Why are stock returns expected to be so low over the next decade?

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SelfEmployed123
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Why are stock returns expected to be so low over the next decade?

Post by SelfEmployed123 » Wed May 09, 2018 2:43 pm

Hello Bogleheads,

There have been several posts as of late regarding forecasts that stocks will have low nominal returns moving forward. Vanguard is forecasting between 4-5 percent nominal returns per year for stocks over the next decade along with high volatility (https://personal.vanguard.com/pdf/ISGVEMO.pdf). Many other prognosticators have similar estimates. The average nominal return for stocks during the 20th century was around 7 percent. Could someone explain why the forecasts for stocks moving forward are so gloomy?

Thanks!

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Pajamas
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Re: Why are stock returns expected to be so low over the next decade?

Post by Pajamas » Wed May 09, 2018 2:51 pm

Here are some previous discussions on this topic:

https://www.google.com/search?sitesearc ... ext+decade

jebmke
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Re: Why are stock returns expected to be so low over the next decade?

Post by jebmke » Wed May 09, 2018 2:54 pm

Low growth. High valuations.
When you discover that you are riding a dead horse, the best strategy is to dismount.

mega317
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Re: Why are stock returns expected to be so low over the next decade?

Post by mega317 » Wed May 09, 2018 3:40 pm

I'm sure there are hundreds of posts answering that question, and maybe this thread will add a hundred more, but really no one can predict anything, and if they could would it change your investing strategy?

user5027
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Re: Why are stock returns expected to be so low over the next decade?

Post by user5027 » Wed May 09, 2018 5:18 pm

Google "mean reversion."

stlutz
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Re: Why are stock returns expected to be so low over the next decade?

Post by stlutz » Wed May 09, 2018 10:52 pm

There is no such thing as "the" expected return. Different people have different expectations for different reasons.

Is there anything in particular your disagree with in the VG logic or in the logic used in the prior threads?

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Peter Foley
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Re: Why are stock returns expected to be so low over the next decade?

Post by Peter Foley » Wed May 09, 2018 11:01 pm

Relatively high valuations. See CAPE Ratio, CAPE Median or Robert Shiller as topics.

Also see historical and expected returns on the Wiki.

AlohaJoe
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Re: Why are stock returns expected to be so low over the next decade?

Post by AlohaJoe » Wed May 09, 2018 11:10 pm

SelfEmployed123 wrote:
Wed May 09, 2018 2:43 pm
Could someone explain why the forecasts for stocks moving forward are so gloomy?
Your OP included a link from Vanguard where the give you all the reasons for why the forecasts for stocks moving forward are so gloomy. Vanguard wrote several pages explaining it. If that PDF was unclear, then you'll probably get more useful replies by asking specific questions about the parts of it that were unclear.

stocknoob4111
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Re: Why are stock returns expected to be so low over the next decade?

Post by stocknoob4111 » Wed May 09, 2018 11:17 pm

It's 4-5% accounting for the correction, what they mean is that it could time correct over the next decade by returning sub-par 4-5% instead of 9-10% average or it could also drop 40% right now and we have another regular bull market after that like what happened post 2008. I have also read theories that we still have some upside left in this bull market as we are at the average length but below the average return of bull markets of the past. The exact scenario that it will playout is virtually impossible to predict and if anyone can tell you that they are flat out lying.

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JoMoney
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Re: Why are stock returns expected to be so low over the next decade?

Post by JoMoney » Wed May 09, 2018 11:32 pm

SelfEmployed123 wrote:
Wed May 09, 2018 2:43 pm
... The average nominal return for stocks during the 20th century was around 7 percent. Could someone explain why the forecasts for stocks moving forward are so gloomy?...
The average "nominal" return was around 10%
The average "real" (inflation adjusted) return was close to 7%
Image
Forward looking forecasts for returns are below average (of the past) because prices are above average (of the past), and expected to mean-revert.
Earnings growth in the recent past has been below average. Projecting that lower growth as normal moving forward lowers expected returns, and NOT expected to mean-revert.
Profitability of businesses in the recent past has been above average, while growth in workers income has been below average. Some expect that gap to close, lowering corporate profits.
American consumers are more in debt, more of their spending income is going to service the interest on debt, and could be squeeze more by rising interest rates.
Health care expenses have grown at extremely high rates consuming more and more of GNP, this squeezes money that could be spent or invested elsewhere.
Government deficits (budgeting to spend more than they take in taxes), seem unstoppable regardless of who's in charge and unsustainable. Since they seem incapable of cutting spending, it's expected taxes must increase which will squeeze corporate profits and individual consumers.
Pensions and social security payments expected to hit unsustainable outflows.
A bunch of baby boomers are expected to hit retirement and be selling stocks en masse.
More government spending, rather than going towards things like infrastructure and investment, is expected to go towards servicing national debt, higher interest rates will squeeze even more.
Further warming of the earth is expected to become a detrimental thing (if it cools that would also be bad).
The cost of investing in stocks has come down, some believe this means the "premium" to investors should go down.
Since the U.S. is now a more developed market than in the past, some believe it's less risky than in the past and the "premium" should go down (especially relative to less developed markets).
Nobody really knows what/where/how new future technology and economic growth will come from (we never do), so projecting how it will change future prosperity seems overly optimistic.
Pessimism sounds smarter.
Last edited by JoMoney on Wed May 09, 2018 11:51 pm, edited 3 times in total.
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confusedinvestor
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Re: Why are stock returns expected to be so low over the next decade?

Post by confusedinvestor » Wed May 09, 2018 11:46 pm

Did you read what Vanguard 2017 outlook was (https://americas.vanguard.com/docs/lite ... k-2017.pdf) and what really happened with SP500 for 2017 ?

But in your subject, Credit Suis might be tad better forecast...
SelfEmployed123 wrote:
Wed May 09, 2018 2:43 pm
Hello Bogleheads,

There have been several posts as of late regarding forecasts that stocks will have low nominal returns moving forward. Vanguard is forecasting between 4-5 percent nominal returns per year for stocks over the next decade along with high volatility (https://personal.vanguard.com/pdf/ISGVEMO.pdf). Many other prognosticators have similar estimates. The average nominal return for stocks during the 20th century was around 7 percent. Could someone explain why the forecasts for stocks moving forward are so gloomy?

Thanks!

MrPotatoHead
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Re: Why are stock returns expected to be so low over the next decade?

Post by MrPotatoHead » Thu May 10, 2018 12:52 am

Here is a perspective. Base your planning on the low expected returns. If they prove fallacious you simply are ahead of the game. If they are accurate you are at plan. The truth is no one knows what the future will bring. It is like poker when you are the house, you simply play the long term odds. the factors under your control are really your savings rate and your expenses. to a great extent you have a great deal of altitude on what you earn each year and what you spend. The market will return what the market will return. If that is not agreeable to you then your next option is to create your own return by active investment (and I do not mean stocks as much as your own business).

turnberry72
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Re: Why are stock returns expected to be so low over the next decade?

Post by turnberry72 » Thu May 10, 2018 7:18 am

Never been a fan of annuities. However, IF (emphasis on IF) the next 10 year's market returns were going to be as modest as many (Vanguard, included) predict, wouldn't a Fixed Immediate Annuity be worthy of consideration for a 65 year old? That is, protecting a significant % of nest egg from extended or deep bear market would be "cheap" relative to predicted market returns.

EXAMPLE: A $500k fixed immediate investment annuity would yield 6.61% -- $2,800/month...$33,600/year

Article that caught my eye: http://monevator.com/annuities-guarante ... -for-life/

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snackdog
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Re: Why are stock returns expected to be so low over the next decade?

Post by snackdog » Thu May 10, 2018 7:33 am

The current bull market trend could have 3-5 years to go if it is like some historic runs.

https://www.ftportfolios.com/Common/Con ... 8ff9bfe12d

turnberry72
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Re: Why are stock returns expected to be so low over the next decade?

Post by turnberry72 » Thu May 10, 2018 7:37 am

I am looking for feedback.

But, more appreciated if they read my 1st sentence...that is, the IF assumption premise.

Thanks

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Re: Why are stock returns expected to be so low over the next decade?

Post by Grt2bOutdoors » Thu May 10, 2018 7:39 am

stocknoob4111 wrote:
Wed May 09, 2018 11:17 pm
It's 4-5% accounting for the correction, what they mean is that it could time correct over the next decade by returning sub-par 4-5% instead of 9-10% average or it could also drop 40% right now and we have another regular bull market after that like what happened post 2008. I have also read theories that we still have some upside left in this bull market as we are at the average length but below the average return of bull markets of the past. The exact scenario that it will playout is virtually impossible to predict and if anyone can tell you that they are flat out lying.
I’m inclined to go with a combination of time correct and 5-10% downward moves. We’ve already experienced a 7.5% decline from highs of VTSAX thus far this year. Keep investing and ride it out if you can.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

wrongfunds
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Re: Why are stock returns expected to be so low over the next decade?

Post by wrongfunds » Thu May 10, 2018 8:18 am

Best thing to do is to dig up 10 or 20 year old predictions from them. With internet, it will be easy. Look at what they said then. Then compare it to the actual history. Then decide if you think they would have similar prediction success or not.

There is no reason why anybody even bothers to make predictions. Their historical record is available for everybody to see if their prediction was accurate.

Tamalak
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Re: Why are stock returns expected to be so low over the next decade?

Post by Tamalak » Thu May 10, 2018 8:40 am

Two reasons of my own to add to the chorus of "low growth high valuations":

1) Survivorship bias. Everyone talks about expected returns in terms of USA stocks. Why USA stocks? Because the USA has had the most stable, successful and profitable stock returns of anywhere in the world for the last 100-200 years. In other words we're an outperforming sector. If you forecast future returns based upon the returns of a recent outperformer.. you're gonna have a bad time.

2) Loss of systemic risk. The collapse of the world financial system is less likely now than it was. Still not at all unlikely (see 2008), but the risk is less. We're not facing tides of communists or Nazis any more and the markets are better regulated than they've almost ever been. With less systemic risk, comes a loss of a risk premium - people will feel more comfortable putting their money into stocks which will drive prices up compared to the value of the company you get.

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Clever_Username
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Re: Why are stock returns expected to be so low over the next decade?

Post by Clever_Username » Thu May 10, 2018 9:36 am

Pessimism is a popular attitude in articles when things are good. It generates clicks. I don't have expectations for stock returns in the next decade, which is good because I don't need the money I have invested in stocks for over a decade.

As has been said already, go look at predictions from years ago and see how certain it was that March 2009 was the highest stocks would be going forward and another big fall was certain and imminent (get out now and stay out of the stock market, they said).
"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_

SelfEmployed123
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Re: Why are stock returns expected to be so low over the next decade?

Post by SelfEmployed123 » Thu May 10, 2018 9:56 am

Thank you to those of you who have been breaking it down. Will post additional questions if I have any.
really no one can predict anything, and if they could would it change your investing strategy?
I'll be in wealth accumulation over the next 20-25 years, so the plan is to keep buying mostly stocks. The various predictions won't alter my investment approach. I was just wanting to understand what is going on. To what end? Mostly just curiosity. This is all very new to me and I am learning a lot.
Best thing to do is to dig up 10 or 20 year old predictions from them. With internet, it will be easy. Look at what they said then. Then compare it to the actual history. Then decide if you think they would have similar prediction success or not.
That's a really good idea. I will let you know if I find anything. I did look up Vanguards prediction for 2017 and it is not substantially different than 2018.
With less systemic risk, comes a loss of a risk premium - people will feel more comfortable putting their money into stocks which will drive prices up compared to the value of the company you get.
I've heard some attribute the relatively low returns expected moving forward to the rise of index fund investing. Is there any truth to that? Seems like a pretty bold statement given how complex the situation really is.

not4me
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Re: Why are stock returns expected to be so low over the next decade?

Post by not4me » Thu May 10, 2018 2:35 pm

turnberry72 wrote:
Thu May 10, 2018 7:18 am
Never been a fan of annuities. However, IF (emphasis on IF) the next 10 year's market returns were going to be as modest as many (Vanguard, included) predict, wouldn't a Fixed Immediate Annuity be worthy of consideration for a 65 year old? That is, protecting a significant % of nest egg from extended or deep bear market would be "cheap" relative to predicted market returns.

EXAMPLE: A $500k fixed immediate investment annuity would yield 6.61% -- $2,800/month...$33,600/year

Article that caught my eye: http://monevator.com/annuities-guarante ... -for-life/
In a later post, you said you really wanted feedback. You also said you've never been a fan of annuities & so I'll assume you've read other threads. I personally think the answer isn't a 1-size-fits-all, but would depend on the 65 year old. My first thought was that you were addressing stock market return expectations by using a product from the bond market arena. Depending upon the assumptions you buy into that helped you reach that stock market expectation, then this may not make sense. That is, you are essentially locking in a low interest rate at a time when you may not have a way to make up for that. Some with limited longevity due to health, no heirs, etc & especially needing peace of mind may find this attractive though. Many, many other threads that get into this in detail

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Clever_Username
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Re: Why are stock returns expected to be so low over the next decade?

Post by Clever_Username » Thu May 10, 2018 5:53 pm

SelfEmployed123 wrote:
Thu May 10, 2018 9:56 am
I've heard some attribute the relatively low returns expected moving forward to the rise of index fund investing. Is there any truth to that? Seems like a pretty bold statement given how complex the situation really is.
No, that's just angry active managers having a harder time justifying their inflated salaries. Now they have to buy fewer ivory backscratchers and it upsets them.
"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_

rmgatl
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Re: Why are stock returns expected to be so low over the next decade?

Post by rmgatl » Tue May 15, 2018 11:20 pm

My interpretation is that lowered equity return expectations largely stem from the market coming off QE effects. It was easier for equities to run up so long as dividend yields>>bond yields. That chapter of history is rapidly coming to an end.

I'm staying in equities with money I know I won't have to access for 7-8+ years, i.e. a full credit/business cycle. I believe in owning companies and think I understand equities risk.

The bond market is where I'm confused...supposed to add safety to our portfolios but doesn't feel safe to me. Any references to historical bond performance is imho irrelevant because we've never lived through anything like the current aftermath of a $4.5T intervention.

What happens in our next inevitable recession? Any bullets left in the gun?

Uncharted territory. I look forward to normalized interest rates with 5-6% CDs again...but getting there might be a wild ride.

jalbert
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Re: Why are stock returns expected to be so low over the next decade?

Post by jalbert » Tue May 15, 2018 11:40 pm

Lots of ways to look at it. The equity risk premium is the excess return above the risk-free rate (yield on cash investments that have no credit risk). The risk-free rate is low, so even if the equity risk premium is rewarded, it is added in to a low risk free-rate to get overall nominal return.

If you analyze the present value of a stock as the future expected cash flows discounted back to a present value using some prevailing discount rate, a rise in interest rates will increase the discount rate. This may occur concurrent with an increase in the risk-free rate, which would be good for equity returns, but the increase in discount rate also reduces the present value of the future revenue stream.

Long-term investors should care more about real returns in any case.
Risk is not a guarantor of return.

Peppergrass
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Re: Why are stock returns expected to be so low over the next decade?

Post by Peppergrass » Wed May 16, 2018 12:42 am

Bill Bernstein talks about this in one of his books, and he uses the gordon equation to back up the claim..

Also I believe he said for a long time stocks have bid up too high.

Another he mentioned is it might be wrong on factors of companies upping dividends, if they did it would change the model, but the model is pretty accurate..

rmgatl
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Re: Why are stock returns expected to be so low over the next decade?

Post by rmgatl » Wed May 16, 2018 6:11 am

I am a semiretired entrepreneur and teach entrepreneurial finance at a major university. Discounted cash flow has always seemed like an academically interesting but mostly not very useful exercise....obviously irrelevant for startups but questionable even for mature companies. Cranking a bunch of numbers gives the impression of precision, but there are so many assumptions. But the big thing is it doesn't account for behavioral dynamics - people choose from available investments and we're coming out of a unique phase where it was sort of a no brainer to buy high dividend stocks given the alternatives.

Ok so maybe the equity markets got a little ahead of reality and they go sideways and remain volatile for a while. Earnings look mostly pretty good but top line growth in US remains anemic. I don't know how you sustain high p/e multiples without top line growth. The flood of cheap money saved us from great depression II but was like pushing a rope on top line. It worries me a little that we might be getting ready to find out what creative ceos and cfos have been doing in fed distorted credit markets. Fair enough, all of us accept volatility as part of equity investing so that bucket is what it is. I stay in equities and tilt a little toward international where top line has better prospects and maybe valuations are more reasonable.

It's the bond counterbalance part that confuses me right now. I feel like I'm taking on disproportionate risks and volatility with bonds given the expected returns. I would normally look to bonds to soften the blow of the next recession but not sure about that. If anything, I could imagine bonds being at the eye of the storm given certain possible cheap credit detox scenarios. I'm not a bond expert so not sure what to make of it, but I'm shifting to CDs and very short term bonds. If I'm only going to make 2.5-3% on that bucket in the near term, I don't want risk or volatility. I assume most are betting on slowly/gradually climbing interest rates that allow bond funds to catch up in their duration timeframes, plus the usual helpful rate declines during the next recession. Who knows.

jalbert
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Re: Why are stock returns expected to be so low over the next decade?

Post by jalbert » Wed May 16, 2018 11:57 am

I am a semiretired entrepreneur and teach entrepreneurial finance at a major university. Discounted cash flow has always seemed like an academically interesting but mostly not very useful exercise....obviously irrelevant for startups but questionable even for mature companies. Cranking a bunch of numbers gives the impression of precision, but there are so many assumptions. 
If you want a precise number for today's value, I agree. Future cash flows are random variables after all. But to make a qualitative argument comparing expected nominal returns with a low vs a high discount rate we don't need to crank a bunch of numbers. There still is a limitation in that future cash flows and the future discount rate are not independent as they both respond to macroeconomic outcomes.
Risk is not a guarantor of return.

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patrick013
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Re: Why are stock returns expected to be so low over the next decade?

Post by patrick013 » Wed May 16, 2018 12:48 pm

Well if you read the weekly financial journals you've got
5 bears on one side of the page and when you turn to the
other side there's 5 bulls looking at other sectors and all
with appropriate facts. Both bears and bulls will not ignore
the chance of the crash.

Energy up could be a big plus. What's Intl flat again ? But,
the thing that's going to save the day is the new tax law. Tax
accruals are going to be so much lower it's going to look like
an economic gain. So people pay for growth and earnings
quality as the equity value of output adjusts upwardly for the
lower taxes.

Bond wise I think two 2.5 year bonds could be better than one 5
year bond. Have to decide about that later. PE's going down
a bit but full EPS in better shape. Shouldn't be bad if sales volume
doesn't crash for some reason. I'd raise total return guess a percent
or two.
age in bonds, buy-and-hold, 10 year business cycle

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