Morningstar: prepare for a lost decade for U.S. stocks

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asset_chaos
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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by asset_chaos » Sun Jul 08, 2018 5:00 pm

FIREchief wrote:
Sun Jul 08, 2018 12:42 am
asset_chaos wrote:
Sat Jul 07, 2018 11:49 pm
After all Bogle makes these decadal return predictions all the time, and the chart in the OP looks like it's made using Bogle's stated methodology or something very close to it.
This may be shocking, blasphemy, or both. I really don't care what Bogle's "methodology" predicts. He may be a very smart man, but his crystal ball is no better than anybody else's. Also, I didn't realize that Jack used CAPE-10 as the basis for his predictions. That is the silliest approach of them all. If you use anything other than CAPE-10 (such as the last four quarters P/E), you get nowhere near a zero percent prediction for future returns. S&P is estimating a June P/E of 21.61. Please run that though Jack's methodology and let us know what you come up with.
I think we'd see that no concrete prediction is being made at all because the prediction for the best performing asset would overlap substantially with the prediction for the worst performing.
Hopefully you'll admit that an article titled "prepare for a lost decade for U.S. stocks" constitutes a prediction for zero return over the next ten years.
Yeah, that's what I meant by some of the posts were getting a bit snippy---and I'll admit uncivil---in tone.
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WanderingDoc
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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by WanderingDoc » Sun Jul 08, 2018 6:03 pm

JoMoney wrote:
Sun Jul 08, 2018 4:51 pm
WanderingDoc wrote:
Sun Jul 08, 2018 3:35 pm
...
Invest in real estate. If your property values go up 10% or go down 10%, you won't care since your 10-15% dividend in the form of rental income flows in like a fine brandy 8-)
:D :D :D A 10% cap rate can be hard to find in the majority of markets. There are parts of California where purchasing a home can only be justified on the expectation of future rising in price. If you can buy a home at 15% rate, and have no concerns about being able to keep it rented or selling it to get your money back, that would be a no-brainer.
Don't say cap rate. That term has zero value and no use for single family homes/condos, nor 2-4 unit deals. This term is butchered and misused by turnkey companies, real estate agents. etc. If someone is advertising cap rates on a 4 unit or less property, run. Far away. Even on larger apartments, not all firms have a solid understanding of it. Use "return on cash", "cash on cash return", or IRR (if you understand this concept).

That said, half of my portfolio has >100% return or actually an infinite return. I cash out refi'd my initial investment or more (tax free by the way) out of these deals, so I have $0 in them, while still getting monthly income, tax benefits, depreciation, principal paydown by tenants, inflation hedging by carrying long term fixed rate financing, and equity growth.

Several markets in CA comprise most of the Top 10 highest returning real estate markets. People have been saying since the 1960s "don't speculate on appreciation", meanwhile those who diligently bought and held in CA are sitting pretty. Come back100 years from now, people (who wish they had invested sooner) will still whine and call investors in appreciating markets "gamblers". I guess Warren Buffet is gambling on capital appreciation of assets as well.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

Freefun
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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by Freefun » Sun Jul 08, 2018 6:16 pm

I predict returns will be a good deal lower - however my track record at predicting these things sucks. Since I will retire soon I'm building a bond tent.

https://www.kitces.com/blog/managing-po ... -red-zone/
Remember when you wanted what you currently have?

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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by jibantik » Sun Jul 08, 2018 6:19 pm

willthrill81 wrote:
Sun Jul 08, 2018 9:54 am
Perhaps because Bogle doesn't care for international stocks?
Yes, I follow his logic, not his implementation. I never understood why he would say one thing and do another. Then again, there are people who make a good living doing that every Sunday.

I have a great respect for Mr. Bogle, but I do disagree with his stance on international using HIS logic :shock:.

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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by david1082b » Sun Jul 08, 2018 7:03 pm

WanderingDoc wrote:
Sun Jul 08, 2018 3:35 pm
Invest in real estate. If your property values go up 10% or go down 10%, you won't care since your 10-15% dividend in the form of rental income flows in like a fine brandy 8-)
Would it be 10-15% income if everyone tried doing that?

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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by FIREchief » Sun Jul 08, 2018 7:40 pm

retiringwhen wrote:
Sun Jul 08, 2018 3:01 pm
Also, if you read between the lines, all that I can see he ever did was lighten his equity position as part of an overall asset allocation more quickly than he may have earlier planned. I doubt there are 1% of the participants on this board who can say they have never done something like that...
I can easily say that, and I highly doubt that I am only one out of 100. 8-)
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Starchild
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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by Starchild » Sun Jul 08, 2018 7:53 pm

I wonder what % of people with any sort or investment/retirement plan even acknowledges any of this?

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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by WanderingDoc » Sun Jul 08, 2018 9:34 pm

david1082b wrote:
Sun Jul 08, 2018 7:03 pm
WanderingDoc wrote:
Sun Jul 08, 2018 3:35 pm
Invest in real estate. If your property values go up 10% or go down 10%, you won't care since your 10-15% dividend in the form of rental income flows in like a fine brandy 8-)
Would it be 10-15% income if everyone tried doing that?
I don't understand your question. That is a decent return on cash to aim for Year 1 after purchase of income-producing real estate. Of course, that is not factoring in tax benefits or principal paydown or appreciation.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

rick2427
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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by rick2427 » Sun Jul 08, 2018 9:53 pm

I thought we already had a lost decade in US markets from 2000-2009. :(

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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by tibbitts » Sun Jul 08, 2018 10:00 pm

WanderingDoc wrote:
Sun Jul 08, 2018 9:34 pm
david1082b wrote:
Sun Jul 08, 2018 7:03 pm
WanderingDoc wrote:
Sun Jul 08, 2018 3:35 pm
Invest in real estate. If your property values go up 10% or go down 10%, you won't care since your 10-15% dividend in the form of rental income flows in like a fine brandy 8-)
Would it be 10-15% income if everyone tried doing that?
I don't understand your question. That is a decent return on cash to aim for Year 1 after purchase of income-producing real estate. Of course, that is not factoring in tax benefits or principal paydown or appreciation.
Also not factoring in the new roof and foundation work that with my luck I'd need to buy in that first year.
Last edited by tibbitts on Sun Jul 08, 2018 10:21 pm, edited 1 time in total.

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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by tibbitts » Sun Jul 08, 2018 10:01 pm

rick2427 wrote:
Sun Jul 08, 2018 9:53 pm
I thought we already had a lost decade in US markets from 2000-2009. :(
We did. I guess we get a second one now.

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willthrill81
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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by willthrill81 » Sun Jul 08, 2018 10:13 pm

rick2427 wrote:
Sun Jul 08, 2018 9:53 pm
I thought we already had a lost decade in US markets from 2000-2009. :(
More than 10% of the historic ten year periods have been 'lost decades' for U.S. stocks. It's just part of the deal.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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FIREchief
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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by FIREchief » Sun Jul 08, 2018 10:18 pm

Starchild wrote:
Sun Jul 08, 2018 7:53 pm
I wonder what % of people with any sort or investment/retirement plan even acknowledges any of this?
Acknowledges what????
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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munemaker
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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by munemaker » Sun Jul 08, 2018 10:35 pm

CULater wrote:
Thu Jul 05, 2018 8:19 am
“Our expectation at the moment is that you won’t have any real return from U.S. equities over the next 10 years,” said Morningstar’s Dan Kemp at a company event Wednesday in London. In the chart he shared below, the black line is pretty close to zero for American stocks.
...

Is it finally time to go anti-Bogle and get into foreign stocks big-time?
Nobody knows nuttin'! Ignore the noise and financial porn. Stay the course.

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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by WanderingDoc » Sun Jul 08, 2018 10:58 pm

tibbitts wrote:
Sun Jul 08, 2018 10:00 pm
WanderingDoc wrote:
Sun Jul 08, 2018 9:34 pm
david1082b wrote:
Sun Jul 08, 2018 7:03 pm
WanderingDoc wrote:
Sun Jul 08, 2018 3:35 pm
Invest in real estate. If your property values go up 10% or go down 10%, you won't care since your 10-15% dividend in the form of rental income flows in like a fine brandy 8-)
Would it be 10-15% income if everyone tried doing that?
I don't understand your question. That is a decent return on cash to aim for Year 1 after purchase of income-producing real estate. Of course, that is not factoring in tax benefits or principal paydown or appreciation.
Also not factoring in the new roof and foundation work that with my luck I'd need to buy in that first year.
Of course repairs and capital expenditures would factor into your analysis of the property before purchasing. Repairs may be 3-6% of the gross rents and CapEx could be 5% of gross rents or a dollar amount such as $50/unit/month or $300/unit/year. Condos of course would have repairs but 0% CapEx since all CapEx in that case are covered by maintenance fees.

Remember, to replace a $300 fridge at year 10 is only $30 per in your CapEx budget (just an example, a fridge replacement could just as easily be classified as a repair in your calcs). To replace a $6000 roof in 30 years is only $200 per year in CapEx. In my condos, my CapEx has been 0% as previously stated, long terms repairs have been ~2.5% of gross rents long term.

As an example, a $25K down payment on a $120K property, would yield $2.5K per year - thats your 10% income figure. For a nicer asset in a better location, 6-8% is reasonable. For a "Class C" asset, blue collar tenants, I would expect a lower purchase price and a rental yield of 12-18% for it to be worth it. Those figures do no include capital appreciation nor tax incentives. Hope that helped.

"Accidental landlords" don't think and analyze like I stated above, so they get mediocre returns. To me, a total return of less than 30% on a leveraged real estate deal is mediocre. These folks "try out real estate". Well, that isn't real estate investing. That is dabbling in real estate. Not the same thing. If you are going to spend your own time on something, make sure you are buying a great deal.
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TheTimeLord
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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by TheTimeLord » Mon Jul 09, 2018 8:47 am

WanderingDoc wrote:
Sun Jul 08, 2018 10:58 pm
tibbitts wrote:
Sun Jul 08, 2018 10:00 pm
WanderingDoc wrote:
Sun Jul 08, 2018 9:34 pm
david1082b wrote:
Sun Jul 08, 2018 7:03 pm
WanderingDoc wrote:
Sun Jul 08, 2018 3:35 pm
Invest in real estate. If your property values go up 10% or go down 10%, you won't care since your 10-15% dividend in the form of rental income flows in like a fine brandy 8-)
Would it be 10-15% income if everyone tried doing that?
I don't understand your question. That is a decent return on cash to aim for Year 1 after purchase of income-producing real estate. Of course, that is not factoring in tax benefits or principal paydown or appreciation.
Also not factoring in the new roof and foundation work that with my luck I'd need to buy in that first year.
Of course repairs and capital expenditures would factor into your analysis of the property before purchasing. Repairs may be 3-6% of the gross rents and CapEx could be 5% of gross rents or a dollar amount such as $50/unit/month or $300/unit/year. Condos of course would have repairs but 0% CapEx since all CapEx in that case are covered by maintenance fees.

Remember, to replace a $300 fridge at year 10 is only $30 per in your CapEx budget (just an example, a fridge replacement could just as easily be classified as a repair in your calcs). To replace a $6000 roof in 30 years is only $200 per year in CapEx. In my condos, my CapEx has been 0% as previously stated, long terms repairs have been ~2.5% of gross rents long term.

As an example, a $25K down payment on a $120K property, would yield $2.5K per year - thats your 10% income figure. For a nicer asset in a better location, 6-8% is reasonable. For a "Class C" asset, blue collar tenants, I would expect a lower purchase price and a rental yield of 12-18% for it to be worth it. Those figures do no include capital appreciation nor tax incentives. Hope that helped.

"Accidental landlords" don't think and analyze like I stated above, so they get mediocre returns. To me, a total return of less than 30% on a leveraged real estate deal is mediocre. These folks "try out real estate". Well, that isn't real estate investing. That is dabbling in real estate. Not the same thing. If you are going to spend your own time on something, make sure you are buying a great deal.
My observation is that successful landlords are able to treat tenants was replaceable temporary objects instead of people because to make money you have to do repairs in a very cost efficient way that is likely very different than you would have done to you home or with your family. Which leads me to believe that people with jobs that require them to compartmentalize are likely more successful at being a landlord than someone who is naturally empathetic. So if this is the case shouldn't the first think you do before deciding to purchase rental property shave an honest assessment of your personality and behavior to understand if you are someone who is likely to overspend on repairs and upgrades?
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]

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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by ChinchillaWhiplash » Mon Jul 09, 2018 9:28 am

I think US equities will be down and can almost guarantee that they will be. My reasoning is that it keeps getting posted that this will happen in financial news. Why does this matter? The general population of investors will follow this info and invest accordingly. Herd mentality. Sell off of US equities will occur and buying of international will occur. This will shift markets in favor or international. I think investors who stay the course are a minority so the majority will have more sway in which way things go. That's my $0.02 on the subject. So question is do you follow the herd of hold your ground?

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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by nedsaid » Mon Jul 09, 2018 9:29 am

packer16 wrote:
Sun Jul 08, 2018 11:47 am
What all the doom & gloomers forget is that the valuation adjustment they make is based upon reversion to some mean P/E over time. The mean P/E is based upon an average interest rate over the time of measurement. Therefore, for the valuation adjustment to be valid interest rates will have to mean revert to the historical average. The interest rates to make this true is 5 to 6%. So the implicit assumption they make in their adjustment is interest rate will rise to 5 to 6%. How many of these folks are willing to make that bet also?

Packer
This is a great point. Interest rates may not revert to 5% or 6% and I don't see any predictions that they will get there. My guess is that the 10 year Treasury might eventually get to 4% but it struggles now to get much past 3%. Short term interest rates have ticked up but longer term rates are not going along with the program. This suggests that the market believes that inflation will continue to be well behaved. What I will say, is that it certainly is not impossible for interest rates to revert back to 5% to 6%, it just doesn't seem to be in the cards right now.

Also lost in this is that accounting standards have changed, thus the definition of earnings has become more conservative over time. A P/E ratio of 16 in 1970 might be more like a P/E ratio of 19 or 20 today. Pretty much, the measuring rod has changed and the market has recognized that. This suggests to me that stocks look more expensive than they really are.
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JoMoney
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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by JoMoney » Mon Jul 09, 2018 9:36 am

ChinchillaWhiplash wrote:
Mon Jul 09, 2018 9:28 am
I think US equities will be down and can almost guarantee that they will be. My reasoning is that it keeps getting posted that this will happen in financial news. Why does this matter? The general population of investors will follow this info and invest accordingly. Herd mentality. Sell off of US equities will occur and buying of international will occur. This will shift markets in favor or international. I think investors who stay the course are a minority so the majority will have more sway in which way things go. That's my $0.02 on the subject. So question is do you follow the herd of hold your ground?
Can't say I agree with your sentiment, but it's an absolute certainty that in aggregate "the herd" will not beat themselves and achieve anything extra in aggregate. Better to 'hold your ground' and stay the course then to be among the "behavioral gap"
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by jeffyscott » Mon Jul 09, 2018 9:49 am

WanderingDoc wrote:
Sun Jul 08, 2018 10:58 pm
As an example, a $25K down payment on a $120K property, would yield $2.5K per year - thats your 10% income figure.
I guess I would see $2500 per year on a $120,000 property as 2.1%. You are just leveraging that up by borrowing.

While the properties may appreciate in value, they may also decline or have higher than expected repair and maintenance expenses. In addition, there is the risk of unexpected vacancy rates. I think these risks are magnified by the leverage.
press on, regardless - John C. Bogle

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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by jeffyscott » Mon Jul 09, 2018 9:53 am

TheTimeLord wrote:
Mon Jul 09, 2018 8:47 am
My observation is that successful landlords are able to treat tenants was replaceable temporary objects instead of people because to make money you have to do repairs in a very cost efficient way that is likely very different than you would have done to you home or with your family. Which leads me to believe that people with jobs that require them to compartmentalize are likely more successful at being a landlord than someone who is naturally empathetic. So if this is the case shouldn't the first think you do before deciding to purchase rental property shave an honest assessment of your personality and behavior to understand if you are someone who is likely to overspend on repairs and upgrades?
This is an excellent point. Whenever my daughter (who lives in poverty) talks about doing this, she always says something like: "of course, I would charge reasonable rent, not like those others...". And I think, but don't say: "why do you think that you should, in effect, give money to some stranger because they happen to be renting from you".
press on, regardless - John C. Bogle

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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by WanderingDoc » Mon Jul 09, 2018 11:34 am

jeffyscott wrote:
Mon Jul 09, 2018 9:49 am
WanderingDoc wrote:
Sun Jul 08, 2018 10:58 pm
As an example, a $25K down payment on a $120K property, would yield $2.5K per year - thats your 10% income figure.
I guess I would see $2500 per year on a $120,000 property as 2.1%. You are just leveraging that up by borrowing.

While the properties may appreciate in value, they may also decline or have higher than expected repair and maintenance expenses. In addition, there is the risk of unexpected vacancy rates. I think these risks are magnified by the leverage.
Leverage is the best feature of real estate. I wouldnt invest in it if I had to purchase cash. Properties declining in value? I am talking about cash flow/income. If my property values went to $0, I wouldn't care since the cash flow is what makes me financial independent through real estate income alone.

Leverage in real estate is what enables you to legally pay no taxes on rental real estate, and get payed 5 ways, instead of 1 like an index fund.

Leverage also mitigates legal risk since the less equity in the property, the less the lawyer has to go after. Leverage on a stock is a totally different animal.

The total return on a typical leveraged real estate deal is 30-40%. Some property in my portfolio pays me every month that I have $0 in, ie. a return of infinity. Real estate is a different way of thinking than stocks and bonds.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

WanderingDoc
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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by WanderingDoc » Mon Jul 09, 2018 11:37 am

TheTimeLord wrote:
Mon Jul 09, 2018 8:47 am
WanderingDoc wrote:
Sun Jul 08, 2018 10:58 pm
tibbitts wrote:
Sun Jul 08, 2018 10:00 pm
WanderingDoc wrote:
Sun Jul 08, 2018 9:34 pm
david1082b wrote:
Sun Jul 08, 2018 7:03 pm


Would it be 10-15% income if everyone tried doing that?
I don't understand your question. That is a decent return on cash to aim for Year 1 after purchase of income-producing real estate. Of course, that is not factoring in tax benefits or principal paydown or appreciation.
Also not factoring in the new roof and foundation work that with my luck I'd need to buy in that first year.
Of course repairs and capital expenditures would factor into your analysis of the property before purchasing. Repairs may be 3-6% of the gross rents and CapEx could be 5% of gross rents or a dollar amount such as $50/unit/month or $300/unit/year. Condos of course would have repairs but 0% CapEx since all CapEx in that case are covered by maintenance fees.

Remember, to replace a $300 fridge at year 10 is only $30 per in your CapEx budget (just an example, a fridge replacement could just as easily be classified as a repair in your calcs). To replace a $6000 roof in 30 years is only $200 per year in CapEx. In my condos, my CapEx has been 0% as previously stated, long terms repairs have been ~2.5% of gross rents long term.

As an example, a $25K down payment on a $120K property, would yield $2.5K per year - thats your 10% income figure. For a nicer asset in a better location, 6-8% is reasonable. For a "Class C" asset, blue collar tenants, I would expect a lower purchase price and a rental yield of 12-18% for it to be worth it. Those figures do no include capital appreciation nor tax incentives. Hope that helped.

"Accidental landlords" don't think and analyze like I stated above, so they get mediocre returns. To me, a total return of less than 30% on a leveraged real estate deal is mediocre. These folks "try out real estate". Well, that isn't real estate investing. That is dabbling in real estate. Not the same thing. If you are going to spend your own time on something, make sure you are buying a great deal.
My observation is that successful landlords are able to treat tenants was replaceable temporary objects instead of people because to make money you have to do repairs in a very cost efficient way that is likely very different than you would have done to you home or with your family. Which leads me to believe that people with jobs that require them to compartmentalize are likely more successful at being a landlord than someone who is naturally empathetic. So if this is the case shouldn't the first think you do before deciding to purchase rental property shave an honest assessment of your personality and behavior to understand if you are someone who is likely to overspend on repairs and upgrades?
This isn't Burger King "Have it your Way". The solution to what you stated is simple - hire a property manager. Just get monthly statements in your email and never talk to the tenant. Problem solved.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by FIREchief » Mon Jul 09, 2018 8:18 pm

The following link downloads the latest Excel spreadsheet from Standard and Poors' website, outlining recent historical and forecasted future market earnings performance.

https://us.spindices.com/documents/addi ... nload=true

This download is linked to the following webpage under <additional info>, <index earnings>:

https://us.spindices.com/indices/equity/sp-500

The spreadsheet appears to indicate that Standard and Poors is forecasting annual growth in the S&P 500 index earnings over the next five years of 14.77%, with a 2018 P/E (operating earnings) of 17.33. Also note that actual operating margins have exceeded 10% for the past four quarters and exceeded 11% for the first quarter 2018.

Question: Since Standard and Poors' expectations for the next five years are so rosey, why are all the experts still telling us that we're in for a decade of ridiculously low (by historical standards) market returns?
Last edited by FIREchief on Mon Jul 09, 2018 9:44 pm, edited 2 times in total.
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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by vineviz » Mon Jul 09, 2018 8:32 pm

FIREchief wrote:
Mon Jul 09, 2018 8:18 pm
The following link downloads the latest Excel spreadsheet from Standard and Poors' website, outlining recent historical and forecasted future market performance.

https://us.spindices.com/documents/addi ... nload=true
Nowhere in that spreadsheet is there a forecast of market returns.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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FIREchief
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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by FIREchief » Mon Jul 09, 2018 8:57 pm

vineviz wrote:
Mon Jul 09, 2018 8:32 pm
FIREchief wrote:
Mon Jul 09, 2018 8:18 pm
The following link downloads the latest Excel spreadsheet from Standard and Poors' website, outlining recent historical and forecasted future market performance.

https://us.spindices.com/documents/addi ... nload=true
Nowhere in that spreadsheet is there a forecast of market returns.
Cell D40. (ESTIMATES&PES tab)
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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vineviz
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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by vineviz » Mon Jul 09, 2018 9:19 pm

FIREchief wrote:
Mon Jul 09, 2018 8:57 pm
vineviz wrote:
Mon Jul 09, 2018 8:32 pm
FIREchief wrote:
Mon Jul 09, 2018 8:18 pm
The following link downloads the latest Excel spreadsheet from Standard and Poors' website, outlining recent historical and forecasted future market performance.

https://us.spindices.com/documents/addi ... nload=true
Nowhere in that spreadsheet is there a forecast of market returns.
Cell D40. (ESTIMATES&PES tab)
That’s an estimate of EPS, not a return forecast.

And EPS estimates are notoriously optimistic. And wrong.
Plenty of research throws doubt on the ability of analysts to predict earnings far in advance, and this is borne by the evidence. According to Standard & Poors, only 9% of analysts were able to forecast current quarter EPS correctly in the last five years.
https://www.forbes.com/sites/raulelizal ... ptimistic/
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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by FIREchief » Mon Jul 09, 2018 9:41 pm

vineviz wrote:
Mon Jul 09, 2018 9:19 pm
FIREchief wrote:
Mon Jul 09, 2018 8:57 pm
Cell D40. (ESTIMATES&PES tab)
That’s an estimate of EPS, not a return forecast.
You are correct. That said, with a forecasted P/E for 2018 of 17, and an estimate of 14% annual earnings growth for the entire S&P 500, my point remains the same. Even if the earnings only go up half that much over each of the next five years, I see little reason for all these dire forcasts of a lost decade or, at the very least, 3% - 4% real returns. Those all seem to emanate from blindly following CAPE-10 and/or historical "risk premiums versus 10 year treasuries."
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: Morningstar: prepare for a lost decade for U.S. stocks

Post by Rick Ferri » Tue Jul 10, 2018 8:05 am

S&P forecast earnings growth out to 2020+ are already priced into stocks. That’s why the S&P 500 is trading at a 25+ current earnings multiple.

The probability of a lower long-term stock return increases as more people believe a robust scenerio for earnings growth in the short-term and push prices higher. In effect, we’ve borrowed return from future expected earnings to create the great run in stock prices over the past few years.

In the end, we only get what the economy produces. Graham said in the short run the market is a voting machine, and in the long run it is a weighing machine.

The risks are 1) rising interest rates compete with stocks 2) robust earnings growth doesn’t continue as forecast 3) the risk of a more subdued forecast for 2020 and beyond.

Taking all this into consideration, even though earnings forecasts are higher in the short-run, stock return forecasts are lower over the next ten years.

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

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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by FIREchief » Tue Jul 10, 2018 10:56 am

Rick Ferri wrote:
Tue Jul 10, 2018 8:05 am
S&P forecast earnings growth out to 2020+ are already priced into stocks. That’s why the S&P 500 is trading at a 25+ current earnings multiple.
According to the Standard and Poors link, they are projecting a 2018 P/E of 17 based upon current prices. How is this a 25+ earnings multiple?
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: Morningstar: prepare for a lost decade for U.S. stocks

Post by FIREchief » Tue Jul 10, 2018 11:04 am

Rick Ferri wrote:
Tue Jul 10, 2018 8:05 am
The risks are 1) rising interest rates compete with stocks 2) robust earnings growth doesn’t continue as forecast 3) the risk of a more subdued forecast for 2020 and beyond.
But all of these factors can go both directions. Rates may continue to "not rise", earnings growth could exceed forecasts and future forecasts could increase. EMH may take a beating at times (and at times well deserved), but I'm just not seeing inefficient pricing as you've described at this point.
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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by garlandwhizzer » Tue Jul 10, 2018 1:35 pm

Rick wrote:

The risks are 1) rising interest rates compete with stocks 2) robust earnings growth doesn’t continue as forecast 3) the risk of a more subdued forecast for 2020 and beyond.

Taking all this into consideration, even though earnings forecasts are higher in the short-run, stock return forecasts are lower over the next ten years.
I agree with Rick's analysis completely. Predicting the future is impossible but as far as predictions go, this one is IMO rationally based and the most likely central outcome with a significant dispersion of results on either the positive or negative side. Nothing is written in stone but for the purposes of financial planning I think it is a mistake to completely ignore it. Other accomplished and experienced market sages--Larry, Bogle, Grantham, Arnott, Asness--come to similar conclusions.

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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by willthrill81 » Tue Jul 10, 2018 2:11 pm

garlandwhizzer wrote:
Tue Jul 10, 2018 1:35 pm
Nothing is written in stone but for the purposes of financial planning I think it is a mistake to completely ignore it.
I believe that it depends on the assumptions one is making for planning purposes already. Many here are using historically low return estimates like 3% real or even lower for periods longer than a decade, independent of anyone's predictions of future returns. Prognostications from Morningstar, Vanguard, and any 'experts', even if they were known a priori to be valid, aren't going to move the needle much for such people.

I don't use a 'set' real return estimate because our savings rate is the far bigger driver in how long it will take for us to become financially independent; a difference of 5% real and 1% real would only add a couple of years or so to our needed time frame and wouldn't change anything significantly in our plan.

Who really needs to pay attention to such predictions are the pension fund managers who are using 7% real or even higher projections for planning purposes.
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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by MIretired » Tue Jul 10, 2018 2:17 pm

FIREchief wrote:
Tue Jul 10, 2018 10:56 am
Rick Ferri wrote:
Tue Jul 10, 2018 8:05 am
S&P forecast earnings growth out to 2020+ are already priced into stocks. That’s why the S&P 500 is trading at a 25+ current earnings multiple.
According to the Standard and Poors link, they are projecting a 2018 P/E of 17 based upon current prices. How is this a 25+ earnings multiple?
Been digging around on Morning.* about definitions of earnings and growth.
3 things: There is TTM net earnings (sometimes called reported earnings) (TTM) is trailing twelve month.
TTM operating earnings ( not sure if this means EBITDA, but, you know, just from operations, not balance sheet adjustments?)
Forward P/E (1 year)
A 4th: Forward earnings growth rate (Morning* says an analyst concensus for 3-5yrs. out; or they make their own estim.)
All these can be inverted for a P/E number or yield number.

Currently (for TSM) I think I saw the following:
TTM P/E (from net earn.) = (didn't find at M*, but been going around as ~25; about 5% E/P) ,Oh, don't forget CAPE10 ~33.
TTM P/E (from oper. earn.) = ~20.xx (about 4% E/P)
Forward 1 yr P/E (current P/forward earn) = ~17.xx (about 5.5-6% E/P)
EGR forward 3-5yr. something like 12. or 14% (operating growth rate on earnings,annualized) --still fuzzy on this exact meaning, or if I' wrong here.

And I'm kinda sure these do not consider the effects of black (and maybe gray) swans, nor any significant economic change.
I don't think a 10 yr. total return guesstimate is the same as a 1 & 3-5

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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by FIREchief » Tue Jul 10, 2018 2:41 pm

MIretired wrote:
Tue Jul 10, 2018 2:17 pm
FIREchief wrote:
Tue Jul 10, 2018 10:56 am
Rick Ferri wrote:
Tue Jul 10, 2018 8:05 am
S&P forecast earnings growth out to 2020+ are already priced into stocks. That’s why the S&P 500 is trading at a 25+ current earnings multiple.
According to the Standard and Poors link, they are projecting a 2018 P/E of 17 based upon current prices. How is this a 25+ earnings multiple?
Been digging around on Morning.* about definitions of earnings and growth.
3 things: There is TTM net earnings (sometimes called reported earnings) (TTM) is trailing twelve month.
TTM operating earnings ( not sure if this means EBITDA, but, you know, just from operations, not balance sheet adjustments?)
Forward P/E (1 year)
A 4th: Forward earnings growth rate (Morning* says an analyst concensus for 3-5yrs. out; or they make their own estim.)
All these can be inverted for a P/E number or yield number.

Currently (for TSM) I think I saw the following:
TTM P/E (from net earn.) = (didn't find at M*, but been going around as ~25; about 5% E/P) ,Oh, don't forget CAPE10 ~33.
TTM P/E (from oper. earn.) = ~20.xx (about 4% E/P)
Forward 1 yr P/E (current P/forward earn) = ~17.xx (about 5.5-6% E/P)
EGR forward 3-5yr. something like 12. or 14% (operating growth rate on earnings,annualized) --still fuzzy on this exact meaning, or if I' wrong here.

And I'm kinda sure these do not consider the effects of black (and maybe gray) swans, nor any significant economic change.
I don't think a 10 yr. total return guesstimate is the same as a 1 & 3-5
It sounds like Morning* is referencing the S&P numbers (all contained within the spreadsheet I linked above). All of your numbers match up except for that ~25 for reported earnings. That should be more like 22.

And yeah, I haven't forgotten CAPE10, I'm just not a believer in looking ten years into the past to make judgements on the current market outlook. Especially when those ten years include a great recession.
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: Morningstar: prepare for a lost decade for U.S. stocks

Post by vineviz » Tue Jul 10, 2018 3:09 pm

FIREchief wrote:
Tue Jul 10, 2018 2:41 pm
It sounds like Morning* is referencing the S&P numbers (all contained within the spreadsheet I linked above).
Morningstar and S&P are both collecting their data from the same source, which is the Wall Street analysts who generated the estimates to begin with. There are several firms that take the individual analyst estimates and combine them into a "consensus" number.

Morningstar does employ its own analysts, but their estimates are going to be clearly marked as their own.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by MIretired » Tue Jul 10, 2018 3:15 pm

^ here's where I get most of this. Also, I add three of these into my custom port view in port manager from Morn.*.

Main thing is difference between oper. and net reported and figuring which is being used.

https://news.morningstar.com/classroom2 ... 397&CN=COM

Yeh. But like I said: the 25 times number I cannot find on Morn.*. Just hear it from 'around'. So you say 22? I thought is was more like a 4% yield(earnings.)
Look at ycharts. about 4% (.039) , 12/2017, 109.88/~2780, 25x. for SP500.

https://ycharts.com/indicators/sp_500_eps_ttm (now just got to believe it's net reported earnings--think it is.)

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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by MIretired » Tue Jul 10, 2018 3:41 pm

I looked in my port. manager from M*, and SP500 oper. earn. TTM and forward 1 yr are both just 10-25 bps higher than they are for TSM.
Can't find TTM /net earn. on TSM on the web.
Here's ycharts for SP500 net reported annualized earnings from prev post--notice no 03/2018 yet.
  • Dec. 31, 2017 109.88
    Sept. 30, 2017 107.08
    June 30, 2017 104.02
    March 31, 2017 100.29
    Dec. 31, 2016 94.55
Morn.* uses oper. earnings for every measure. There was some kind of SEC rule for reporting earnings in 3rd or 4th quart. of 1988 to use oper. E for something.
I know Jack B. doesn't like using op earnings growth rate for his 10 yr guesstimates of TR. He's said he uses the previous ten year reported earnings growth rate for his Div Yld + EGR +/- a P/E reversion measure annualized % change.

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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by FIREchief » Tue Jul 10, 2018 4:11 pm

vineviz wrote:
Tue Jul 10, 2018 3:09 pm
FIREchief wrote:
Tue Jul 10, 2018 2:41 pm
It sounds like Morning* is referencing the S&P numbers (all contained within the spreadsheet I linked above).
Morningstar and S&P are both collecting their data from the same source, which is the Wall Street analysts who generated the estimates to begin with. There are several firms that take the individual analyst estimates and combine them into a "consensus" number.

Morningstar does employ its own analysts, but their estimates are going to be clearly marked as their own.
Thanks. I didn't know that. I like the S&P spreadsheet, because you can see how the different numbers are calculated and it provides a nice summary of where we have been and where the analysts think things are heading.
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: Morningstar: prepare for a lost decade for U.S. stocks

Post by wolf359 » Tue Jul 10, 2018 4:18 pm

Some thoughts:

- If this lost decade is similar to previous lost decades, then you can do better by having some bonds, reinvesting interest and dividends, and dollar cost averaging your contributions throughout the entire period. The lost decades are called such only from the perspective of a one-time purchase at the beginning of the period. For someone in accumulation mode who is constantly contributing, the returns aren't zero.

- The converse is also true. Don't start living on a big pot of money purchased at the beginning of the period. If possible, don't make yourself dependent solely on market-based income over the next ten years. Maybe that means not retiring right away, but it may also mean diversifying your income streams, claiming social security or a pension, holding more bonds, rental real estate, single premium immediate annuities or even supplementing income with a post-retirement business or paying hobby.

- Economic forecasts are wildly inaccurate. I remember predictions that interest rates were going to rise in 2013, because you couldn't go below zero. Eventually the predictions were correct, but it took 5 years longer than anticipated. The lost decade could be a market that goes sideways for ten years (1970's style), or it could crash, recover, then crash again (2000-2010 style), or the prediction could simply be wrong. (no lost decade at all.) Be prepared for both the best and worst cases. Adjust your asset allocations while the markets are good.

- Cut your debt and expenses, including your mortgage. You can't go bankrupt if you don't owe any money. In addition, it's easier to make your nut (cover your expenses) if they're really low.

- Make sure your emergency fund is topped off.

If this sounds like doing what you should already be doing, there's a reason for that. Stay flexible. Live beneath your means. Tune out the news. Stay the course.

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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by MIretired » Tue Jul 10, 2018 5:41 pm

FIREchief wrote:
Mon Jul 09, 2018 8:18 pm
The following link downloads the latest Excel spreadsheet from Standard and Poors' website, outlining recent historical and forecasted future market earnings performance.

https://us.spindices.com/documents/addi ... nload=true

This download is linked to the following webpage under <additional info>, <index earnings>:

https://us.spindices.com/indices/equity/sp-500

The spreadsheet appears to indicate that Standard and Poors is forecasting annual growth in the S&P 500 index earnings over the next five years of 14.77%, with a 2018 P/E (operating earnings) of 17.33. Also note that actual operating margins have exceeded 10% for the past four quarters and exceeded 11% for the first quarter 2018.

Question: Since Standard and Poors' expectations for the next five years are so rosey, why are all the experts still telling us that we're in for a decade of ridiculously low (by historical standards) market returns?
Great link! I hadn't opened it yet. I'd probably of kept limping on what I had so far. Seems Shiller's has errors for recent 5 or so years. But his goes back b4 this 1989 history with EY and DY and price.

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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by FIREchief » Tue Jul 10, 2018 5:47 pm

MIretired wrote:
Tue Jul 10, 2018 5:41 pm
FIREchief wrote:
Mon Jul 09, 2018 8:18 pm
The following link downloads the latest Excel spreadsheet from Standard and Poors' website, outlining recent historical and forecasted future market earnings performance.

https://us.spindices.com/documents/addi ... nload=true

This download is linked to the following webpage under <additional info>, <index earnings>:

https://us.spindices.com/indices/equity/sp-500

The spreadsheet appears to indicate that Standard and Poors is forecasting annual growth in the S&P 500 index earnings over the next five years of 14.77%, with a 2018 P/E (operating earnings) of 17.33. Also note that actual operating margins have exceeded 10% for the past four quarters and exceeded 11% for the first quarter 2018.

Question: Since Standard and Poors' expectations for the next five years are so rosey, why are all the experts still telling us that we're in for a decade of ridiculously low (by historical standards) market returns?
Great link! I hadn't opened it yet. I'd probably of kept limping on what I had so far. Seems Shiller's has errors for recent 5 or so years. But his goes back b4 this 1989 history with EY and DY and price.
Different economy, different "country," different century, etc. As is likely clear by now, I'm not an advocate of driving by looking miles back in the rear view mirror.

If others want to believe the CAPE-10 stuff and back away from the market, then I'm fine with that. It might help us avoid a bursting bubble (at least for a while).
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: Morningstar: prepare for a lost decade for U.S. stocks

Post by MIretired » Tue Jul 10, 2018 6:19 pm

FIREchief wrote:
Tue Jul 10, 2018 5:47 pm
MIretired wrote:
Tue Jul 10, 2018 5:41 pm
FIREchief wrote:
Mon Jul 09, 2018 8:18 pm
The following link downloads the latest Excel spreadsheet from Standard and Poors' website, outlining recent historical and forecasted future market earnings performance.

https://us.spindices.com/documents/addi ... nload=true

This download is linked to the following webpage under <additional info>, <index earnings>:

https://us.spindices.com/indices/equity/sp-500

The spreadsheet appears to indicate that Standard and Poors is forecasting annual growth in the S&P 500 index earnings over the next five years of 14.77%, with a 2018 P/E (operating earnings) of 17.33. Also note that actual operating margins have exceeded 10% for the past four quarters and exceeded 11% for the first quarter 2018.

Question: Since Standard and Poors' expectations for the next five years are so rosey, why are all the experts still telling us that we're in for a decade of ridiculously low (by historical standards) market returns?
Great link! I hadn't opened it yet. I'd probably of kept limping on what I had so far. Seems Shiller's has errors for recent 5 or so years. But his goes back b4 this 1989 history with EY and DY and price.
Different economy, different "country," different century, etc. As is likely clear by now, I'm not an advocate of driving by looking miles back in the rear view mirror.

If others want to believe the CAPE-10 stuff and back away from the market, then I'm fine with that. It might help us avoid a bursting bubble (at least for a while).
Me ,too! It's as if people lose their minds at times. I know I do.
ETA: I just use the data to look at earnings volatility and making my own dividends, historically.

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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by JamalJones » Tue Jul 10, 2018 7:05 pm

CULater wrote:
Thu Jul 05, 2018 8:19 am
“Our expectation at the moment is that you won’t have any real return from U.S. equities over the next 10 years,” said Morningstar’s Dan Kemp at a company event Wednesday in London. In the chart he shared below, the black line is pretty close to zero for American stocks.
Image

https://www.marketwatch.com/story/brace ... 2018-07-05

Is it finally time to go anti-Bogle and get into foreign stocks big-time?


Ok - just sold all assests and went 100% Europe Emerging Markets!!!. All it took was looking at that graphic. Didn't even read the article!
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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by FIREchief » Tue Jul 10, 2018 7:47 pm

JamalJones wrote:
Tue Jul 10, 2018 7:05 pm
CULater wrote:
Thu Jul 05, 2018 8:19 am
“Our expectation at the moment is that you won’t have any real return from U.S. equities over the next 10 years,” said Morningstar’s Dan Kemp at a company event Wednesday in London. In the chart he shared below, the black line is pretty close to zero for American stocks.
Image

https://www.marketwatch.com/story/brace ... 2018-07-05

Is it finally time to go anti-Bogle and get into foreign stocks big-time?


Ok - just sold all assests and went 100% Europe Emerging Markets!!!. All it took was looking at that graphic. Didn't even read the article!
Well, it was probably that title "Valuation Implied Return" that really got into your head and fixed your thinking! I mean, we're not talking about pedicted or even forecast. This is IMPLIED!!
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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by jalbert » Wed Jul 11, 2018 12:17 am

Don't say cap rate. That term has zero value and no use for single family homes/condos, nor 2-4 unit deals. 
A correctly calculated cap rate has value for any real estate investment. Cap rate is net of expenses, and you may not know the expected expenses for small properties, hence the difficulty.

The gross rent multiplier or rent ratio does not take expenses into account, but it is easier to calculate: purchase price divided by annual rent.
Risk is not a guarantor of return.

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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by WanderingDoc » Wed Jul 11, 2018 2:26 am

jalbert wrote:
Wed Jul 11, 2018 12:17 am
Don't say cap rate. That term has zero value and no use for single family homes/condos, nor 2-4 unit deals. 
A correctly calculated cap rate has value for any real estate investment. Cap rate is net of expenses, and you may not know the expected expenses for small properties, hence the difficulty.

The gross rent multiplier or rent ratio does not take expenses into account, but it is easier to calculate: purchase price divided by annual rent.
No, it doesn't. You don't understand the definition of cap rate, which is deceptively hard to define accurately as it is used in the field. 4 unit or less properties are valuated by comparables, with "cap rates" having zero role. The reason I put it in quotes because it is incorrect to use that term. Not everything you read on Google or biggerpockets is accurate.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by jalbert » Wed Jul 11, 2018 3:39 am

I’m not relying on google or biggerpockets. Cap rate is easily defined as net operating income divided by property value. This is confirmed on page 109 of “Investment Analysis for Real Estate Decisions” 6th ed. by Kolbe & Greer, both of whom are faculty members in the graduate program in real estate at University of Memphis. This definition applies to any property.

Cap rate may be used in reverse to value a property if you know the net operating income and prevailing cap rate in a location at a point in time. Because the market for single-family residential properties is driven by supply and demand and takes more into account (such as schools) to determine demand, such properties are normally valued by comparable sales.

However, if you are buying a single-family home or duplex as an investment property to rent out, the expected appreciation and cap rate of the property are the drivers of expected return, and the better you are able to estimate those quantities the better you can quantify the investment potential of the property.
Last edited by jalbert on Wed Jul 11, 2018 5:49 pm, edited 1 time in total.
Risk is not a guarantor of return.

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Re: Morningstar: prepare for a lost decade for U.S. stocks

Post by david1082b » Wed Jul 11, 2018 6:33 am

Prepare for a lost decade for Bogleheads as all the threads about stocks turn into endless property discussions :P

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