Expected returns for 80/20 stock bond for next 10 years.

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danielc
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by danielc » Tue Jul 03, 2018 4:51 pm

oldcomputerguy wrote:
Tue Jul 03, 2018 4:20 pm
danielc wrote:
Tue Jul 03, 2018 10:53 am
Does this mean that you estimate the equities risk premium to be 2.13% ?
I'm no expert, but I don't believe risk figures for different asset classes are linearly additive.
That's not what a risk premium is. A risk premium is how much additional return you receve in compensation for the additional risk. Of course the risk itself (e.g. standard deviation) is not additive.

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Rick Ferri
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by Rick Ferri » Tue Jul 03, 2018 5:01 pm

Rick, surely you do not encourage people to plan an uncertain future based on assuming that investment returns are certain. Are you suggesting that doing so and getting a single number with no range of uncertainty around the result is a better idea than using a probabilistic model as all the current retirement models are? Note that telling people to use a probabilistic model is not telling people to ignore the best available forecasts. It is exactly the opposite in fact
That’s what I’ve been doing for 20 years. It works fine as long as you don’t use some pie in the sky numbers based on bull market returns.


As I’ve said three times now, it is an absolute certainty that a 10-year Zero Coupon Treasury will deliver 2.87% over the next ten years. Stock will likely pay 2% in dividends based on today’s prices. Inflation might be around 2% also, but that’s much harder to predict. That’s what you have to work with. So, my 5% for a 80/20 portfolio actually assumes 3% real return. Honestly, what more can you do? What more do you expect with a world awash in cash?

BTW, what’s the alternative planning measure? Telling people “Our super-super Monti Carlo simulator predicts your 80/20 portfolio has a 10% chance of you eating dog food when you’re 80 years old”. What good does that do anyone?
Last edited by Rick Ferri on Tue Jul 03, 2018 5:10 pm, edited 1 time in total.
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patrick013
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by patrick013 » Tue Jul 03, 2018 5:09 pm

It's interesting that GDP is growing at 2% but the early reports of
500 earnings looks slightly negative. That's after the tax benefit
of the new tax law. So have to wait and see how that cycle turns
out.
age in bonds, buy-and-hold, 10 year business cycle

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Rick Ferri
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by Rick Ferri » Tue Jul 03, 2018 5:20 pm

Tariffs on imports replace the cut in corporate tax rates, but not 1 for 1. So, rising deficit. Nonetheless, in the GDP equation, “investment” after tax cuts increases while “imports” decrease. Both are positive. Also, energy exports increase as investment in pipelines and terminals begin to pay off. Another positive for GDP. Yet, the Fed sees GDP decelerating in 2020. Why? Higher interest rates start to show up in the numbers. This also effects emerging market growth. Technology increases productivity, but it’s uneven. So, headwinds are there, no doubt.

I’ll stick with my 5% nominal number over 10 years for my own planning purposes.

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The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by FIREchief » Tue Jul 03, 2018 5:25 pm

Rick Ferri wrote:
Tue Jul 03, 2018 5:01 pm
BTW, what’s the alternative planning measure? Telling people “Our super-super Monti Carlo simulator predicts your 80/20 portfolio has a 10% chance of you eating dog food when you’re 80 years old”. What good does that do anyone?

It's a lot like another old saying "if you want to make God laugh, just tell him your plans."

If somebody is in their accumulation years, this is the plan I would suggest:
a) live well below your means, buy only what you need and not what you want - place spending priorities on your family's long term well being (this is also good for the soul)
b) save as much as you can and invest aggressively in equities (80/20 minimum)
c) invest in your career and plan to work as long as possible
d) take advantage of as many tax-advantaged savings opportunities as you can
e) track your progress as you approach the end of your career and the long term results will let you tentatively plan for a reasonable FIRE point
f) never give your money away to some guy in a nice suit who tries to convince you that they can find a short cut to FIRE

None of this requires any predictions about the future, and it is likely the path that many FIRE'd Bogleheads chose to reach the promised land.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by H-Town » Tue Jul 03, 2018 5:31 pm

masonstone wrote:
Mon Jul 02, 2018 7:24 pm
What’s a reasonable Expected returns for 80/20 stock bond vanguard admiral shares total market for both sides for next 10 years.
From 3-5% in term of real return.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by GT99 » Tue Jul 03, 2018 5:42 pm

masonstone wrote:
Mon Jul 02, 2018 8:44 pm
Rick Ferri wrote:
Mon Jul 02, 2018 8:22 pm
A realistic return number for an 80/20 allocation is 5% nominal and 3% real. Sorry I was not clear in that.
This is not accurate according to historical returns. Realistic nominal returns are between 7-10
I have a feeling if you look at 10 year periods starting >5 years into a bull market, you won't find many that averaged greater than 7% (if anyone wants to run the numbers, I'd love to see them =). That doesn't mean we can't see 10% average returns for the next 10 years, it just means it's less likely than in any random historical year.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by Cop51 » Tue Jul 03, 2018 5:50 pm

The “experts” also said in fall of 2017 that emerging markets were the area you should tilt your portfolio to. Well they were wrong. Real wrong.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by GAAP » Tue Jul 03, 2018 6:09 pm

corn18 wrote:
Tue Jul 03, 2018 4:40 pm
Maybe we could all get together and decide the markets need to correct down 40% right now so we can forecast 7-10% real growth over the next 10 years. Everyone sell everything on Friday and get those prices down!
Sure -- you go first...

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by corn18 » Tue Jul 03, 2018 6:13 pm

GAAP wrote:
Tue Jul 03, 2018 6:09 pm
corn18 wrote:
Tue Jul 03, 2018 4:40 pm
Maybe we could all get together and decide the markets need to correct down 40% right now so we can forecast 7-10% real growth over the next 10 years. Everyone sell everything on Friday and get those prices down!
Sure -- you go first...
Going first would be the best position.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by H-Town » Tue Jul 03, 2018 6:17 pm

corn18 wrote:
Tue Jul 03, 2018 6:13 pm
GAAP wrote:
Tue Jul 03, 2018 6:09 pm
corn18 wrote:
Tue Jul 03, 2018 4:40 pm
Maybe we could all get together and decide the markets need to correct down 40% right now so we can forecast 7-10% real growth over the next 10 years. Everyone sell everything on Friday and get those prices down!
Sure -- you go first...
Going first would be the best position.
Sure... Going first and then turning around only to see everyone else stays put. :beer

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by cutehumor » Tue Jul 03, 2018 7:13 pm

2000-2010

Total market index: 0% nominal
60/40 index: approx 2% nominal

2007-2017

TMSI: 7% nominal
60/40 index: Approx 2% nominal

2007-2017 is kind of a best case scenario going from peak to peak. 2000-2010 was going from extreme peak to relative midpoint.

It is really hard to look at those and expect 7-10% nominal for an 80/20 AA.
[/quote

I graduated from college in 2000. I invested starting in 2000 and pretty much earned nothing in the stock market from 2000-2010. I was 100% in vanguard 500. I stopped investing and saved 20% for down payment on my house in 2010 at the end of the housing bubble. I had my two kids with in 2011 and in 2015 with full time daycare bills of around $1600 per month. When my first child almost finished daycare, I did not get serious again with investing except for 6% minimum for company matches until 2016. Since 2/16, we are maxing 401k and IRAs. My wife and I are frugal, we have 500k combined in investments. So, now I'm to expect 3 percent for the next ten years from 2018-2028??, I"ll be 51 by then. I want to retire by 55 I was born at the wrong time!! :oops:

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by Rick Ferri » Tue Jul 03, 2018 8:48 pm

“cutehumor” wrote:I want to retire by 55 I was born at the wrong time!! :oops:
Every generation has their bear market and bull market. Your time will come.
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by FIREchief » Tue Jul 03, 2018 9:51 pm

cutehumor wrote:
Tue Jul 03, 2018 7:13 pm
2000-2010

Total market index: 0% nominal
60/40 index: approx 2% nominal

2007-2017

TMSI: 7% nominal
60/40 index: Approx 2% nominal

2007-2017 is kind of a best case scenario going from peak to peak. 2000-2010 was going from extreme peak to relative midpoint.

It is really hard to look at those and expect 7-10% nominal for an 80/20 AA.
[/quote

I graduated from college in 2000. I invested starting in 2000 and pretty much earned nothing in the stock market from 2000-2010. I was 100% in vanguard 500. I stopped investing and saved 20% for down payment on my house in 2010 at the end of the housing bubble. I had my two kids with in 2011 and in 2015 with full time daycare bills of around $1600 per month. When my first child almost finished daycare, I did not get serious again with investing except for 6% minimum for company matches until 2016. Since 2/16, we are maxing 401k and IRAs. My wife and I are frugal, we have 500k combined in investments. So, now I'm to expect 3 percent for the next ten years from 2018-2028??, I"ll be 51 by then. I want to retire by 55 I was born at the wrong time!! :oops:
If you left those ten years of accumulated savings in equities in 2010, then you should be in pretty good shape. TMI has tripled since 2010 (total return). That's why it's called stay the course. :sharebeer
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by randomguy » Tue Jul 03, 2018 11:34 pm

FIREchief wrote:
Tue Jul 03, 2018 9:51 pm

If you left those ten years of accumulated savings in equities in 2010, then you should be in pretty good shape. TMI has tripled since 2010 (total return). That's why it's called stay the course. :sharebeer
500k is nice but with 3% returns, you need some really intense savings to get to the 1.5-2 million that a lot of people want to maintain their lifestyles (i.e. people making the 100-200k range) over over the next 15 years to retire at 55. With 7-10% returns it is pretty feasible.

While everyone has their bull markets and bear markets during their investing lifetime, when they happen and how big they can drastically effect your results. That person who started working in 1970 had a lot of things go right (1979-1999 had a 12% REAL CAGR AND a lot of the growth was in the last 5 years when you had a large account balance. ). Obviously this is not something we can control. You just have to deal with it.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by FIREchief » Tue Jul 03, 2018 11:48 pm

randomguy wrote:
Tue Jul 03, 2018 11:34 pm
FIREchief wrote:
Tue Jul 03, 2018 9:51 pm

If you left those ten years of accumulated savings in equities in 2010, then you should be in pretty good shape. TMI has tripled since 2010 (total return). That's why it's called stay the course. :sharebeer
500k is nice but with 3% returns, you need some really intense savings to get to the 1.5-2 million that a lot of people want to maintain their lifestyles (i.e. people making the 100-200k range) over over the next 15 years to retire at 55. With 7-10% returns it is pretty feasible.

While everyone has their bull markets and bear markets during their investing lifetime, when they happen and how big they can drastically effect your results. That person who started working in 1970 had a lot of things go right (1979-1999 had a 12% REAL CAGR AND a lot of the growth was in the last 5 years when you had a large account balance. ). Obviously this is not something we can control. You just have to deal with it.
Exactly. A: stay the course, B: nobody knows nothing
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by TheOscarGuy » Wed Jul 04, 2018 4:44 am

masonstone wrote:
Mon Jul 02, 2018 7:24 pm
What’s a reasonable Expected returns for 80/20 stock bond vanguard admiral shares total market for both sides for next 10 years.
Whatever you do please trust the experts. They have never been wrong in the past.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by ignition » Wed Jul 04, 2018 7:33 am

I'm hoping 4-5% real for stocks over the next 10-20 years. We'll see what happens.

It's quite interesting to read about Shiller who thinks stocks are way overvalued vs Siegel who thinks stocks are fairly valued.

Also, we can look at 1998 where the CAPE for S&P 500 was 32 (similar level as today). The S&P500 returned 2.5% real over the next decade and 5% real over the next 20 years.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by columbia » Wed Jul 04, 2018 7:50 am

am wrote:
Tue Jul 03, 2018 2:06 pm
Rick Ferri wrote:
Tue Jul 03, 2018 1:37 pm
I’m not trying to be negative. I’m trying to explain there are real economic reasons why the next ten years probably will not be like the last ten. They never are.
How are we going to get to 5% nominal? Crash followed by recovery, steady low, etc. I think I can do better than 5% since I am still accumulating and rebalancing.
Can you please explain why you think that.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by WhyNotUs » Wed Jul 04, 2018 8:03 am

I just read a VG blog post for institutional investors that displayed nominal returns for 10 yr period ending in 2017 with several 70/30 scenarios, returns were between 6 and 7% even with the run up of stocks over that period.

5% seems utterly reasonable for planning purposes and I would be delighted if our little endowment can achieve that return even though we will be losing ground after distributions. We have done better than distributions for several years and the pendulum tends to seek center.

The future will be a surprise and we might fail due to our American-centric position or thrive when the robots replace us all creating more paper wealth and poverty. There is no way to know but there is a relatively simple prescription for keeping money in the game and doing as well as one can.
I own the next hot stock- VTSAX

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by WhyNotUs » Wed Jul 04, 2018 8:15 am

cutehumor wrote:
Tue Jul 03, 2018 7:13 pm
My wife and I are frugal, we have 500k combined in investments. So, now I'm to expect 3 percent for the next ten years from 2018-2028??, I"ll be 51 by then. I want to retire by 55 I was born at the wrong time!! :oops:
Sounds like you have already accomplished a lot and have learned the most liberating skill, thrift. Since no one owes you the right to retire at 55, it might be a more resilient goal to seek financial independence, which could complement your thrift with the ability to work part time at something that you love doing starting in your 50's. I am not "retired" but have been able to do only work that I enjoy (largely :) ), travel quite a bit and stay out of my retirement savings since my mid-50's. If I continue enjoying this mix, I may do it until I die or am no longer productive at my work.

The idea of working hard until 65 and then retiring to putter seems to be fading both as an option and a goal.
I own the next hot stock- VTSAX

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by pkcrafter » Wed Jul 04, 2018 9:09 am

I really don't like the term "expected" return.
What is Expected Return?

The expected return on an investment is the expected value of the probability distribution of possible returns it can provide to investors. The return on the investment is an unknown variable that has different values associated with different probabilities. Expected return is calculated by multiplying potential outcomes (returns) by the chances of each outcome occurring, and then calculating the sum of those results (as shown below).
https://corporatefinanceinstitute.com/r ... ted-return

How accurate can you expect the number to be?

I do know one thing though -- stocks don't grow to the sky. If the market has grown at 7% real I don't think we would get that value if there weren't occasional dramatic downturns. And so it follows that the best way to invest is to ride the market and don't try to time your way in and out. Timing has a high probability of lowering your long term returns. Once you get close to needing the money you cut down on the risk to cut down on the possibility of getting cut off at the knees.

The Boglehead philosophy is to buy/hold/ignore things like "expected" returns. Playing games is only going to hurt returns in the long run.
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by oldcomputerguy » Wed Jul 04, 2018 9:23 am

Rick Ferri wrote:
Tue Jul 03, 2018 5:20 pm
I’ll stick with my 5% nominal number over 10 years for my own planning purposes.
Rick, I guess I'm the pessimistic one here. My long-term plan spreadsheet includes an assumption of an annual average 2% nominal gain for a 50/50 portfolio. Hopefully it'll be better than that, but if not, then hopefully I'm prepared.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by am » Wed Jul 04, 2018 9:28 am

columbia wrote:
Wed Jul 04, 2018 7:50 am
am wrote:
Tue Jul 03, 2018 2:06 pm
Rick Ferri wrote:
Tue Jul 03, 2018 1:37 pm
I’m not trying to be negative. I’m trying to explain there are real economic reasons why the next ten years probably will not be like the last ten. They never are.
How are we going to get to 5% nominal? Crash followed by recovery, steady low, etc. I think I can do better than 5% since I am still accumulating and rebalancing.
Can you please explain why you think that.
Because I’ll be buying shares when the market is low and rebalancing into underperforming asset classes.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by Silk McCue » Wed Jul 04, 2018 9:33 am

Rick Ferri wrote:
Mon Jul 02, 2018 7:42 pm
I would use up to 5.0% for that allocation if the bond side is in the intermediate-term corporate fund. Less if you use Treasuries.
Thanks for the perspective. I just adjusted my modeling from 7% to 5% and my plan is still good for our retirement in 2.5 years when we will be 60/62. We have a COLA'd pension as our income base and plan to take SS at 68/70 or 70/70 as determined when we get there. I'll use the these numbers until proven otherwise. If they do better then it's all upside.

I am in VG Target Date Fund 2025, current allocation 62/38. I am considering moving the bond portion to a 5 year CD paying 4.2%. I am certain that I will not need those funds before the 5 years is up. What is your opinion on this approach and what are my downside risks in doing so?

Thank you for your time.

Cheers

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by Rick Ferri » Wed Jul 04, 2018 9:42 am

Nothing wrong with your plan. A CD yielding 4.2% for 5-years FDIC insured is a good rate.
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by Silk McCue » Wed Jul 04, 2018 9:46 am

Rick Ferri wrote:
Wed Jul 04, 2018 9:42 am
Nothing wrong with your plan. A CD yielding 4.2% for 5-years FDIC insured is a good rate.
Thanks Rick. Happy 4th of July to you and yours!

Cheers

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by HomerJ » Wed Jul 04, 2018 9:50 am

ignition wrote:
Wed Jul 04, 2018 7:33 am
I'm hoping 4-5% real for stocks over the next 10-20 years. We'll see what happens.

It's quite interesting to read about Shiller who thinks stocks are way overvalued vs Siegel who thinks stocks are fairly valued.

Also, we can look at 1998 where the CAPE for S&P 500 was 32 (similar level as today). The S&P500 returned 2.5% real over the next decade and 5% real over the next 20 years.
(1) That's a single data point.
(2) Accounting rules changed in the 2000s so earnings are calculated differently.
(3) 5% real over 20 years isn't too bad (2% lower than historical average) considering we started at "extreme" valuations, and experienced TWO large stock market crashes in that period.

When your worst case (so far, based on one sample point, using outdated earning calculations) is 5% real over 20 years, that's still pretty good.

For a worst case.
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by Dottie57 » Wed Jul 04, 2018 10:00 am

Cunir wrote:
Tue Jul 03, 2018 2:56 am
I read the other day that Warren Buffett is expecting average annual returns of 7% for US stocks going forward, down from 10%. presumably he knows what he’s talking about. Chuck in some bonds as well and obviously it will be lower.
Where does Mr. Buffet buy his magic eight ball?

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by ignition » Wed Jul 04, 2018 10:07 am

HomerJ wrote:
Wed Jul 04, 2018 9:50 am
ignition wrote:
Wed Jul 04, 2018 7:33 am
I'm hoping 4-5% real for stocks over the next 10-20 years. We'll see what happens.

It's quite interesting to read about Shiller who thinks stocks are way overvalued vs Siegel who thinks stocks are fairly valued.

Also, we can look at 1998 where the CAPE for S&P 500 was 32 (similar level as today). The S&P500 returned 2.5% real over the next decade and 5% real over the next 20 years.
(1) That's a single data point.
Yes.
HomerJ wrote:
Wed Jul 04, 2018 9:50 am
(2) Accounting rules changed in the 2000s so earnings are calculated differently.
Which accounting rules? If you're talking about mark-to-market I believe that was implemented in the early 90's already.
HomerJ wrote:
Wed Jul 04, 2018 9:50 am
(3) 5% real over 20 years isn't too bad (2% lower than historical average) considering we started at "extreme" valuations, and experienced TWO large stock market crashes in that period.

When your worst case (so far, based on one sample point, using outdated earning calculations) is 5% real over 20 years, that's still pretty good.

For a worst case.
Yes, it's a reason to be optimistic I think. Although the worst case could definitely be worse than 5% of course.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by letsgobobby » Wed Jul 04, 2018 10:12 am

Noobvestor wrote:
Tue Jul 03, 2018 12:09 am
AlohaJoe wrote:
Mon Jul 02, 2018 10:02 pm
However, I disagree about the real returns for bonds of 1-2%. I don't see anyone forecasting that high.
  • RA 0.88%
  • Robeco -3%
  • JP Morgan 0.75%
  • BNY Mellon 0.1%
  • Callan 0.5%
  • Blackrock -0.45%
  • GMO -1%
  • AQR 0.4%
  • Schwab 0.9%
No one is really forecasting 1% real return for bonds; everyone seems to come in quite a bit under that. Though admittedly there will be some variation between Treasuries, total bond market, corporates, etc. But I don't think anyone is forecasting any kind of investment grade US debt to be 2% real return.
10-year TIPS are at around .75% right now - forecasting lower than that for the next decade seems strange to me. I guess if you assume longer bonds and rising rates? But if you just wanted to beat the majority of those forecasts, you could do it with ultra-safe, real-return TIPS alone. And I'm no expert, but if safe bonds are yielding that, surely an investor can expect a bit more if they take default/inflation risks, no?
i forecast 1% real for total bonds.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by Dottie57 » Wed Jul 04, 2018 10:14 am

FIREchief wrote:
Tue Jul 03, 2018 5:25 pm
Rick Ferri wrote:
Tue Jul 03, 2018 5:01 pm
BTW, what’s the alternative planning measure? Telling people “Our super-super Monti Carlo simulator predicts your 80/20 portfolio has a 10% chance of you eating dog food when you’re 80 years old”. What good does that do anyone?

It's a lot like another old saying "if you want to make God laugh, just tell him your plans."

If somebody is in their accumulation years, this is the plan I would suggest:
a) live well below your means, buy only what you need and not what you want - place spending priorities on your family's long term well being (this is also good for the soul)
b) save as much as you can and invest aggressively in equities (80/20 minimum)
c) invest in your career and plan to work as long as possible
d) take advantage of as many tax-advantaged savings opportunities as you can
e) track your progress as you approach the end of your career and the long term results will let you tentatively plan for a reasonable FIRE point
f) never give your money away to some guy in a nice suit who tries to convince you that they can find a short cut to FIRE

None of this requires any predictions about the future, and it is likely the path that many FIRE'd Bogleheads chose to reach the promised land.
I think this is good advice for those early in accumulation. I am retired and 80/20 is too high for me. I want to have liquid low volatile assets for the next 8 to 9 years.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by frugalminded » Wed Jul 04, 2018 10:43 am

Trying to learn the language of investing and feeling very mentally challenged (not even sure what to do about SS after reading tons on this site)
We have $550K Traditional/SEP IRA's in VFIJX (slowly building there since 1993/1998).
We are gliding into retirement over the next couple of years and don't need the RMD's.
Income in retirement will more than cover expenses, and we have a lot of cash earning 1.7% in banks.
Somewhere in here I read a piece that indicated tax-free should be in bonds.
Are we in the right stock?
Probably shouldn't have been in there in the first place but is it time to move IRA's to... where ???

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HomerJ
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by HomerJ » Wed Jul 04, 2018 11:35 am

ignition wrote:
Wed Jul 04, 2018 10:07 am
Which accounting rules? If you're talking about mark-to-market I believe that was implemented in the early 90's already.
http://www.philosophicaleconomics.com/2013/12/shiller/

2001 at least had a big change.
Now, FAS 142 may be a more accurate accounting standard than its predecessor, but that isn’t the issue for the Shiller CAPE. The issue for the Shiller CAPE is that the accounting standard is not being applied consistently across time. None of the “reported” earnings numbers used in the Shiller CAPE for years before 2001 were held to the harsh standard of FAS 142. But all of the “reported” earnings numbers used in the metric for years after 2001 were held to that standard. Consequently, any comparison between the present value of the metric and pre-2001 values is a comparison between inconsistently measured data points. The present values end up looking more expensive relative to the past than they actually are.
The J stands for Jay

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nedsaid
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by nedsaid » Wed Jul 04, 2018 12:15 pm

HomerJ wrote:
Wed Jul 04, 2018 11:35 am
ignition wrote:
Wed Jul 04, 2018 10:07 am
Which accounting rules? If you're talking about mark-to-market I believe that was implemented in the early 90's already.
http://www.philosophicaleconomics.com/2013/12/shiller/

2001 at least had a big change.
Now, FAS 142 may be a more accurate accounting standard than its predecessor, but that isn’t the issue for the Shiller CAPE. The issue for the Shiller CAPE is that the accounting standard is not being applied consistently across time. None of the “reported” earnings numbers used in the Shiller CAPE for years before 2001 were held to the harsh standard of FAS 142. But all of the “reported” earnings numbers used in the metric for years after 2001 were held to that standard. Consequently, any comparison between the present value of the metric and pre-2001 values is a comparison between inconsistently measured data points. The present values end up looking more expensive relative to the past than they actually are.
Just looked it up, FAS 142 has to do with the treatment of Goodwill. Let's say that you buy a company in excess of what the accountants say that it is worth, that is Book Value. Book value is $30 a share and you buy the company at $60 a share, the $30 in excess of book value is called goodwill. In the old days, you would write off the $30 a share over 40 years. Now there is an impairment test. If some event happens that negatively affects the value of a company, the accountants have to write off the amount of the impairment immediately rather than as part of a write-off over 40 years. The impairment write-off could be a rather large hit to earnings.

Another change is accounting for stock options. Pretty much, these are now charged as compensation expense and thus reduces earnings. Impressive tech company earnings during the 1990's would have been a lot less impressive had stock options then been charged to expense.

So a couple of examples of accountants making the definition of earnings more and more conservative over the years. I am sure there are other examples over the years.

Larry Swedroe thinks that the effect might be an increase in the P/E multiple of $3 to $4 a share. A P/E ratio of 16 in 1970 might be more like 19 or 20 today. Homer has posted extensively that stocks have exceeded past pessimistic projections of future returns. A big reason for this is that valuation measurements probably make stocks look more expensive than they really are.

Another example is book value. An increasing amount of corporate assets are intangible assets which are difficult for accountants to measure. One thing is the development of intellectual property, hard to say how much a patent is really worth without putting it up for sale and weighing the offers. A pretty good article about good companies that actually have a negative book value. The was a thread that discussed this which also linked to a couple of interesting links. There aren't a lot of companies like this so far but it is an indication that something is amiss with accounting measurements.

Here is a thread discussing the increasing irrelevance of book value:

viewtopic.php?t=248741
A fool and his money are good for business.

randomguy
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by randomguy » Wed Jul 04, 2018 12:24 pm

nedsaid wrote:
Wed Jul 04, 2018 12:15 pm
HomerJ wrote:
Wed Jul 04, 2018 11:35 am
ignition wrote:
Wed Jul 04, 2018 10:07 am
Which accounting rules? If you're talking about mark-to-market I believe that was implemented in the early 90's already.
http://www.philosophicaleconomics.com/2013/12/shiller/

2001 at least had a big change.
Now, FAS 142 may be a more accurate accounting standard than its predecessor, but that isn’t the issue for the Shiller CAPE. The issue for the Shiller CAPE is that the accounting standard is not being applied consistently across time. None of the “reported” earnings numbers used in the Shiller CAPE for years before 2001 were held to the harsh standard of FAS 142. But all of the “reported” earnings numbers used in the metric for years after 2001 were held to that standard. Consequently, any comparison between the present value of the metric and pre-2001 values is a comparison between inconsistently measured data points. The present values end up looking more expensive relative to the past than they actually are.
Just looked it up, FAS 142 has to do with the treatment of Goodwill. Let's say that you buy a company in excess of what the accountants say that it is worth, that is Book Value. Book value is $30 a share and you buy the company at $60 a share, the $30 in excess of book value is called goodwill. In the old days, you would write off the $30 a share over 40 years. Now there is an impairment test. If some event happens that negatively affects the value of a company, the accountants have to write off the amount of the impairment immediately rather than as part of a write-off over 40 years. The impairment write-off could be a rather large hit to earnings.

Another change is accounting for stock options. Pretty much, these are now charged as compensation expense and thus reduces earnings. Impressive tech company earnings during the 1990's would have been a lot less impressive had stock options then been charged to expense.

So a couple of examples of accountants making the definition of earnings more and more conservative over the years. I am sure there are other examples over the years.

Larry Swedroe thinks that the effect might be an increase in the P/E multiple of $3 to $4 a share. A P/E ratio of 16 in 1970 might be more like 19 or 20 today. Homer has posted extensively that stocks have exceeded past pessimistic projections of future returns. A big reason for this is that valuation measurements probably make stocks look more expensive than they really are.

Another example is book value. An increasing amount of corporate assets are intangible assets which are difficult for accountants to measure. One thing is the development of intellectual property, hard to say how much a patent is really worth without putting it up for sale and weighing the offers. A pretty good article about good companies that actually have a negative book value. The was a thread that discussed this which also linked to a couple of interesting links. There aren't a lot of companies like this so far but it is an indication that something is amiss with accounting measurements.

Here is a thread discussing the increasing irrelevance of book value:

viewtopic.php?t=248741
I have seen estimates that it is a 20-25% change. Not sure if Larry's absolute number is more or less accurate. You apply a couple of things you and you can come to a conclusion that stocks are more in the fully valued range versus a highly overvalued and you can talk yourself into another 2% return over the next t 10 years.

But even with accurate numbers it is important to realize that the realistic range of returns is something like 11% to 10%(real) with most of them clustering in the 3-6% range. In 10 years we will look back and go it was obvious that low returns were on the way because of high valuations. Or we will look back and go it was obvious that high returns were on the way because of all the AI breakthroughs (or some other factor). as it is we have no clue. Since it is unknowable you need to have plans to deal with either case. Maybe it is to work til 60 instead of 55 if things don't work out. Maybe it is spend less money and still retire at 55, if we get poor returns. Maybe it is to put off living by saving more money. Pick which one balances your needs and desires.

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nedsaid
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by nedsaid » Wed Jul 04, 2018 12:40 pm

randomguy wrote:
Wed Jul 04, 2018 12:24 pm
nedsaid wrote:
Wed Jul 04, 2018 12:15 pm
Just looked it up, FAS 142 has to do with the treatment of Goodwill. Let's say that you buy a company in excess of what the accountants say that it is worth, that is Book Value. Book value is $30 a share and you buy the company at $60 a share, the $30 in excess of book value is called goodwill. In the old days, you would write off the $30 a share over 40 years. Now there is an impairment test. If some event happens that negatively affects the value of a company, the accountants have to write off the amount of the impairment immediately rather than as part of a write-off over 40 years. The impairment write-off could be a rather large hit to earnings.

Another change is accounting for stock options. Pretty much, these are now charged as compensation expense and thus reduces earnings. Impressive tech company earnings during the 1990's would have been a lot less impressive had stock options then been charged to expense.

So a couple of examples of accountants making the definition of earnings more and more conservative over the years. I am sure there are other examples over the years.

Larry Swedroe thinks that the effect might be an increase in the P/E multiple of $3 to $4 a share. A P/E ratio of 16 in 1970 might be more like 19 or 20 today. Homer has posted extensively that stocks have exceeded past pessimistic projections of future returns. A big reason for this is that valuation measurements probably make stocks look more expensive than they really are.

Another example is book value. An increasing amount of corporate assets are intangible assets which are difficult for accountants to measure. One thing is the development of intellectual property, hard to say how much a patent is really worth without putting it up for sale and weighing the offers. A pretty good article about good companies that actually have a negative book value. The was a thread that discussed this which also linked to a couple of interesting links. There aren't a lot of companies like this so far but it is an indication that something is amiss with accounting measurements.

Here is a thread discussing the increasing irrelevance of book value:

viewtopic.php?t=248741
I have seen estimates that it is a 20-25% change. Not sure if Larry's absolute number is more or less accurate. You apply a couple of things you and you can come to a conclusion that stocks are more in the fully valued range versus a highly overvalued and you can talk yourself into another 2% return over the next t 10 years.

But even with accurate numbers it is important to realize that the realistic range of returns is something like 11% to 10%(real) with most of them clustering in the 3-6% range. In 10 years we will look back and go it was obvious that low returns were on the way because of high valuations. Or we will look back and go it was obvious that high returns were on the way because of all the AI breakthroughs (or some other factor). as it is we have no clue. Since it is unknowable you need to have plans to deal with either case. Maybe it is to work til 60 instead of 55 if things don't work out. Maybe it is spend less money and still retire at 55, if we get poor returns. Maybe it is to put off living by saving more money. Pick which one balances your needs and desires.
This gets to be pretty sophisticated stuff even for more experienced investors like me. Hard to say how much a change accounting standards have made in market P/E but I would take Larry Swedroe's opinion as a well informed guess. The fact that market P/E ratios have creeped up over the years suggest pretty strongly that the market has adjusted to accounting standards.

I remember Rx4investing. He wrote interesting posts and he posted extensively about the markets being overvalued. He was rather mechanical in his approach and I kept pointing out to him that he needed to update his assumptions to take into account changing accounting standards. I hammered him pretty hard on this though I also told him to keep posting as he expressed an important point of view. I hope I didn't run him off the forum, that wasn't my intent. Markets and the economy are dynamic and we as investors have to adjust, a static approach that worked 30-40 years ago may not work today. Rx4investing seemed to believe that the markets were simply making stocks more and more expensive over time. My point was that the market participants are very smart and that they were on to something. Stocks only seem to be more expensive than they used to be.

Homer made a pretty important point about FAS 142, for the market it is sort of a B.C. and A.D. sort of thing. Comparisons of P/E ratios between the two eras are flawed because this alone was a pretty dramatic accounting change.
A fool and his money are good for business.

letsgobobby
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by letsgobobby » Wed Jul 04, 2018 2:23 pm

FAS142 raises CAPE10 about 15% per Larry, IIRC. So 32 today is more like 27 twenty years ago. High, but nothing like 2000. figure also the very low earnings of 2008 have now begun to drop off and we might land at the equivalent of 25 in six months if the market were to stay flat. not much to get excited about.

tony g
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by tony g » Wed Jul 04, 2018 5:02 pm

Silk McCue wrote:
Wed Jul 04, 2018 9:33 am
Rick Ferri wrote:
Mon Jul 02, 2018 7:42 pm
I would use up to 5.0% for that allocation if the bond side is in the intermediate-term corporate fund. Less if you use Treasuries.
Thanks for the perspective. I just adjusted my modeling from 7% to 5% and my plan is still good for our retirement in 2.5 years when we will be 60/62. We have a COLA'd pension as our income base and plan to take SS at 68/70 or 70/70 as determined when we get there. I'll use the these numbers until proven otherwise. If they do better then it's all upside.

I am in VG Target Date Fund 2025, current allocation 62/38. I am considering moving the bond portion to a 5 year CD paying 4.2%. I am certain that I will not need those funds before the 5 years is up. What is your opinion on this approach and what are my downside risks in doing so?

Thank you for your time.

Cheers
Just curious ... where did you find a CD paying 4.2%? I just looked and the best (newly issued) 5 yr FDIC CD were being issued at 3.3%. Heck, 5 year MYGAs (with a B++ AM Best rating) are only paying 3.7% ... no FDIC insurance and many caveats with this. ???
Tony

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by Silk McCue » Wed Jul 04, 2018 5:34 pm

tony g wrote:
Wed Jul 04, 2018 5:02 pm
Just curious ... where did you find a CD paying 4.2%? I just looked and the best (newly issued) 5 yr FDIC CD were being issued at 3.3%. Heck, 5 year MYGAs (with a B++ AM Best rating) are only paying 3.7% ... no FDIC insurance and many caveats with this. ???
Tony
Achievacu.com. You can becone a member pretty easily without living in their service area. Here is a link inside a thread that I was a part of. The rate has been up for over a month. Good luck.

viewtopic.php?f=10&t=249535&p=3943461#p3942908

Enter any county to see a the rates.

https://www.achievacu.com/Home/Rates


Cheers
Last edited by Silk McCue on Thu Jul 05, 2018 10:17 am, edited 1 time in total.

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Toons
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by Toons » Wed Jul 04, 2018 5:41 pm

5 percent
:happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

BogleBoogie
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by BogleBoogie » Wed Jul 04, 2018 6:13 pm

For those who will be in accumulation phase for the next 10 years, a lower return (3-5%) isn't necessarily a bad thing, correct? Or am I missing something?

balbrec2
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by balbrec2 » Wed Jul 04, 2018 9:32 pm

Dottie57 wrote:
Wed Jul 04, 2018 10:00 am
Cunir wrote:
Tue Jul 03, 2018 2:56 am
I read the other day that Warren Buffett is expecting average annual returns of 7% for US stocks going forward, down from 10%. presumably he knows what he’s talking about. Chuck in some bonds as well and obviously it will be lower.
Where does Mr. Buffet buy his magic eight ball?
Not according to the Buffett model, found at guru focus
https://www.gurufocus.com/stock-market-valuations.php

letsgobobby
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by letsgobobby » Wed Jul 04, 2018 10:10 pm

BogleBoogie wrote:
Wed Jul 04, 2018 6:13 pm
For those who will be in accumulation phase for the next 10 years, a lower return (3-5%) isn't necessarily a bad thing, correct? Or am I missing something?
I agree. I'd actually like to see -5% real, if only I can be promised the world will recover immediately after.

davidsorensen32
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by davidsorensen32 » Wed Jul 04, 2018 10:12 pm

+1

5% for next decade it is.
Rick Ferri wrote:
Tue Jul 03, 2018 9:11 am
I disagree that predicting 10 year returns is a random event. There is no randomness in a the expected return of a 10-year zero coupon bond. It is 2.87%. That’s an absolute number which all other expect returns can be derived by adding expected risk premiums.

randomguy
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by randomguy » Thu Jul 05, 2018 2:57 am

BogleBoogie wrote:
Wed Jul 04, 2018 6:13 pm
For those who will be in accumulation phase for the next 10 years, a lower return (3-5%) isn't necessarily a bad thing, correct? Or am I missing something?
It depends on if you believe that if we have poor returns now, that it will lead to great returns later. In US history that has been pretty much true. Last 30 years in japan, not so much.:) Every now and then things change the previous assumptions no longer hold

In reality think about how we get to 3-5% returns. It is by doing 8-15%/year except for those 1-2 years where we lose 15-30%. Depending on when that loss happens matters a lot to people adding or removing money from accounts.

If in 10 years we have had 3-5% returns AND our PE10s (for a real simplified model of what influence future returns) are still at 30, you are in the same place you started. Your expectations for the future are not different than today. If those PE10s have shrunk to 15, you might be more optimistic about future returns. Or if they have expanded to 40, you might be even more pessimistic:)

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by A-Commoner » Thu Jul 05, 2018 7:19 am

I remember the lost decade of 2000-2010. My asset allocation the whole time was set at 70:30 (stock:bond). My net worth at the top of the dot com bubble was $100k. Then we had the popping of the bubble, recession, the terrorist attacks of 911, the Iraq war, the real estate bubble, the global financial crisis and recession of 2008-2009. In the summer of 2010, my net worth hit $1 million (excluding equity in our house). Continued savings during that terrible decade, plowing money into stocks and bonds, staying the course, and the fortuitous sale of our medical practice to a hospital all helped turn a disaster of a decade into a boon for my net worth. Just a data point to share.

Dottie57
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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by Dottie57 » Thu Jul 05, 2018 11:58 am

A-Commoner wrote:
Thu Jul 05, 2018 7:19 am
I remember the lost decade of 2000-2010. My asset allocation the whole time was set at 70:30 (stock:bond). My net worth at the top of the dot com bubble was $100k. Then we had the popping of the bubble, recession, the terrorist attacks of 911, the Iraq war, the real estate bubble, the global financial crisis and recession of 2008-2009. In the summer of 2010, my net worth hit $1 million (excluding equity in our house). Continued savings during that terrible decade, plowing money into stocks and bonds, staying the course, and the fortuitous sale of our medical practice to a hospital all helped turn a disaster of a decade into a boon for my net worth. Just a data point to share.
Your story holds for me too. Steadily investing through that time period really worked. I hit 1m. About 4 yrs ago.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by tennisplyr » Fri Jul 06, 2018 9:51 am

Rick Ferri wrote:
Tue Jul 03, 2018 9:11 am
I disagree that predicting 10 year returns is a random event. There is no randomness in a the expected return of a 10-year zero coupon bond. It is 2.87%. That’s an absolute number which all other expect returns can be derived by adding expected risk premiums.
He's talking 80% equities, do you know that?
Those who move forward with a happy spirit will find that things always work out.

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Re: Expected returns for 80/20 stock bond for next 10 years.

Post by vineviz » Fri Jul 06, 2018 10:05 am

tennisplyr wrote:
Fri Jul 06, 2018 9:51 am
Rick Ferri wrote:
Tue Jul 03, 2018 9:11 am
I disagree that predicting 10 year returns is a random event. There is no randomness in a the expected return of a 10-year zero coupon bond. It is 2.87%. That’s an absolute number which all other expect returns can be derived by adding expected risk premiums.
He's talking 80% equities, do you know that?
He does. It's evident in the excerpt you quoted. The 10 year zero coupon bond is being used as a proxy for the risk-free rate, to which the expected equity risk premium is added to arrive as the expected nominal 10 year return for stocks.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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