Are the days of 7% avg index returns over?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Topic Author
SoftServeAddict
Posts: 31
Joined: Tue Jul 11, 2017 12:36 am

Are the days of 7% avg index returns over?

Post by SoftServeAddict »

In Jerome Powell's latest interview on NPR it was hinted that this may be the case since more and more people are investing. Moving forward would it be more realistic to expect returns of 3-4% on average now? I think even Bogle mentioned something like this in the past where he thought the average returns would be around 4%
runner3081
Posts: 3564
Joined: Mon Aug 22, 2016 3:22 pm

Re: Are the days of 7% avg index returns over?

Post by runner3081 »

Well, 50% chance it is true and 50% chance it isn't.

No one knows.
dru808
Posts: 962
Joined: Sat Oct 15, 2011 2:42 pm
Location: mid pac

Re: Are the days of 7% avg index returns over?

Post by dru808 »

Maybe, maybe not. nobody knows for sure. There’s always talk of index bubbles, low expected returns. how often do these doomsday scenarios pan out?
60% SCHK | 25% VIGI | 15% ILTB
mikejuss
Posts: 122
Joined: Tue Jun 23, 2020 1:36 pm

Re: Are the days of 7% avg index returns over?

Post by mikejuss »

SoftServeAddict wrote: Mon Sep 07, 2020 11:34 pm In Jerome Powell's latest interview on NPR it was hinted that this may be the case since more and more people are investing. Moving forward would it be more realistic to expect returns of 3-4% on average now? I think even Bogle mentioned something like this in the past where he thought the average returns would be around 4%
And will a 3% return on the index make stock picking more attractive to investors?
anonsdca
Posts: 405
Joined: Mon Jun 01, 2015 11:47 pm

Re: Are the days of 7% avg index returns over?

Post by anonsdca »

mikejuss wrote: Tue Sep 08, 2020 12:20 am
SoftServeAddict wrote: Mon Sep 07, 2020 11:34 pm In Jerome Powell's latest interview on NPR it was hinted that this may be the case since more and more people are investing. Moving forward would it be more realistic to expect returns of 3-4% on average now? I think even Bogle mentioned something like this in the past where he thought the average returns would be around 4%
And will a 3% return on the index make stock picking more attractive to investors?
If they are counting on a certain historical withdrawal rate (& growth rate) when they retire to live and pay their expenses, then you can count on it. For folks looking long term--and doing their historical projections---and realizing they cant get where they want--- what else is there except to change?
mikejuss
Posts: 122
Joined: Tue Jun 23, 2020 1:36 pm

Re: Are the days of 7% avg index returns over?

Post by mikejuss »

anonsdca wrote: Tue Sep 08, 2020 12:26 am
mikejuss wrote: Tue Sep 08, 2020 12:20 am
SoftServeAddict wrote: Mon Sep 07, 2020 11:34 pm In Jerome Powell's latest interview on NPR it was hinted that this may be the case since more and more people are investing. Moving forward would it be more realistic to expect returns of 3-4% on average now? I think even Bogle mentioned something like this in the past where he thought the average returns would be around 4%
And will a 3% return on the index make stock picking more attractive to investors?
If they are counting on a certain historical withdrawal rate (& growth rate) when they retire to live and pay their expenses, then you can count on it. For folks looking long term--and doing their historical projections---and realizing they cant get where they want--- what else is there except to change?
That's a depressing thought. There is one way to cope with lowered returns expectations: to earn and/or save more. Of course, that's easier said than done--but will be necessary for those of us who are loath to turn to the dark side.
anonsdca
Posts: 405
Joined: Mon Jun 01, 2015 11:47 pm

Re: Are the days of 7% avg index returns over?

Post by anonsdca »

mikejuss wrote: Tue Sep 08, 2020 12:35 am
anonsdca wrote: Tue Sep 08, 2020 12:26 am
mikejuss wrote: Tue Sep 08, 2020 12:20 am
SoftServeAddict wrote: Mon Sep 07, 2020 11:34 pm In Jerome Powell's latest interview on NPR it was hinted that this may be the case since more and more people are investing. Moving forward would it be more realistic to expect returns of 3-4% on average now? I think even Bogle mentioned something like this in the past where he thought the average returns would be around 4%
And will a 3% return on the index make stock picking more attractive to investors?
If they are counting on a certain historical withdrawal rate (& growth rate) when they retire to live and pay their expenses, then you can count on it. For folks looking long term--and doing their historical projections---and realizing they cant get where they want--- what else is there except to change?
That's a depressing thought. There is one way to cope with lowered returns expectations: to earn and/or save more. Of course, that's easier said than done--but will be necessary for those of us who are loath to turn to the dark side.
It is not depressing at all. Folks will adapt. Lowered returns means folks need to look to alternative strategies. Some of those are good, some not. What it surely does is to force folks to do/say more than they "no nothin".
Hastur
Posts: 10
Joined: Thu Aug 06, 2020 1:14 am

Re: Are the days of 7% avg index returns over?

Post by Hastur »

Right, 7% returns are over, 10% have come.
iamlucky13
Posts: 2076
Joined: Sat Mar 04, 2017 5:28 pm
Location: Western Washington

Re: Are the days of 7% avg index returns over?

Post by iamlucky13 »

SoftServeAddict wrote: Mon Sep 07, 2020 11:34 pm In Jerome Powell's latest interview on NPR it was hinted that this may be the case since more and more people are investing. Moving forward would it be more realistic to expect returns of 3-4% on average now? I think even Bogle mentioned something like this in the past where he thought the average returns would be around 4%
Don't get caught up in the attempts to prognosticate. There are already historical periods where 30 year US large cap returns have been in the range of 4%, inflation adjusted. For 20 year periods, the returns have sometimes been only around 1%, inflation adjusted. That history already gives you the answer you need:

Regardless of whether the market has fundamentally changed or not (I'm skeptical), your long term planning should make sure that 3-4% real returns don't ruin you.

Bogle did say something to that effect. My impression was he was basing that on Vanguard's 10-year forecast that they update periodically. They've been expecting relatively low US 10-year returns for a couple rounds of updates now, based in large part, if I understand right, on the currently high PE ratios.
CurlyDave
Posts: 1970
Joined: Thu Jul 28, 2016 11:37 am

Re: Are the days of 7% avg index returns over?

Post by CurlyDave »

SoftServeAddict wrote: Mon Sep 07, 2020 11:34 pm In Jerome Powell's latest interview on NPR it was hinted that this may be the case since more and more people are investing. Moving forward would it be more realistic to expect returns of 3-4% on average now? I think even Bogle mentioned something like this in the past where he thought the average returns would be around 4%
This old geezer (me, not Jerome) has been hearing these calamitous predictions for at least a decade.

Lets put it in perspective by looking at SPY performance. The data for 2016-present is easy for me to come up with so here goes:

2016 +12.00%
2017 +21.70%
2018 -4.56%
2019 +31.22%

for these 4 years CAGR is +14% .

And, 2020 YTD is +9.68%. And the year is young still.

Looks to me like the people who have been making these dire predictions have been shown to be just plain wrong. Why should I believe them going forward when their recent past record is so bad?

Have you ever taken Economics 101? Remember the part about supply and demand? More people investing means the demand for stocks will go up. Unless the supply increases, the price will go up, not down.
langlands
Posts: 569
Joined: Wed Apr 03, 2019 10:05 pm

Re: Are the days of 7% avg index returns over?

Post by langlands »

CurlyDave wrote: Tue Sep 08, 2020 1:24 am Have you ever taken Economics 101? Remember the part about supply and demand? More people investing means the demand for stocks will go up. Unless the supply increases, the price will go up, not down.
I think the idea is that more people have already invested. In other words, the P/E ratio of stocks already got its one time boost from increased saving. If you think the savings rate will continue to go up, then perhaps the multiple can expand further. But if it's already reached its saturation point, then it will start going down.
User avatar
zarci
Posts: 98
Joined: Sat Jun 10, 2017 11:02 am

Re: Are the days of 7% avg index returns over?

Post by zarci »

SoftServeAddict wrote: Mon Sep 07, 2020 11:34 pm In Jerome Powell's latest interview on NPR it was hinted that this may be the case since more and more people are investing. Moving forward would it be more realistic to expect returns of 3-4% on average now? I think even Bogle mentioned something like this in the past where he thought the average returns would be around 4%
It is a likely scenario.

All the way through the 19th and 20th century population growth has explained a large part (roughly half, not sure on the exact number) of economic growth. When you look at the probable scenarios for demographic growth for the upcoming 21st century, one where economic growth is slowed down by little to no demographic growth is a very likely possibility. See Thomas Piketty's "Capital in the 21st Century" if you're interested.

What strikes me is that people from different backgrounds tackle this from a wildly different perspective:

A historian such as Piketty explains lackluster economic growth from a demographic perspective.

Mr. Bogle has explained lower economic growth by quoting "2% dividend growth and 2% earnings growth".

Powell seems to explain it by pointing at a larger percentage of the population that's investing.

Climate activists and liberals even make a compelling case to move economic growth to a lower rung on the political priorities ladder, but seem to confuse cause and effect here. Lower growth seems to be more of an observable phenomenon rather than something politics has any tangible influence over.


I think this issue warrants more careful thought rather than the usual "nobody knows nothing" mantra. Obviously, it is far from certain that growth will slow down significantly. But it is one of the more likely scenarios.

It seems prudent to me to expect 4 to 5% real growth for the total stock market, rather than the historical average 7%. At least try using that number when testing the chances of success of your personal investment or retirement plan. As in "Would my plan still succeed IF lower economic growth comes to pass?"

Besides that, we don't know how inflation would respond in such a scenario. So far, inflation seems to be a lot lower than it used to be. Inherited wealth will also grow in importance, since slower growth will no longer erode it as it did during the previous centuries.

As a final point: Lower returns affect your chances of success, but do not necessarily warrant any profound change in asset allocation. Investing and staying the course would still be equally relevant.
User avatar
Forester
Posts: 1555
Joined: Sat Jan 19, 2019 2:50 pm
Location: UK

Re: Are the days of 7% avg index returns over?

Post by Forester »

CurlyDave wrote: Tue Sep 08, 2020 1:24 am
SoftServeAddict wrote: Mon Sep 07, 2020 11:34 pm In Jerome Powell's latest interview on NPR it was hinted that this may be the case since more and more people are investing. Moving forward would it be more realistic to expect returns of 3-4% on average now? I think even Bogle mentioned something like this in the past where he thought the average returns would be around 4%
This old geezer (me, not Jerome) has been hearing these calamitous predictions for at least a decade.

Lets put it in perspective by looking at SPY performance. The data for 2016-present is easy for me to come up with so here goes:

2016 +12.00%
2017 +21.70%
2018 -4.56%
2019 +31.22%

for these 4 years CAGR is +14% .

And, 2020 YTD is +9.68%. And the year is young still.

Looks to me like the people who have been making these dire predictions have been shown to be just plain wrong. Why should I believe them going forward when their recent past record is so bad?

Have you ever taken Economics 101? Remember the part about supply and demand? More people investing means the demand for stocks will go up. Unless the supply increases, the price will go up, not down.
US CAPE was 24 at the start of 2016. All that's happened is returns have been brought forward. Yes the last 4 years had slightly above average returns but now stocks are relatively more expensive than in 2016.
typical.investor
Posts: 2290
Joined: Mon Jun 11, 2018 3:17 am

Re: Are the days of 7% avg index returns over?

Post by typical.investor »

CurlyDave wrote: Tue Sep 08, 2020 1:24 am
SoftServeAddict wrote: Mon Sep 07, 2020 11:34 pm In Jerome Powell's latest interview on NPR it was hinted that this may be the case since more and more people are investing. Moving forward would it be more realistic to expect returns of 3-4% on average now? I think even Bogle mentioned something like this in the past where he thought the average returns would be around 4%
This old geezer (me, not Jerome) has been hearing these calamitous predictions for at least a decade.

Lets put it in perspective by looking at SPY performance. The data for 2016-present is easy for me to come up with so here goes:

2016 +12.00%
2017 +21.70%
2018 -4.56%
2019 +31.22%

for these 4 years CAGR is +14% .

And, 2020 YTD is +9.68%. And the year is young still.

Looks to me like the people who have been making these dire predictions have been shown to be just plain wrong. Why should I believe them going forward when their recent past record is so bad?

Have you ever taken Economics 101? Remember the part about supply and demand? More people investing means the demand for stocks will go up. Unless the supply increases, the price will go up, not down.
Powell was talking about interest rates. With more savings, yields will lower as bond prices will get bid up and people will take a lower return.
So if you go back and look at the U.S. Treasury, it would have been yielding 5 or 6% 40 years ago. And now the 10 year treasury is yielding less than 1%. And now why is that? And one of the reasons is that people expect inflation to be much lower. And also the level of savings that people as the population has aged, they create a lot of savings. And when people invest, that means they drive down interest rates. So that also means lower interest rates. So a big part of why interest rates are low is nothing to do with the Fed. It's just that interest rates generally are much lower all over the world. And to that extent, there's no reason why that would lead to, you know, excessive asset prices, for example, in stocks.
JBTX
Posts: 6963
Joined: Wed Jul 26, 2017 12:46 pm

Re: Are the days of 7% avg index returns over?

Post by JBTX »

One would expect that with interest rates near zero, the return on stocks gravitate to lower levels also. But while rates are actually dropping and continued monetary liquidity stocks may actually go up due to higher PEs before they eventually flatten.

Or not. Future unexpected events tend to lay waste to predictions.
Seasonal
Posts: 2090
Joined: Sun May 21, 2017 1:49 pm

Re: Are the days of 7% avg index returns over?

Post by Seasonal »

SoftServeAddict wrote: Mon Sep 07, 2020 11:34 pm In Jerome Powell's latest interview on NPR it was hinted that this may be the case since more and more people are investing. Moving forward would it be more realistic to expect returns of 3-4% on average now? I think even Bogle mentioned something like this in the past where he thought the average returns would be around 4%
More and more people are investing? The vast majority of people own very little stock - the top 1% own more than half and the top 10% own most of the rest. The "more and more" would not seem to own enough to have a major influence on price.

It's not clear that there's a relation between the number of people who invest and returns.

Link to interview?
diabelli
Posts: 25
Joined: Sat Mar 09, 2019 3:26 pm

Re: Are the days of 7% avg index returns over?

Post by diabelli »

By citing more people investing, I think the OP may have been referring to the millennial movement into day-trading apps on their phone which they approach with a gambling mindset.

Re: those people predicting lower US returns, they've influenced me and are part of the reason I've just adopted a global weighting going forward i.e. VTWAX (although I haven't sold or rebalanced the 3 years of strictly US funds I acquired earlier).
columbia
Posts: 2928
Joined: Tue Aug 27, 2013 5:30 am

Re: Are the days of 7% avg index returns over?

Post by columbia »

Projecting any level of returns seems unwise - you take what the market gives you.
(It does raise the question of investors engaging in "planning", where they actually do speculate on future returns - it seems silly.)
Chicken Little
Posts: 399
Joined: Fri Feb 22, 2019 5:03 am

Re: Are the days of 7% avg index returns over?

Post by Chicken Little »

CurlyDave wrote: Tue Sep 08, 2020 1:24 amLooks to me like the people who have been making these dire predictions have been shown to be just plain wrong. Why should I believe them going forward when their recent past record is so bad?
Not necessarily wrong, more like they they were instantaneously thrust into different versions of the game as the rules changed.

QE, negative interests rates, government bond buying. Of course you could say "the game has always changed, look at the gold standard", but many of these new "innovations" were not really conceivable before they were conceived.

Currently, Japanese government is largest holder of Japanese ETFs.
Grt2bOutdoors
Posts: 23050
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Are the days of 7% avg index returns over?

Post by Grt2bOutdoors »

mikejuss wrote: Tue Sep 08, 2020 12:35 am
anonsdca wrote: Tue Sep 08, 2020 12:26 am
mikejuss wrote: Tue Sep 08, 2020 12:20 am
SoftServeAddict wrote: Mon Sep 07, 2020 11:34 pm In Jerome Powell's latest interview on NPR it was hinted that this may be the case since more and more people are investing. Moving forward would it be more realistic to expect returns of 3-4% on average now? I think even Bogle mentioned something like this in the past where he thought the average returns would be around 4%
And will a 3% return on the index make stock picking more attractive to investors?
If they are counting on a certain historical withdrawal rate (& growth rate) when they retire to live and pay their expenses, then you can count on it. For folks looking long term--and doing their historical projections---and realizing they cant get where they want--- what else is there except to change?
That's a depressing thought. There is one way to cope with lowered returns expectations: to earn and/or save more. Of course, that's easier said than done--but will be necessary for those of us who are loath to turn to the dark side.ea
Or just spend less. Perhaps not ideal, but if you have no choice then you just accept it.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
whereskyle
Posts: 1262
Joined: Wed Jan 29, 2020 10:29 am

Re: Are the days of 7% avg index returns over?

Post by whereskyle »

SoftServeAddict wrote: Mon Sep 07, 2020 11:34 pm In Jerome Powell's latest interview on NPR it was hinted that this may be the case since more and more people are investing. Moving forward would it be more realistic to expect returns of 3-4% on average now? I think even Bogle mentioned something like this in the past where he thought the average returns would be around 4%
No. If there's one thing Bogle, Buffett, and others who have framed the Boglehead approach did (do) not understand, it is just how easy it currently is for tech companies to produce earnings. The robust IP protections in the US make earnings generation incredibly easy relative to the required labor. Design software, patent it, store it on a server, and then boom, you have all the infrastructure and materials you need for an infinite revenue stream. Everyone was wrong about how quickly earnings would grow over the past 10 years. Everyone was VERY wrong, and they all based their views on P/E ratios. P/E ratios have little predictive value when earnings growth exceeds expectations.

We truly, absolutely, positively know nothing. Assume a few percent below the average historical return to protect yourself. That is, a conservative investor should expect a 7% nominal return from stocks. If earnings for the extremely lightweight, low-cost-to-operate businesses of the present and future continue to exceed expectations, enjoy the excess returns.

In sum, no, we should not expect American capitalism to just come screeching to a halt. How old is the country? How tired is the game? And yet, young companies like Alphabet, Facebook, and Tesla are worth a trillion dollars. Nothing slowing down in my windshield.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
Ferdinand2014
Posts: 1689
Joined: Mon Dec 17, 2018 6:49 pm

Re: Are the days of 7% avg index returns over?

Post by Ferdinand2014 »

7%? I have been getting 15.5% ROI with FXAIX (Fidelity 500 Index) the last 10 years year to date and I am very happy.
Last edited by Ferdinand2014 on Tue Sep 08, 2020 6:44 am, edited 1 time in total.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett
User avatar
firebirdparts
Posts: 1787
Joined: Thu Jun 13, 2019 4:21 pm

Re: Are the days of 7% avg index returns over?

Post by firebirdparts »

mikejuss wrote: Tue Sep 08, 2020 12:20 am
SoftServeAddict wrote: Mon Sep 07, 2020 11:34 pm In Jerome Powell's latest interview on NPR it was hinted that this may be the case since more and more people are investing. Moving forward would it be more realistic to expect returns of 3-4% on average now? I think even Bogle mentioned something like this in the past where he thought the average returns would be around 4%
And will a 3% return on the index make stock picking more attractive to investors?
It would if you think you can beat everybody else. So it takes a certain kind of person. The truth is, it already happened. we don't have to wait for it to happen. Active investing has had a surge in popularity on the internet. I guess at some point we'll get an idea of how much money is involved.
A fool and your money are soon partners
rascott
Posts: 2347
Joined: Wed Apr 15, 2015 10:53 am

Re: Are the days of 7% avg index returns over?

Post by rascott »

Ferdinand2014 wrote: Tue Sep 08, 2020 6:41 am 7%? I have been getting 15.5% ROI with FXAIX (Fidelity 500 Index) the last 10 years year to date and I am very happy.
Which greatly increases the odds that it may well return close to nothing over the next ten years. Much like international has this past decade. Or the SP500 did the prior decade.
User avatar
nisiprius
Advisory Board
Posts: 41970
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Are the days of 7% avg index returns over?

Post by nisiprius »

iamlucky13 wrote: Tue Sep 08, 2020 1:13 am...There are already historical periods where 30 year US large cap returns have been in the range of 4%, inflation adjusted. For 20 year periods, the returns have sometimes been only around 1%, inflation adjusted. That history already gives you the answer you need:

Regardless of whether the market has fundamentally changed or not (I'm skeptical), your long term planning should make sure that 3-4% real returns don't ruin you.
Additional details:
20-year real returns:

Image

30-year real returns:

Image
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
User avatar
bottlecap
Posts: 6538
Joined: Tue Mar 06, 2007 11:21 pm
Location: Tennessee

Re: Are the days of 7% avg index returns over?

Post by bottlecap »

Well, I read the interview and he literally said nothing of the sort.

Since the number of investors don’t affect the growth of companies directly, I was curious.

Now the amount of money in the system certainly affect asset prices and may ultimately hurt future returns if the Fed ever tightens back up. But he didn’t say that either.

It was a good read, however, and thanks for posting. There are certainly some eye-opening statements in there.

My favorite was that interest rates are controlled largely by market factors and later when he took it a step farther and said that the current low interest rates had very little to do with current Fed policy? You see, it’s all the old people we have...

I understand that the economy can outlast the Fed and that it will make us pay the piper sometime down the road.

But the Fed has little influence over the short run? If that's we the case, why would anyone be interested in interviewing him (or reading the interview)? If that's the case, why even have a Federal Reserve?

Like I said, eye-opening.

JT
deltaneutral83
Posts: 1704
Joined: Tue Mar 07, 2017 4:25 pm

Re: Are the days of 7% avg index returns over?

Post by deltaneutral83 »

I think if you include 2000 which would encompass 42/50/34% declines, we still are at 6% CAGR on the S&P the last 20 years.
MotoTrojan
Posts: 10659
Joined: Wed Feb 01, 2017 8:39 pm

Re: Are the days of 7% avg index returns over?

Post by MotoTrojan »

CurlyDave wrote: Tue Sep 08, 2020 1:24 am
SoftServeAddict wrote: Mon Sep 07, 2020 11:34 pm In Jerome Powell's latest interview on NPR it was hinted that this may be the case since more and more people are investing. Moving forward would it be more realistic to expect returns of 3-4% on average now? I think even Bogle mentioned something like this in the past where he thought the average returns would be around 4%
This old geezer (me, not Jerome) has been hearing these calamitous predictions for at least a decade.

Lets put it in perspective by looking at SPY performance. The data for 2016-present is easy for me to come up with so here goes:

2016 +12.00%
2017 +21.70%
2018 -4.56%
2019 +31.22%

for these 4 years CAGR is +14% .

And, 2020 YTD is +9.68%. And the year is young still.

Looks to me like the people who have been making these dire predictions have been shown to be just plain wrong. Why should I believe them going forward when their recent past record is so bad?

Have you ever taken Economics 101? Remember the part about supply and demand? More people investing means the demand for stocks will go up. Unless the supply increases, the price will go up, not down.
The bubble is getting bigger (P/E) does not sound like a strong reason to believe it’ll persist perpetually. Earnings need to catch up, or price will come back home. If neither happens, then we perpetually have a high P/E and thus much lower returns.
tibbitts
Posts: 11891
Joined: Tue Feb 27, 2007 6:50 pm

Re: Are the days of 7% avg index returns over?

Post by tibbitts »

mikejuss wrote: Tue Sep 08, 2020 12:35 am There is one way to cope with lowered returns expectations: to earn and/or save more. Of course, that's easier said than done--but will be necessary for those of us who are loath to turn to the dark side.
For many people working longer to earn and save more is the dark side - at least as dark as active investing, if not darker.
User avatar
JoMoney
Posts: 9768
Joined: Tue Jul 23, 2013 5:31 am

Re: Are the days of 7% avg index returns over?

Post by JoMoney »

If you believe the businesses/companies themselves will be less profitable in the future, that could impact returns.

If you believe stock prices will be lower in the future, that could lead to lower returns on stocks bought today, but would imply higher returns from that future period that has lower prices.

If you stick with a regimen of periodically buying across time while accumulating, and similarly selling off across time in the deccumulation phase, you'll get something close to the 'average' return that was available over your time period. Which could have shockingly high variance over specific points in time, and isn't guaranteeing you any particular return, but is highly likely to do better than trying to "time" getting in and out (which is a zero sum game).
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
User avatar
JoMoney
Posts: 9768
Joined: Tue Jul 23, 2013 5:31 am

Re: Are the days of 7% avg index returns over?

Post by JoMoney »

For some reason, I see we have a thread about a news item / interview... and nobody even linked to it :confused
Is this what's being discussed?
https://www.npr.org/2020/09/04/90959004 ... ome-powell

Although, I think, as a layman about the super low interest rates that we now can see extending quite far into the future, one practical effect of that is that somebody with some money can't put it in the bank and expect it to grow because the savings interest rate will be very low. And so they have to put it in the stock market. Are very low interest rates contributing to some kind of bubble in the markets?


You know, the connection between low interest rates and sort of excessive exuberance in the financial markets is not as tight as you might think. So interest rates are low for a reason. As I mentioned at the beginning, the sort of equilibrium, the general level of interest rates has declined steadily for more than 40 years. And the reason is, you know, there's some economics behind what sets an interest rate. There's a real return and there's an expectation about inflation in every interest rate. So if you go back and look at the U.S. Treasury, it would have been yielding 5 or 6% 40 years ago. And now the 10 year treasury is yielding less than 1%. And now why is that? And one of the reasons is that people expect inflation to be much lower. And also the level of savings that people as the population has aged, they create a lot of savings. And when people invest, that means they drive down interest rates. So that also means lower interest rates. So a big part of why interest rates are low is nothing to do with the Fed. It's just that interest rates generally are much lower all over the world. And to that extent, there's no reason why that would lead to, you know, excessive asset prices, for example, in stocks.

You don't think that that hypothesis would be what's happening?

I think, I'm just saying that the connection between low interest rates and financial instability generally is not as tight as many people would think. I don't want to comment on the level of the stock market. That's just something we don't do.
...I don't want to comment on the level of the stock market. That's just something we don't do...
I feel like I've heard fed chairman make general comments about the level of stocks before. :?

Janet Yellen calls stock market, real estate valuations ‘high’ in last interview before exit as Fed chief
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Seasonal
Posts: 2090
Joined: Sun May 21, 2017 1:49 pm

Re: Are the days of 7% avg index returns over?

Post by Seasonal »

CurlyDave wrote: Tue Sep 08, 2020 1:24 amHave you ever taken Economics 101? Remember the part about supply and demand? More people investing means the demand for stocks will go up. Unless the supply increases, the price will go up, not down.
Raw numbers of investors is essentially meaningless. The supply and demand curves I'm used to seeing have quantity on the x axis, not number of market participants. Did you take a different Econ 101? Perhaps you're assuming all else being equal, but that's not necessarily a valid assumption.

There are factors such as how the existing investors will react, how many new people there are, how much demand is generated by the new people, the prices market participants will find acceptable, etc., etc.
heyyou
Posts: 3797
Joined: Tue Feb 20, 2007 4:58 pm

Re: Are the days of 7% avg index returns over?

Post by heyyou »

by columbia »
Projecting any level of returns seems unwise - you take what the market gives you.
(It does raise the question of investors engaging in "planning", where they actually do speculate on future returns - it seems silly.)
That view suits me.
Yes, the article is well written, but the theme and this topic here, are speculating about an unknown future, with the usual bait of suggesting a more dire one in the near future. The problem is not in the returns, it is in our minds--our steady perceptions of our wealth being inadequate, and our constant desire for more certainty than what there is.

A century ago, the financier was correct in his forecast of the market level, "It will fluctuate."
So "Move along, nothing to see here" but the journalist did journal well. Now, was there any actionable info? Saving more is always good advice, and yes, the random market is expected to fluctuate from its recent history.
atdharris
Posts: 624
Joined: Wed Jan 02, 2019 3:18 pm

Re: Are the days of 7% avg index returns over?

Post by atdharris »

I'm not sure how more people investing would hurt returns. But right now, fewer Americans own stock than ever before. I don't think there is a problem with too many people investing.
iamlucky13
Posts: 2076
Joined: Sat Mar 04, 2017 5:28 pm
Location: Western Washington

Re: Are the days of 7% avg index returns over?

Post by iamlucky13 »

tibbitts wrote: Tue Sep 08, 2020 7:47 am
mikejuss wrote: Tue Sep 08, 2020 12:35 am There is one way to cope with lowered returns expectations: to earn and/or save more. Of course, that's easier said than done--but will be necessary for those of us who are loath to turn to the dark side.
For many people working longer to earn and save more is the dark side - at least as dark as active investing, if not darker.
Between two equal choices - earning higher returns or working longer and foregoing more discretionary expenses, no one would pick the latter. It would be easy to call it the dark aide if the choices were equal.

But the choices are not equal. I have a very high level of control over how long I work and how much of my income I save. I have almost zero control over market returns, and what control I do have consists mainly of trading expected returns for risk.

Active investing does not escape this paradigm.
dh
Posts: 507
Joined: Sun Mar 13, 2011 8:01 pm

Re: Are the days of 7% avg index returns over?

Post by dh »

columbia wrote: Tue Sep 08, 2020 5:39 am Projecting any level of returns seems unwise - you take what the market gives you.
(It does raise the question of investors engaging in "planning", where they actually do speculate on future returns - it seems silly.)
+1
Invest in your plan, not a particular outcome. Some years will be greater than 7%, some years will be less, some years will be negative. There is no need to speculate, rather just make a plan that works for you. :sharebeer
jay22
Posts: 867
Joined: Thu Aug 23, 2012 8:56 am
Location: Sacramento, CA

Re: Are the days of 7% avg index returns over?

Post by jay22 »

Nobody knows nothing.

It is incredible how as I progress in my (still early) investing career, I am able to block out news like this and continue to focus on my savings rate and ensuring I stay invested per my IPS no matter what happens.
KlangFool
Posts: 17723
Joined: Sat Oct 11, 2008 12:35 pm

Re: Are the days of 7% avg index returns over?

Post by KlangFool »

jay22 wrote: Tue Sep 08, 2020 9:51 am Nobody knows nothing.

It is incredible how as I progress in my (still early) investing career, I am able to block out news like this and continue to focus on my savings rate and ensuring I stay invested per my IPS no matter what happens.

+1,000.


KlangFool
Chicken Little
Posts: 399
Joined: Fri Feb 22, 2019 5:03 am

Re: Are the days of 7% avg index returns over?

Post by Chicken Little »

jay22 wrote: Tue Sep 08, 2020 9:51 amNobody knows nothing.
I like “Nobody in here knows nothing.” a lot better.
User avatar
vineviz
Posts: 7818
Joined: Tue May 15, 2018 1:55 pm

Re: Are the days of 7% avg index returns over?

Post by vineviz »

SoftServeAddict wrote: Mon Sep 07, 2020 11:34 pm In Jerome Powell's latest interview on NPR it was hinted that this may be the case since more and more people are investing. Moving forward would it be more realistic to expect returns of 3-4% on average now? I think even Bogle mentioned something like this in the past where he thought the average returns would be around 4%
As others have pointed out, the "more and more people are investing" part of this statement is of questionable relevance.

However, setting a baseline expectation of future market returns is essentially just a process to taking the current yield on a 5-year Treasury note (currently about 0.30%) and adding a reasonable long-run estimate of the equity risk premium (I'd say anywhere between 3% and 5% would be reasonable).

So a 10-year expected return of 3.5% to 5.5% is totally in the ballpark. As others have pointed out, however, there's a tremendous amount of uncertainty embedded in the return expectations: the 95% confidence interval is pretty wide.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
JBTX
Posts: 6963
Joined: Wed Jul 26, 2017 12:46 pm

Re: Are the days of 7% avg index returns over?

Post by JBTX »

A useful way to frame it

In order for stocks to get 7% per year going forward, it will require:

- stocks earnings growth will continue to exceed the growth rate of GDP. Earnings as a percent of GDP is the highest it has ever been already, and it would need to go even higher

OR

- PE ratios continue to increase already over their historically high levels

OR

- stocks materially increase their dividend payout ratios, either in ordinary dividends or stock buyback
iamlucky13
Posts: 2076
Joined: Sat Mar 04, 2017 5:28 pm
Location: Western Washington

Re: Are the days of 7% avg index returns over?

Post by iamlucky13 »

vineviz wrote: Tue Sep 08, 2020 10:49 am
SoftServeAddict wrote: Mon Sep 07, 2020 11:34 pm In Jerome Powell's latest interview on NPR it was hinted that this may be the case since more and more people are investing. Moving forward would it be more realistic to expect returns of 3-4% on average now? I think even Bogle mentioned something like this in the past where he thought the average returns would be around 4%
As others have pointed out, the "more and more people are investing" part of this statement is of questionable relevance.

However, setting a baseline expectation of future market returns is essentially just a process to taking the current yield on a 5-year Treasury note (currently about 0.30%) and adding a reasonable long-run estimate of the equity risk premium (I'd say anywhere between 3% and 5% would be reasonable).

So a 10-year expected return of 3.5% to 5.5% is totally in the ballpark. As others have pointed out, however, there's a tremendous amount of uncertainty embedded in the return expectations: the 95% confidence interval is pretty wide.
Note that historically, there are periods of negative equity returns on 10 year time frames. I haven't looked to see exactly what bonds were doing during those periods, but suffice to say, equities can not only fail to garner a 3-5% margin on bonds over decade time scales, but can underperform bonds on those time scales.
User avatar
David Jay
Posts: 9380
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Are the days of 7% avg index returns over?

Post by David Jay »

nisiprius wrote: Tue Sep 08, 2020 7:01 am30-year real returns:

Image
Just using the old “Mark 1 Eyeball”, 7% looks like a pretty good median. Those periods that ended between 1984 and 1994 were in the 4s, but the periods that ended between 1961 to 1972 were significantly higher.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
User avatar
abuss368
Posts: 21584
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Are the days of 7% avg index returns over?

Post by abuss368 »

SoftServeAddict wrote: Mon Sep 07, 2020 11:34 pm In Jerome Powell's latest interview on NPR it was hinted that this may be the case since more and more people are investing. Moving forward would it be more realistic to expect returns of 3-4% on average now? I think even Bogle mentioned something like this in the past where he thought the average returns would be around 4%
The truth is no one knows. Everyone's crystal ball will say something different.

Instead of market noise, it is best to focus on owning total market index funds and constantly looking for ways to increase the savings & investing rate each year.
John C. Bogle: “Simplicity is the master key to financial success."
User avatar
abuss368
Posts: 21584
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Are the days of 7% avg index returns over?

Post by abuss368 »

jay22 wrote: Tue Sep 08, 2020 9:51 am Nobody knows nothing.

It is incredible how as I progress in my (still early) investing career, I am able to block out news like this and continue to focus on my savings rate and ensuring I stay invested per my IPS no matter what happens.
The older I get as I continue along our investing journey, the more I appreciate this. I gave up a long time ago reading forecasts and listening to investing experts.
John C. Bogle: “Simplicity is the master key to financial success."
hoops777
Posts: 3289
Joined: Sun Apr 10, 2011 12:23 pm

Re: Are the days of 7% avg index returns over?

Post by hoops777 »

Quickly now.How many here in December predicted what has happened so far this year in 2020.Quickly now. How many have any idea what is going to happen the rest of 2020?.
That is what I thought and that is for just one freaking year.
K.I.S.S........so easy to say so difficult to do.
Chicken Little
Posts: 399
Joined: Fri Feb 22, 2019 5:03 am

Re: Are the days of 7% avg index returns over?

Post by Chicken Little »

Chicken Little wrote: Tue Sep 08, 2020 10:41 am
jay22 wrote: Tue Sep 08, 2020 9:51 amNobody knows nothing.
I like “Nobody in here knows nothing.” a lot better.
Could be misconstrued, so how about;

"We don't know nothing, and nobody who does know anything will tell us."

I'll admit, it's a little wordy for a catch-phrase.

You really think it's random? That's a little overblown, right? Everybody is throwing darts?

These finance houses are populated by PhDs (in math, who cares about the economists), sporting the latest technology. I think plenty of people know a lot about how to make money in the market, they just have no interest in selling you a fund.

If you had to pick the topic that really smart people know less about, would it be making money in the market or Alzheimer's therapy?

The important thing about choosing indexing is recognizing that you can't do it. Not sure why nobody else is allowed to be able to do it either? If you actually could make money, would you tell everyone else how?

Is all information garbage, or is all the information you can get your hands on garbage?
KlangFool
Posts: 17723
Joined: Sat Oct 11, 2008 12:35 pm

Re: Are the days of 7% avg index returns over?

Post by KlangFool »

Chicken Little wrote: Wed Sep 09, 2020 5:55 am

These finance houses are populated by PhDs (in math, who cares about the economists), sporting the latest technology. I think plenty of people know a lot about how to make money in the market, they just have no interest in selling you a fund.

Chicken Little,

My family member worked in those places. He was paid 7 figures in annual salary and bonuses. He lost 10 million in Telecom bust.


KlangFool
Last edited by KlangFool on Wed Sep 09, 2020 8:36 am, edited 1 time in total.
heyyou
Posts: 3797
Joined: Tue Feb 20, 2007 4:58 pm

Re: Are the days of 7% avg index returns over?

Post by heyyou »

His money or his investors' money?
balbrec2
Posts: 340
Joined: Mon Nov 13, 2017 3:03 pm

Re: Are the days of 7% avg index returns over?

Post by balbrec2 »

SoftServeAddict wrote: Mon Sep 07, 2020 11:34 pm In Jerome Powell's latest interview on NPR it was hinted that this may be the case since more and more people are investing. Moving forward would it be more realistic to expect returns of 3-4% on average now? I think even Bogle mentioned something like this in the past where he thought the average returns would be around 4%
likely, for a while anyway. stick to your plan
Post Reply