Grantham: US will return 2% real next 2 decades
- Clever_Username
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Re: Grantham: US will return 2% real next 2 decades
Okay, I do not believe my crystal ball is working at the moment, but I know this guy's crystal ball is, at best, broken.
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Re: Grantham: US will return 2% real next 2 decades
nisiprius wrote: ↑Thu Mar 07, 2019 7:38 pm GMO (Grantham's) "forecasts" are noise. Ignore them.
These were their forecasts 6/30/11-6/30/18
Here's my chart of how their forecasts compared with the actual results:
The correlation coefficient between the forecasts and the observations 0.05. That is to say, virtually zero. The forecast had virtually no predictive power.
I think if you break up the dataset into two separate datasets - bonds projected vs actual and equity projections vs actual - you will find that the correlation for the first is near 1 and the correlation for the second is something in the neighborhood of -0.6. Just eyeballing, haven't run the numbers.
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Re: Grantham: US will return 2% real next 2 decades
Can anyone remember when this wasn't the prediction going into a new year?
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Re: Grantham: US will return 2% real next 2 decades
2% or 2% annualized ?
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Re: Grantham: US will return 2% real next 2 decades
Well, that would be no good. I need 4% returns to retire in 15 years.
2019: $75,000 * 1.04 + $20,000 = $98,000
2020: $98,000 * 1.04 + $24,000 = $125,920
2021: $125,920 * 1.04 + $24,000 = $154,956
2022: $154,956 * 1.04 + $24,000 = $185,154
2023: $185,154 * 1.04 + $24,000 = $216,560
2024: $216,560 * 1.04 + $24,000 = $249,222
2025: $249,222 * 1.04 + $24,000 = $283,191
2026: $283,191 * 1.04 + $24,000 = $318,519
2027: $318,519 * 1.04 + $24,000 = $355,259
2028: $355,259 * 1.04 + $24,000 = $393,469
2029: $393,469 * 1.04 + $24,000 = $433,207
2030: $433,207 * 1.04 + $24,000 = $474,535
2031: $474,535 * 1.04 + $24,000 = $517,516
2032: $517,516 * 1.04 + $24,000 = $562,216
2033: $562,216 * 1.04 + $24,000 = $608,704 and retire.
I don't even want to do the depressing math on how long 2% would take me.
2019: $75,000 * 1.04 + $20,000 = $98,000
2020: $98,000 * 1.04 + $24,000 = $125,920
2021: $125,920 * 1.04 + $24,000 = $154,956
2022: $154,956 * 1.04 + $24,000 = $185,154
2023: $185,154 * 1.04 + $24,000 = $216,560
2024: $216,560 * 1.04 + $24,000 = $249,222
2025: $249,222 * 1.04 + $24,000 = $283,191
2026: $283,191 * 1.04 + $24,000 = $318,519
2027: $318,519 * 1.04 + $24,000 = $355,259
2028: $355,259 * 1.04 + $24,000 = $393,469
2029: $393,469 * 1.04 + $24,000 = $433,207
2030: $433,207 * 1.04 + $24,000 = $474,535
2031: $474,535 * 1.04 + $24,000 = $517,516
2032: $517,516 * 1.04 + $24,000 = $562,216
2033: $562,216 * 1.04 + $24,000 = $608,704 and retire.
I don't even want to do the depressing math on how long 2% would take me.
- willthrill81
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Re: Grantham: US will return 2% real next 2 decades
One decade is tough enough. But two? Forget this noise.
The extrapolated ten year returns predicted by the average stock allocation model are currently 3.28%, which is very much in line with 1/CAPE.
The extrapolated ten year returns predicted by the average stock allocation model are currently 3.28%, which is very much in line with 1/CAPE.
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Re: Grantham: US will return 2% real next 2 decades
I saw the interview live. Some of his other "non-financial" predictions were hilarious. Poor guy.
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Re: Grantham: US will return 2% real next 2 decades
5% SWR should do just fine for 33 years with 2% real (absent an unfortunate early sequence on top of that).
70/30 AA for life, Global market cap equity. Rebalance if fixed income <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.
Re: Grantham: US will return 2% real next 2 decades
Ok, it may be actionable, but this thread doesn't belong in the Personal Investments tab. Maybe it belongs in the Investing Theory tab. I'm just trying to keep things in their place. You should see my garage. I would post a picture if I knew how.
Last edited by printer86 on Fri Mar 08, 2019 6:41 pm, edited 1 time in total.
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Re: Grantham: US will return 2% real next 2 decades
Better than 0.
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Re: Grantham: US will return 2% real next 2 decades
I think you're right.cheezit wrote: ↑Fri Mar 08, 2019 1:34 pmI think if you break up the dataset into two separate datasets - bonds projected vs actual and equity projections vs actual - you will find that the correlation for the first is near 1 and the correlation for the second is something in the neighborhood of -0.6. Just eyeballing, haven't run the numbers.
The correlation is actually -0.41.
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Re: Grantham: US will return 2% real next 2 decades
If you believed that, why would you leave your money in stocks instead of just buying the house down the street and renting it out? Should be easy to buy a cap rate 4 house. Add on appreciation at rate of inflation and that's 7% nominal or 4% real.stocknoob4111 wrote: ↑Thu Mar 07, 2019 7:14 pm Of course nobody can predict the future but this guy says 2% real returns over the next 2 decades and will be painful.
https://www.youtube.com/watch?v=h37hMronhas
He says EM Value can return as much as 8% real. Scary stuff but not quite sure I buy it.
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Re: Grantham: US will return 2% real next 2 decades
That's what many people do... Not necessarily the house down the street, just properties that make sense as rentals. The main reason I've seen people give here for not doing that is that being a landlord requires some work that they don't want to do. Many on this forum do indeed own rentals. I think it's best to diversify and hold both.White Coat Investor wrote: ↑Fri Mar 08, 2019 8:27 pmIf you believed that, why would you leave your money in stocks instead of just buying the house down the street and renting it out? Should be easy to buy a cap rate 4 house. Add on appreciation at rate of inflation and that's 7% nominal or 4% real.stocknoob4111 wrote: ↑Thu Mar 07, 2019 7:14 pm Of course nobody can predict the future but this guy says 2% real returns over the next 2 decades and will be painful.
https://www.youtube.com/watch?v=h37hMronhas
He says EM Value can return as much as 8% real. Scary stuff but not quite sure I buy it.
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Re: Grantham: US will return 2% real next 2 decades
If I didn't hate the kind of work required I would likely have a rental. In my area the cap rate is like 8.White Coat Investor wrote: ↑Fri Mar 08, 2019 8:27 pmIf you believed that, why would you leave your money in stocks instead of just buying the house down the street and renting it out? Should be easy to buy a cap rate 4 house. Add on appreciation at rate of inflation and that's 7% nominal or 4% real.stocknoob4111 wrote: ↑Thu Mar 07, 2019 7:14 pm Of course nobody can predict the future but this guy says 2% real returns over the next 2 decades and will be painful.
https://www.youtube.com/watch?v=h37hMronhas
He says EM Value can return as much as 8% real. Scary stuff but not quite sure I buy it.
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Re: Grantham: US will return 2% real next 2 decades
Interestingly O"shoughnessy Asset management talked about this in their most recent letter. They have recently teamed up with the guy from philosophical economics to do research. The topic this quarter was about the predictive value of various valuation measures. They show that it is more or less nothing in short horizens and peaks and stays flat for 10-20 year intervals and again goes back towards zero as you approach 30 years.willthrill81 wrote: ↑Fri Mar 08, 2019 3:13 pm One decade is tough enough. But two? Forget this noise.
The extrapolated ten year returns predicted by the average stock allocation model are currently 3.28%, which is very much in line with 1/CAPE.
https://www.osam.com/pdfs/research/61_Q ... Letter.pdf
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Re: Grantham: US will return 2% real next 2 decades
That's an interesting read. Certainly pretty much every metric out there is predicting that future returns will be lower than historic averages. But the elephant in the room is earnings. If earnings can grow significantly in the coming years, then returns may outpace expectations. But that's an awfully big if.fennewaldaj wrote: ↑Fri Mar 08, 2019 10:14 pmInterestingly O"shoughnessy Asset management talked about this in their most recent letter. They have recently teamed up with the guy from philosophical economics to do research. The topic this quarter was about the predictive value of various valuation measures. They show that it is more or less nothing in short horizens and peaks and stays flat for 10-20 year intervals and again goes back towards zero as you approach 30 years.willthrill81 wrote: ↑Fri Mar 08, 2019 3:13 pm One decade is tough enough. But two? Forget this noise.
The extrapolated ten year returns predicted by the average stock allocation model are currently 3.28%, which is very much in line with 1/CAPE.
https://www.osam.com/pdfs/research/61_Q ... Letter.pdf
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Re: Grantham: US will return 2% real next 2 decades
Whether Jeremy Grantham turns out to be right or wrong, it's still just a guess.
I prefer to follow Jack's advice......"nobody knows nuttin...", and "stay the course".
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I prefer to follow Jack's advice......"nobody knows nuttin...", and "stay the course".
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Re: Grantham: US will return 2% real next 2 decades
I would do 3% as a compromise. 2000-2018 had a real return of 2.64% but we had 2 major crashes, so my thoughts were actually that the next 20 years are going to be far better... but what do I know!! The "experts" think differently, 3% real seems reasonable to me but yes, it's pretty disappointing.LiterallyIronic wrote: ↑Fri Mar 08, 2019 2:30 pm Well, that would be no good. I need 4% returns to retire in 15 years.
...
I don't even want to do the depressing math on how long 2% would take me.
The stock market (large caps) since 1871 supposedly has returned 6.87 annualized real returns, that's inflation adjusted... not quite sure why we are going to have a 40 year period (i.e. the previous 20 years and the following 20) with a third of those returns.
Data from this source:
http://www.moneychimp.com/features/market_cagr.htm
Re: Grantham: US will return 2% real next 2 decades
Economic growth has slowed down a lot in the developed world when compared to the old days...stocknoob4111 wrote: ↑Sat Mar 09, 2019 12:22 am not quite sure why we are going to have a 40 year period (i.e. the previous 20 years and the following 20) with a third of those returns.
Re: Grantham: US will return 2% real next 2 decades
Me too...
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Re: Grantham: US will return 2% real next 2 decades
Lots of hand wringing, don't worry, be happy.
“Those who move forward with a happy spirit will find that things always work out.” -Retired 13 years 😀
Re: Grantham: US will return 2% real next 2 decades
That is more or less what I have found. The drivers of return depend on the time horizon.fennewaldaj wrote: ↑Fri Mar 08, 2019 10:14 pmInterestingly O"shoughnessy Asset management talked about this in their most recent letter. They have recently teamed up with the guy from philosophical economics to do research. The topic this quarter was about the predictive value of various valuation measures. They show that it is more or less nothing in short horizens and peaks and stays flat for 10-20 year intervals and again goes back towards zero as you approach 30 years.willthrill81 wrote: ↑Fri Mar 08, 2019 3:13 pm One decade is tough enough. But two? Forget this noise.
The extrapolated ten year returns predicted by the average stock allocation model are currently 3.28%, which is very much in line with 1/CAPE.
https://www.osam.com/pdfs/research/61_Q ... Letter.pdf
In the short term, 2-3 years, it is all about momentum. Returns are driven primarily by change in prices.
Get in at the start of a bull market and ride it up.
Don't get in at the start of a bear market.
In the medium-to-long term, 10-20 years, it is valuation. Returns are driven by starting valuations and change in valuation over the period.
If valuation is unchanged, you would get about the earnings yield, e.g. 1/CAPE.
If valuation goes down, like GMO predicts, you get less than earnings yield.
If valuation goes up, like has actually happened, you got more than that.
In the very long run, 50-100+ years, valuation matters less and less with longer time horizons. Returns approach the ROE, less some drags.
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Re: Grantham: US will return 2% real next 2 decades
Buy a REIT and be done with it.White Coat Investor wrote: ↑Fri Mar 08, 2019 8:27 pmIf you believed that, why would you leave your money in stocks instead of just buying the house down the street and renting it out? Should be easy to buy a cap rate 4 house. Add on appreciation at rate of inflation and that's 7% nominal or 4% real.stocknoob4111 wrote: ↑Thu Mar 07, 2019 7:14 pm Of course nobody can predict the future but this guy says 2% real returns over the next 2 decades and will be painful.
https://www.youtube.com/watch?v=h37hMronhas
He says EM Value can return as much as 8% real. Scary stuff but not quite sure I buy it.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Re: Grantham: US will return 2% real next 2 decades
This thread is now in the Investing - Theory, News & General forum (general discussion).
Re: Grantham: US will return 2% real next 2 decades
Looks like 18 years with 2% real instead of 15 years to 4% real. Your contributions make a bigger difference than the rate of return.LiterallyIronic wrote: ↑Fri Mar 08, 2019 2:30 pm Well, that would be no good. I need 4% returns to retire in 15 years.
2019: $75,000 * 1.04 + $20,000 = $98,000
2020: $98,000 * 1.04 + $24,000 = $125,920
2021: $125,920 * 1.04 + $24,000 = $154,956
2022: $154,956 * 1.04 + $24,000 = $185,154
2023: $185,154 * 1.04 + $24,000 = $216,560
2024: $216,560 * 1.04 + $24,000 = $249,222
2025: $249,222 * 1.04 + $24,000 = $283,191
2026: $283,191 * 1.04 + $24,000 = $318,519
2027: $318,519 * 1.04 + $24,000 = $355,259
2028: $355,259 * 1.04 + $24,000 = $393,469
2029: $393,469 * 1.04 + $24,000 = $433,207
2030: $433,207 * 1.04 + $24,000 = $474,535
2031: $474,535 * 1.04 + $24,000 = $517,516
2032: $517,516 * 1.04 + $24,000 = $562,216
2033: $562,216 * 1.04 + $24,000 = $608,704 and retire.
I don't even want to do the depressing math on how long 2% would take me.
2019: 75000 * 1.02 + 20000 = 96500
2020: 96500 * 1.02 + 24000 = 122430
2021: 122430 * 1.02 + 24000 = 148879
2022: 148879 * 1.02 + 24000 = 175856
2023: 175856 * 1.02 + 24000 = 203373
2024: 203373 * 1.02 + 24000 = 231441
2025: 231441 * 1.02 + 24000 = 260070
2026: 260070 * 1.02 + 24000 = 289271
2027: 289271 * 1.02 + 24000 = 319056
2028: 319056 * 1.02 + 24000 = 349438
2029: 349438 * 1.02 + 24000 = 380426
2030: 380426 * 1.02 + 24000 = 412035
2031: 412035 * 1.02 + 24000 = 444275
2032: 444275 * 1.02 + 24000 = 477161
2033: 477161 * 1.02 + 24000 = 510704
2034: 510704 * 1.02 + 24000 = 544918
2035: 544918 * 1.02 + 24000 = 579817
2036: 579817 * 1.02 + 24000 = 615413
Re: Grantham: US will return 2% real next 2 decades
Amazing the confidence of this forums participants that Grantham's forecast will be wrong. If you have ever looked at GMO's annual expected returns, every year since 2000 they have predicted EM and EAFE would have higher returns than US stocks. So obviously you shouldn't take them literally.
But if you look back at their forecasts, when there is a wide disparity between expected returns of asset classes, say more than 5 percent, their relative rankings have absolutely been spot on. From about 2006 to 2015 that was not the case, there wasn't much difference between the expected returns of asset classes. Right now their forecast has a 10% gap between the return of EM value and US stocks. When this has been the case in the past EM has always won by a huge margin. Even their expected returns for EAFE are much higher than they have been on average. So maybe they will be wrong but I don't feel as confident as others that they will be wrong.
But if you look back at their forecasts, when there is a wide disparity between expected returns of asset classes, say more than 5 percent, their relative rankings have absolutely been spot on. From about 2006 to 2015 that was not the case, there wasn't much difference between the expected returns of asset classes. Right now their forecast has a 10% gap between the return of EM value and US stocks. When this has been the case in the past EM has always won by a huge margin. Even their expected returns for EAFE are much higher than they have been on average. So maybe they will be wrong but I don't feel as confident as others that they will be wrong.
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Re: Grantham: US will return 2% real next 2 decades
I think the papers they write on various investing topics are some of the best I've ever read, unlike their 7 year forecasts, which must be embarrassing to them.asif408 wrote: ↑Sat Mar 09, 2019 1:42 pm Amazing the confidence of this forums participants that Grantham's forecast will be wrong. If you have ever looked at GMO's annual expected returns, every year since 2000 they have predicted EM and EAFE would have higher returns than US stocks. So obviously you shouldn't take them literally.
But if you look back at their forecasts, when there is a wide disparity between expected returns of asset classes, say more than 5 percent, their relative rankings have absolutely been spot on. From about 2006 to 2015 that was not the case, there wasn't much difference between the expected returns of asset classes. Right now their forecast has a 10% gap between the return of EM value and US stocks. When this has been the case in the past EM has always won by a huge margin. Even their expected returns for EAFE are much higher than they have been on average. So maybe they will be wrong but I don't feel as confident as others that they will be wrong.
Re: Grantham: US will return 2% real next 2 decades
The key is not to look at them as a prediction but more as a condition to evaluate the sustainability of your plan. That is, if they are right, how does your plan work out?asif408 wrote: ↑Sat Mar 09, 2019 1:42 pm Amazing the confidence of this forums participants that Grantham's forecast will be wrong. If you have ever looked at GMO's annual expected returns, every year since 2000 they have predicted EM and EAFE would have higher returns than US stocks. So obviously you shouldn't take them literally.
But if you look back at their forecasts, when there is a wide disparity between expected returns of asset classes, say more than 5 percent, their relative rankings have absolutely been spot on. From about 2006 to 2015 that was not the case, there wasn't much difference between the expected returns of asset classes. Right now their forecast has a 10% gap between the return of EM value and US stocks. When this has been the case in the past EM has always won by a huge margin. Even their expected returns for EAFE are much higher than they have been on average. So maybe they will be wrong but I don't feel as confident as others that they will be wrong.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
Re: Grantham: US will return 2% real next 2 decades
No one is confident they will be wrong. They could indeed be right.asif408 wrote: ↑Sat Mar 09, 2019 1:42 pm Amazing the confidence of this forums participants that Grantham's forecast will be wrong. If you have ever looked at GMO's annual expected returns, every year since 2000 they have predicted EM and EAFE would have higher returns than US stocks. So obviously you shouldn't take them literally.
But if you look back at their forecasts, when there is a wide disparity between expected returns of asset classes, say more than 5 percent, their relative rankings have absolutely been spot on. From about 2006 to 2015 that was not the case, there wasn't much difference between the expected returns of asset classes. Right now their forecast has a 10% gap between the return of EM value and US stocks. When this has been the case in the past EM has always won by a huge margin. Even their expected returns for EAFE are much higher than they have been on average. So maybe they will be wrong but I don't feel as confident as others that they will be wrong.
What we're confident is that they don't really know.
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Re: Grantham: US will return 2% real next 2 decades
I'm sure that Wade Pfau and Larry Swedroe were both confident in their low single-digit stock return predictions 7-8 years ago.HomerJ wrote: ↑Sat Mar 09, 2019 5:21 pmNo one is confident they will be wrong. They could indeed be right.asif408 wrote: ↑Sat Mar 09, 2019 1:42 pm Amazing the confidence of this forums participants that Grantham's forecast will be wrong. If you have ever looked at GMO's annual expected returns, every year since 2000 they have predicted EM and EAFE would have higher returns than US stocks. So obviously you shouldn't take them literally.
But if you look back at their forecasts, when there is a wide disparity between expected returns of asset classes, say more than 5 percent, their relative rankings have absolutely been spot on. From about 2006 to 2015 that was not the case, there wasn't much difference between the expected returns of asset classes. Right now their forecast has a 10% gap between the return of EM value and US stocks. When this has been the case in the past EM has always won by a huge margin. Even their expected returns for EAFE are much higher than they have been on average. So maybe they will be wrong but I don't feel as confident as others that they will be wrong.
What we're confident is that they don't really know.
The Sensible Steward
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Re: Grantham: US will return 2% real next 2 decades
Indeed, my master plan spreadsheet covering the next several years always assumes 2% nominal. If I can get 2% real, that's a bonus for me.Grt2bOutdoors wrote: ↑Fri Mar 08, 2019 12:33 pm 2%??!! Whew! That means somewhere between 4-5% nominal (isn’t that what Jack was implying not too long ago), much better than my worse case scenario.
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Re: Grantham: US will return 2% real next 2 decades
No one is predicting strong (US) gains.
Is too many dollars chasing too few profits a real factor? It sure seems like it could be.
Is too many dollars chasing too few profits a real factor? It sure seems like it could be.
Re: Grantham: US will return 2% real next 2 decades
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Last edited by lostdog on Sat Mar 09, 2019 5:44 pm, edited 1 time in total.
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Re: Grantham: US will return 2% real next 2 decades
Noise.
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Re: Grantham: US will return 2% real next 2 decades
Right, but if it's 2% real, then a 50/50 US stock/bond portfolio will return about 1% real, which is quite lousy.
With such low returns, it's not a very appealing investment when considering the volatility and sequence of returns problems that you have to tolerate. I don't know whether to believe it or not, but if I was going to believe it, I would seriously consider increasing the percentage of assets in rental properties.
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Re: Grantham: US will return 2% real next 2 decades
And you think you are the only one with this idea? If returns in normal investments become sub-par for too long, the money will come raging to investments with higher perceived returns. That torrent of money will drive down returns there as well. A better return might be to pay down all debt first.visualguy wrote: ↑Sat Mar 09, 2019 5:58 pmRight, but if it's 2% real, then a 50/50 US stock/bond portfolio will return about 1% real, which is quite lousy.
With such low returns, it's not a very appealing investment when considering the volatility and sequence of returns problems that you have to tolerate. I don't know whether to believe it or not, but if I was going to believe it, I would seriously consider increasing the percentage of assets in rental properties.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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Re: Grantham: US will return 2% real next 2 decades
In my example, above, there was more than a 5% disparity between U.S. Small and Emerging Markets.
Emerging markets was supposed to return 7.5% more.
But in fact U.S. Small earned 12.0% and Emerging Markets earned 0.7%, i.e. Emerging Markets earned 11.3% less.
How can you call that "spot on?"
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Re: Grantham: US will return 2% real next 2 decades
The rental real estate market is far less efficient than the stock market. But I agree that paying down debt may easily be the better strategy. Those taking out mortgages around 1999-2000 were certainly better off paying those down than owning stocks.Grt2bOutdoors wrote: ↑Sat Mar 09, 2019 6:49 pmAnd you think you are the only one with this idea? If returns in normal investments become sub-par for too long, the money will come raging to investments with higher perceived returns. That torrent of money will drive down returns there as well. A better return might be to pay down all debt first.visualguy wrote: ↑Sat Mar 09, 2019 5:58 pmRight, but if it's 2% real, then a 50/50 US stock/bond portfolio will return about 1% real, which is quite lousy.
With such low returns, it's not a very appealing investment when considering the volatility and sequence of returns problems that you have to tolerate. I don't know whether to believe it or not, but if I was going to believe it, I would seriously consider increasing the percentage of assets in rental properties.
The Sensible Steward
Re: Grantham: US will return 2% real next 2 decades
While I don't think following Grantham or ANYONE'S predictions is wise, it is interesting you found that GMO predicted EM would have higher returns. So I looked back at the performance of asset class since 2000 and found that EM was either the best or 2nd best performer in 2003, 2004, 2005, 2006, 2007, 2009, 2012, and 2017. See: https://www.callan.com/wp-content/uploa ... e-2019.pdfasif408 wrote: ↑Sat Mar 09, 2019 1:42 pm Amazing the confidence of this forums participants that Grantham's forecast will be wrong. If you have ever looked at GMO's annual expected returns, every year since 2000 they have predicted EM and EAFE would have higher returns than US stocks. So obviously you shouldn't take them literally.
I still hold Bogle's sage advice: Nobody knows nothing. So I simply stay diversified and rebalance back to what my IPS states.
Re: Grantham: US will return 2% real next 2 decades
Well said. I find his quarterlies informative, although for the most part I don't follow his advice.AlohaJoe wrote: ↑Thu Mar 07, 2019 8:07 pmIn GMO/Grantham's defense....all his forecasts really are is fairly standard "valuations" and CAPE10 projections -- and not substantially different from the methodology that Bogle used.
If you're someone who talks about valuations and says things like "everything is expensive" or "CAPE10 is near historical highs", then really the onus is on you to explain why your beliefs about expected returns are different/better than Grantham's.
For myself, I see Grantham's forecast as the obvious logical conclusion if you're going to make arguments about valuations or mean reversion. Which I take as evidence that talk about valuations & mean reversion is somewhere between misleading & useless -- evidence that there's been some kind of regime change in the past ~20 years that makes it harder to reason about the future by looking at the past.GMO employs a straightforward methodology to project asset class performance, which I’ve described previously. Its forecasts are based on certain key metrics – P/E ratio, profit margin, sales growth and dividend yield – that GMO believes will revert to their mean over a seven-year time horizon. Given that those variables are known today, anticipating future returns is a simple matter of assuming that these measures will revert to their historical means and calculating the implications
It is worth saying that he personally doesn't even necessarily think the 7 year mean reverting forecasts are going to be right. He seems to think that mean reversion will take longer, but if your looking at a 20 year span it probably doesn't make much difference.
I don't think 2-3% real is an unreasonable forecast for the next 20 years. Bogle predicted 4-5 % nominal over the next 10.
I tend mentally prepare myself for a Grantham like scenario, and I'm marginally more conservative than I would otherwise be, and if it turns out to be better then that's fine too.
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Re: Grantham: US will return 2% real next 2 decades
Everyone who appears on CNBC is respected by CNBC. [sarcasm]stocknoob4111 wrote: ↑Thu Mar 07, 2019 7:28 pmoh! that's good to know, I heard it on CNBC and it seemed like he was a respected guy so was a bit alarmed at this forecast.stlutz wrote: ↑Thu Mar 07, 2019 7:22 pm This guy has pretty much been wrong about everything since 2008.
Example: https://www.mymoneyblog.com/gmo-asset-r ... -2018.html
The surest way to know the future is when it becomes the past.
Re: Grantham: US will return 2% real next 2 decades
Correct. The real estate market isn't really all that similar to the stock market, and it's actually many markets with different behavior.willthrill81 wrote: ↑Sat Mar 09, 2019 7:11 pmThe rental real estate market is far less efficient than the stock market. But I agree that paying down debt may easily be the better strategy. Those taking out mortgages around 1999-2000 were certainly better off paying those down than owning stocks.Grt2bOutdoors wrote: ↑Sat Mar 09, 2019 6:49 pmAnd you think you are the only one with this idea? If returns in normal investments become sub-par for too long, the money will come raging to investments with higher perceived returns. That torrent of money will drive down returns there as well. A better return might be to pay down all debt first.visualguy wrote: ↑Sat Mar 09, 2019 5:58 pmRight, but if it's 2% real, then a 50/50 US stock/bond portfolio will return about 1% real, which is quite lousy.
With such low returns, it's not a very appealing investment when considering the volatility and sequence of returns problems that you have to tolerate. I don't know whether to believe it or not, but if I was going to believe it, I would seriously consider increasing the percentage of assets in rental properties.
Once debt is paid off, the question is where to invest... For me, the question is what is a good balance between stocks/bonds and direct real estate. The answer would vary depending on the expected return of stocks... My current thinking is 50% in real estate is good, but if we can expect only 2% real from stocks, I would weigh real estate a lot heavier, and now would probably be a decent time to make that shift.
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Re: Grantham: US will return 2% real next 2 decades
2% nominal and what CPI? 2% nominal and 5% inflation (negative 3% real) is not out of the question. Negative real rates strike me as highly appealing to central banks now.oldcomputerguy wrote: ↑Sat Mar 09, 2019 5:30 pmIndeed, my master plan spreadsheet covering the next several years always assumes 2% nominal. If I can get 2% real, that's a bonus for me.Grt2bOutdoors wrote: ↑Fri Mar 08, 2019 12:33 pm 2%??!! Whew! That means somewhere between 4-5% nominal (isn’t that what Jack was implying not too long ago), much better than my worse case scenario.
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Re: Grantham: US will return 2% real next 2 decades
My plan assumes 2% nominal and 3% inflation. Pessimistic, I admit, but almost all our expenses will be covered by SS and pensions, so I think we'll be okay.gmaynardkrebs wrote: ↑Sat Mar 09, 2019 10:01 pm2% nominal and what CPI? 2% nominal and 5% inflation (negative 3% real) is not out of the question. Negative real rates strike me as highly appealing to central banks now.oldcomputerguy wrote: ↑Sat Mar 09, 2019 5:30 pmIndeed, my master plan spreadsheet covering the next several years always assumes 2% nominal. If I can get 2% real, that's a bonus for me.Grt2bOutdoors wrote: ↑Fri Mar 08, 2019 12:33 pm 2%??!! Whew! That means somewhere between 4-5% nominal (isn’t that what Jack was implying not too long ago), much better than my worse case scenario.
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Re: Grantham: US will return 2% real next 2 decades
I found this hard to believe, until I remembered just what happening around 2000. It's endpoints, endpoints, all endpoints, and the Callan table happens to be over a time period very favorable to emerging markets.dh wrote: ↑Sat Mar 09, 2019 8:30 pmWhile I don't think following Grantham or ANYONE'S predictions is wise, it is interesting you found that GMO predicted EM would have higher returns. So I looked back at the performance of asset class since 2000 and found that EM was either the best or 2nd best performer in 2003, 2004, 2005, 2006, 2007, 2009, 2012, and 2017. See: https://www.callan.com/wp-content/uploa ... e-2019.pdfasif408 wrote: ↑Sat Mar 09, 2019 1:42 pm Amazing the confidence of this forums participants that Grantham's forecast will be wrong. If you have ever looked at GMO's annual expected returns, every year since 2000 they have predicted EM and EAFE would have higher returns than US stocks. So obviously you shouldn't take them literally.
I still hold Bogle's sage advice: Nobody knows nothing. So I simply stay diversified and rebalance back to what my IPS states.
If we look at Vanguard Emerging Markets Index Fund versus Vanguard 500 Index--I'm using the S&P 500 because the Callan table has data for "large cap equity" but not "total US stock market," the results look almost identical with Total Stock--since inception, we see this. Emerging markets, fund blue and category average orange; US large caps, green:
Source
Since GMO's forecasts are seven-year forecasts, if we look at the last seven years we see:
But, yes, indeed, for your suggested starting point of "since 2000," which I interpret as 12/31/2000, we see this (and similar results if we start at 12/31/1999 or 12/31/1998):
I don't know what to say about this, except to say that constantly forecasting superior results for emerging markets smacks of ideology or enthusiasm. During the time period when emerging markets mutual funds have been generally available, they have had bursts of both strong outperformance and bad underperformance, and since Grantham is apparently not able to discriminate in advance between the two, his forecasts don't seem very valuable.
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Re: Grantham: US will return 2% real next 2 decades
Here is a look at emerging markets and US large cap, as represented by annual returns of VEIEX and VFINX, over overlapping 7-year ranges. Over seventeen overlapping seven-year time periods:
--emerging markets outperformed US large caps 9 times out of 17 = 53% of the time.
--US large caps outperformed emerging markets 8 times out of 17 = 47% of the time.
"Since 2000," i.e. from 2001 through 2018, inclusive, there have been twelve overlapping 7-year periods.
--emerging markets outperformed US large caps 6 times out of 12 = 50% of the time.
--US large caps outperformed emerging markets 6 times out of 12 = 50% of the time.
I don't have an easy reference for GMO's forecasts, but if, as asif418 states, "every year since 2000 they have predicted EM and EAFE would have higher returns than US stocks," then they have been right almost exactly half the time.
And including "all available data" for these funds, overall the average returns were 5.90% for VEIEX, 8.22% for VFINX.
The best I can do for "all available data, period" at the moment is 1990 through 2018, inclusive; I don't have the actual MSCI index for those years but I have the Morningstar Diversified Emerging Markets category average, and it as +6.42%, versus +9.29% for the S&P 500. Inception of the MSCI Emerging Markets Index was 1988, so 1990 is reasonably close to all available data.
In short, overall, emerging markets have underperformed US large cap considerably since inception of the index.
--emerging markets outperformed US large caps 9 times out of 17 = 53% of the time.
--US large caps outperformed emerging markets 8 times out of 17 = 47% of the time.
"Since 2000," i.e. from 2001 through 2018, inclusive, there have been twelve overlapping 7-year periods.
--emerging markets outperformed US large caps 6 times out of 12 = 50% of the time.
--US large caps outperformed emerging markets 6 times out of 12 = 50% of the time.
I don't have an easy reference for GMO's forecasts, but if, as asif418 states, "every year since 2000 they have predicted EM and EAFE would have higher returns than US stocks," then they have been right almost exactly half the time.
Code: Select all
Year VEIEX VFINX Range VEIEX VFINX
1996 15.83% 22.88% 1996-2002 -2.63% 6.82%
1997 -16.82% 33.19% 1997-2003 1.76% 7.51%
1998 -18.12% 28.62% 1998-2004 7.99% 4.71%
1999 61.57% 21.07% 1999-2005 15.63% 1.69%
2000 -27.56% -9.06% 2000-2006 12.01% 1.03%
2001 -2.88% -12.02% 2001-2007 22.93% 3.18%
2002 -7.43% -22.15% 2002-2008 10.89% -1.64%
2003 57.65% 28.50% 2003-2009 21.54% 5.43%
2004 26.12% 10.74% 2004-2010 16.74% 3.76%
2005 32.05% 4.77% 2005-2011 9.62% 2.54%
2006 29.39% 15.64% 2006-2012 7.96% 4.02%
2007 38.90% 5.39% 2007-2013 3.27% 6.02%
2008 -52.81% -37.02% 2008-2014 -1.41% 7.15%
2009 75.98% 26.49% 2009-2015 7.16% 14.67%
2010 18.86% 14.91% 2010-2016 0.39% 12.67%
2011 -18.78% 1.97% 2011-2017 1.81% 13.59%
2012 18.64% 15.82% 2012-2018 2.53% 12.53%
2013 -5.19% 32.18%
2014 0.42% 13.51%
2015 -15.47% 1.25%
2016 11.50% 11.82%
2017 31.15% 21.67%
2018 -14.71% -4.52%
The best I can do for "all available data, period" at the moment is 1990 through 2018, inclusive; I don't have the actual MSCI index for those years but I have the Morningstar Diversified Emerging Markets category average, and it as +6.42%, versus +9.29% for the S&P 500. Inception of the MSCI Emerging Markets Index was 1988, so 1990 is reasonably close to all available data.
In short, overall, emerging markets have underperformed US large cap considerably since inception of the index.
Last edited by nisiprius on Sun Mar 10, 2019 10:32 am, edited 2 times in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: Grantham: US will return 2% real next 2 decades
We are [old guy] brothers in arms as far as better safe than sorry. Since so much of my portfolio is in TIPS, I presume 0% real, which is a little less than what my TIPS are actually yielding.oldcomputerguy wrote: ↑Sun Mar 10, 2019 6:01 amMy plan assumes 2% nominal and 3% inflation. Pessimistic, I admit, but almost all our expenses will be covered by SS and pensions, so I think we'll be okay.gmaynardkrebs wrote: ↑Sat Mar 09, 2019 10:01 pm2% nominal and what CPI? 2% nominal and 5% inflation (negative 3% real) is not out of the question. Negative real rates strike me as highly appealing to central banks now.oldcomputerguy wrote: ↑Sat Mar 09, 2019 5:30 pmIndeed, my master plan spreadsheet covering the next several years always assumes 2% nominal. If I can get 2% real, that's a bonus for me.Grt2bOutdoors wrote: ↑Fri Mar 08, 2019 12:33 pm 2%??!! Whew! That means somewhere between 4-5% nominal (isn’t that what Jack was implying not too long ago), much better than my worse case scenario.
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Re: Grantham: US will return 2% real next 2 decades
No central bank wants a deflationary spiral.gmaynardkrebs wrote: ↑Sat Mar 09, 2019 10:01 pm2% nominal and what CPI? 2% nominal and 5% inflation (negative 3% real) is not out of the question. Negative real rates strike me as highly appealing to central banks now.oldcomputerguy wrote: ↑Sat Mar 09, 2019 5:30 pmIndeed, my master plan spreadsheet covering the next several years always assumes 2% nominal. If I can get 2% real, that's a bonus for me.Grt2bOutdoors wrote: ↑Fri Mar 08, 2019 12:33 pm 2%??!! Whew! That means somewhere between 4-5% nominal (isn’t that what Jack was implying not too long ago), much better than my worse case scenario.
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Re: Grantham: US will return 2% real next 2 decades
That's not as bad as I would've guessed. But what's the difference between real and nominal again?Lars_2013 wrote: ↑Sat Mar 09, 2019 1:30 pmLooks like 18 years with 2% real instead of 15 years to 4% real. Your contributions make a bigger difference than the rate of return.LiterallyIronic wrote: ↑Fri Mar 08, 2019 2:30 pm Well, that would be no good. I need 4% returns to retire in 15 years.
2019: $75,000 * 1.04 + $20,000 = $98,000
2020: $98,000 * 1.04 + $24,000 = $125,920
2021: $125,920 * 1.04 + $24,000 = $154,956
2022: $154,956 * 1.04 + $24,000 = $185,154
2023: $185,154 * 1.04 + $24,000 = $216,560
2024: $216,560 * 1.04 + $24,000 = $249,222
2025: $249,222 * 1.04 + $24,000 = $283,191
2026: $283,191 * 1.04 + $24,000 = $318,519
2027: $318,519 * 1.04 + $24,000 = $355,259
2028: $355,259 * 1.04 + $24,000 = $393,469
2029: $393,469 * 1.04 + $24,000 = $433,207
2030: $433,207 * 1.04 + $24,000 = $474,535
2031: $474,535 * 1.04 + $24,000 = $517,516
2032: $517,516 * 1.04 + $24,000 = $562,216
2033: $562,216 * 1.04 + $24,000 = $608,704 and retire.
I don't even want to do the depressing math on how long 2% would take me.
2019: 75000 * 1.02 + 20000 = 96500
2020: 96500 * 1.02 + 24000 = 122430
2021: 122430 * 1.02 + 24000 = 148879
2022: 148879 * 1.02 + 24000 = 175856
2023: 175856 * 1.02 + 24000 = 203373
2024: 203373 * 1.02 + 24000 = 231441
2025: 231441 * 1.02 + 24000 = 260070
2026: 260070 * 1.02 + 24000 = 289271
2027: 289271 * 1.02 + 24000 = 319056
2028: 319056 * 1.02 + 24000 = 349438
2029: 349438 * 1.02 + 24000 = 380426
2030: 380426 * 1.02 + 24000 = 412035
2031: 412035 * 1.02 + 24000 = 444275
2032: 444275 * 1.02 + 24000 = 477161
2033: 477161 * 1.02 + 24000 = 510704
2034: 510704 * 1.02 + 24000 = 544918
2035: 544918 * 1.02 + 24000 = 579817
2036: 579817 * 1.02 + 24000 = 615413