also, OP, you have been studying investing for a month now.
Have you had a chance to read this book? It is a widely respected resource for investors.
https://www.amazon.com/Random-Walk-Down ... b_title_bk
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Re: So now stocks only return 3% over time?

Post by HomerJ »

1130Super wrote: Wed Jan 01, 2020 12:29 pm Are those 9% nominal returns with dividends reinvested?
Yes.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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HomerJ
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Re: So now stocks only return 3% over time?

Post by HomerJ »

watchnerd wrote: Wed Jan 01, 2020 8:26 pm
Phineas J. Whoopee wrote: Wed Jan 01, 2020 8:24 pm

Anybody who tells you they know in advance is not your friend.

PJW
I don't want friends who even try.

I like friends who tell me who is going to win the Super Bowl, instead.
The Chiefs.

You're welcome.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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HomerJ
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Re: So now stocks only return 3% over time?

Post by HomerJ »

MathWizard wrote: Wed Jan 01, 2020 8:49 pm Investopedia states that the real historical real total return of the stock market has been about 7% . You have to make sure that you are looking at total return , dividends matter a lot.

7% seems about right, though looking ahead, I only expect about 4% real total return. Total stock market dividends should provide about 2% , and the other 2% above my inflation will come from stock appreciation.
Looking how far ahead?

The next decade may indeed have low returns, maybe even longer... Long periods of low returns have happened before.

But, so far, they are always followed by periods of high returns.

Are you saying you expect 4% real total return forever? Or just for the next 10-15 years, which may then be followed by 10-15 years of 10% real returns...

Which will then average out to 7% real total returns over the long-run... I can get behind the latter prediction.

The 7% real long-term return (9%-10% nominal) INCLUDES all the bad years and all the crashes in the past.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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HomerJ
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Re: So now stocks only return 3% over time?

Post by HomerJ »

ohai wrote: Thu Jan 02, 2020 3:19 pm Stocks will probably return 7% real or something like that over the next decade. However, you should obviously make plans around a more conservative assumption. So, practically, you should pretend it's like 4% return or something.
This.

I plan around low returns... That's a conservative and smart way to plan and invest. Because we might get low returns.

If we actually get good returns, one can retire earlier or spend more.

That's the smart way to do it. Plan for low returns, and adjust upwards if we get normal returns, but you're still fine if we get low returns.

Planning for normal returns is more dangerous. If we instead get low returns, now you have to work longer (not always your choice), or spend less.

Save enough, and keep expenses low enough, that low returns is all you need.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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Re: So now stocks only return 3% over time?

Post by RickBoglehead »

thelateinvestor43 wrote: Thu Jan 02, 2020 3:51 am How do you find the annual average return if say you have 5 years of various returns? Do you just add them up and divide by 5?

for example:

Year1: 12%
year2: 8%
year3: -2%
year4: 5%
year5: 6%

What would be the "average" return for each of the 5 years?
Why do you care about a) what the average return has been or b) what Dave Ramsey has said?

Plan on a conservative return. Say 4%. When you get, like in 2019, 20%+, jump up and down, try not to wet your pants, and plan on 4% next year.

You keep referring to what Dave Ramsey says, people tell you not to, then you go read more. Stop reading -historical returns do not predict the future. Set your AA%, and stop looking and stop reading.
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Independent George
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Re: So now stocks only return 3% over time?

Post by Independent George »

To understand why a 'conservative' 4% real growth rate can be quite useful even if you actually expect much higher growth, consider the last three years.

In 2017, my 90/10 portfolio grew by about 23%, declined by -8.5% in 2018, then rose again by 26% in 2019. So over a three-year span, my portfolio grew 17.9% nominal, for a CAGR of 5.64%. Inflation over this period averaged 2.4% per year, leaving me with a paltry 3.24% growth rate over three years in a bull market.

Obviously this is a very small sample size, and historically markets have performed much better than 3.24% real. But there's no guarantee that 7% real will continue into the future, nor is 3.24% real some crazy conservative guess. It's just another possibility in a world of possibilities.
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Re: So now stocks only return 3% over time?

Post by CryingHawaiian »

Independent George wrote: Thu Jan 02, 2020 4:49 pm To understand why a 'conservative' 4% real growth rate can be quite useful even if you actually expect much higher growth, consider the last three years.

In 2017, my 90/10 portfolio grew by about 23%, declined by -8.5% in 2018, then rose again by 26% in 2019. So over a three-year span, my portfolio grew 17.9% nominal, for a CAGR of 5.64%. Inflation over this period averaged 2.4% per year, leaving me with a paltry 3.24% growth rate over three years in a bull market.

Obviously this is a very small sample size, and historically markets have performed much better than 3.24% real. But there's no guarantee that 7% real will continue into the future, nor is 3.24% real some crazy conservative guess. It's just another possibility in a world of possibilities.
check your math?
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scubadiver
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Re: So now stocks only return 3% over time?

Post by scubadiver »

thelateinvestor43 wrote: Wed Jan 01, 2020 6:03 am First Dave Ramsey says 10-12%, then I read on the internet that the average is 9% and then 7% and then someone here says the "historical return" is 6.9% and then I read in "If You Can" that stocks only return a real value of 3% over time.

Wow, now I'm confused! Now I'm disheartened! This guy paints a very pessimistic picture of investing.
Dave Ramsey gives excellent advice on management of personal finances.

Dave Ramsey gives world class bad advice on managing investments. Not quite Edward Jones bad, but elite for sure.

As for the expected real return on stocks, others have already commented and posted links to some suitable reading material.
MotoTrojan
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Re: So now stocks only return 3% over time?

Post by MotoTrojan »

Stef wrote: Thu Jan 02, 2020 5:22 am It's not like that.

Arithmetric return: (12+8-2+5+6)/5 = 5.8%/year
Geometric return: (1.12*1.08*0.98*1.05*1.06)^(1/5) = 5.7%/year
Yup be careful. This series of returns has a 25% arithmetic return, and a 0% geometric.

100%
-50%
100%
-50%
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jeffyscott
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Re: So now stocks only return 3% over time?

Post by jeffyscott »

CryingHawaiian wrote: Thu Jan 02, 2020 5:13 pm
Independent George wrote: Thu Jan 02, 2020 4:49 pm To understand why a 'conservative' 4% real growth rate can be quite useful even if you actually expect much higher growth, consider the last three years.

In 2017, my 90/10 portfolio grew by about 23%, declined by -8.5% in 2018, then rose again by 26% in 2019. So over a three-year span, my portfolio grew 17.9% nominal, for a CAGR of 5.64%. Inflation over this period averaged 2.4% per year, leaving me with a paltry 3.24% growth rate over three years in a bull market.

Obviously this is a very small sample size, and historically markets have performed much better than 3.24% real. But there's no guarantee that 7% real will continue into the future, nor is 3.24% real some crazy conservative guess. It's just another possibility in a world of possibilities.
check your math?
1×1.23×.915×1.26 = 1.418, almost 42% not 17.9%

CAGR ~12.4% and around 10% real (assuming the 2.4% inflation figure is correct, that seems high to me)
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F150HD
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Re: So now stocks only return 3% over time?

Post by F150HD »

maybe the thelateinvestor43 is using the harmonic mean.
random_walker_77
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Re: So now stocks only return 3% over time?

Post by random_walker_77 »

It's good to plan conservatively. Even so, sometimes things can end up disappointing you. I remember being disappointed with the stock market in 2010, given how poorly the previous decade had gone. (S&P 500 was basically flat after a decade. Probably negative in real terms):
https://www.google.com/amp/s/www.forbes ... ecade/amp/

Thank goodness I was early career and so my personal returns were better due to DCA'ing 401k contributions over time. But that signing bonus I put into the market index in 2000, instead of student loan payments, turned out to be a losing bet.

So that's a recent example of a full decade with poor returns. Granted, 2000 was a peak and both crashes that decade were big ones.

It's strange to think that there are so many people now whose entire working careers began after these crashes.
Barsoom
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Re: So now stocks only return 3% over time?

Post by Barsoom »

Deleted. Will handle myself.

-B
Last edited by Barsoom on Fri Jan 03, 2020 3:10 pm, edited 2 times in total.
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watchnerd
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Re: So now stocks only return 3% over time?

Post by watchnerd »

Barsoom wrote: Thu Jan 02, 2020 10:00 pm Hi, all. Maybe some of you can help me.

I'm in the process of building a Monte Carlo spreadsheet to generate future market scenarios over a 40 year period based on a probability function using minimum, likely, and maximum values for stock growth and bond growth.

Since nobody knows the future like the past, the spreadsheet will create 1,000 distinct future sets of 40 annual return rates, and then test a portfolio against them. The final expected value (risk-adjusted weighted average of all the final portfolio values in year 40) can be used to test different asset allocation strategies over time, given an uncertain future.

Think of it as being like back-testing against a known past, but instead, it's future testing against a randomly-generated set of future growth scenarios. Some scenarios will be early negative and late growth, others will be early grown and late recession, some will be up-down-up, some will be down-up-down, some will be stagnant, etc. Over all 1,000 of them, the weighted average should be indicative of the strength of the portfolio over many market conditions, including the percent of time (probability out of 1,000) that the portfolio runs out of money early.

What I'd like to know is what values do you think are appropriate for the likely (median, not average) stock and bond growth rates, and how low or high from the likely should a generator consider? I'll be using both a BetaPert and Triangle probability distribution function, so the former will stress the likely while the latter will stress the extremes. Bonds will be negatively correlated to stocks, so as one goes up the other will generally go down.

I did some quick Google searches and found a few that looked interesting.

This one (What is the average annual return for the S&P 500? suggests that an average stock return is between 8%-10%, with a reasonable minimum of about -10% and a reasonable maximum of about 20%-25%.

For bonds, I found this (What Real Returns Should Bond Investors Expect?), which suggests that a likely rate should be about 4%, with a minimum in the area of 0.8% and a maximum of 12%.

As I write this, I see that the bond article was using real rates (nominal minus inflation), while I think I have been nominal rates all along.

So, what would you all suggest is an appropriate min/likely/max spread to use for stock and bond future growth assumptions?

Thanks,
-B
Just making sure you know there are already online tools that do this, right?
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