Grantham: US will return 2% real next 2 decades

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Re: Grantham: US will return 2% real next 2 decades

Post by Clever_Username » Fri Mar 08, 2019 2:24 pm

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

Post by cheezit » Fri Mar 08, 2019 2:34 pm

nisiprius wrote:
Thu Mar 07, 2019 8:38 pm
GMO (Grantham's) "forecasts" are noise. Ignore them.

These were their forecasts 6/30/11-6/30/18

Image

Here's my chart of how their forecasts compared with the actual results:

Image

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

Post by wesgreen » Fri Mar 08, 2019 3:02 pm

DB2 wrote:
Fri Mar 08, 2019 12:44 pm
People are ripping him, but Vanguard and Morningstar are predicting notably higher returns with international vs. U.S. over the next 10 years.
Thanks for reminding us! There's some company to be in for Vanguard.

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Re: Grantham: US will return 2% real next 2 decades

Post by TheTimeLord » Fri Mar 08, 2019 3:13 pm

wesgreen wrote:
Fri Mar 08, 2019 3:02 pm
DB2 wrote:
Fri Mar 08, 2019 12:44 pm
People are ripping him, but Vanguard and Morningstar are predicting notably higher returns with international vs. U.S. over the next 10 years.
Thanks for reminding us! There's some company to be in for Vanguard.
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

Post by Thesaints » Fri Mar 08, 2019 3:20 pm

2% or 2% annualized ?

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Re: Grantham: US will return 2% real next 2 decades

Post by LiterallyIronic » Fri Mar 08, 2019 3:30 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.

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Re: Grantham: US will return 2% real next 2 decades

Post by willthrill81 » Fri Mar 08, 2019 4:13 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.
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Re: Grantham: US will return 2% real next 2 decades

Post by DanMahowny » Fri Mar 08, 2019 4:28 pm

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

Post by MnD » Fri Mar 08, 2019 6:43 pm

5% SWR should do just fine for 33 years with 2% real (absent an unfortunate early sequence on top of that).
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Re: Grantham: US will return 2% real next 2 decades

Post by printer86 » Fri Mar 08, 2019 7:30 pm

HomerJ wrote:
Thu Mar 07, 2019 11:08 pm
H-Town wrote:
Thu Mar 07, 2019 10:51 pm
printer86 wrote:
Thu Mar 07, 2019 8:23 pm
Not an actionable post.
I think it does. There are plenty of fair warning signs that U.S. stocks might lay an egg for a decade. If you own 100% U.S. equity, now is the time to have at least 40% foreign equity.
This was stated in 2011.

No one knows the future.
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 7:41 pm, edited 1 time in total.

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Re: Grantham: US will return 2% real next 2 decades

Post by StandingRock » Fri Mar 08, 2019 7:33 pm

Better than 0.

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Re: Grantham: US will return 2% real next 2 decades

Post by nisiprius » Fri Mar 08, 2019 7:56 pm

cheezit wrote:
Fri Mar 08, 2019 2:34 pm
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.
I think you're right.

Image

The correlation is actually -0.41.
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Re: Grantham: US will return 2% real next 2 decades

Post by White Coat Investor » Fri Mar 08, 2019 9:27 pm

stocknoob4111 wrote:
Thu Mar 07, 2019 8:14 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.
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.
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Re: Grantham: US will return 2% real next 2 decades

Post by visualguy » Fri Mar 08, 2019 10:19 pm

White Coat Investor wrote:
Fri Mar 08, 2019 9:27 pm
stocknoob4111 wrote:
Thu Mar 07, 2019 8:14 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.
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.
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.

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Re: Grantham: US will return 2% real next 2 decades

Post by fennewaldaj » Fri Mar 08, 2019 11:09 pm

White Coat Investor wrote:
Fri Mar 08, 2019 9:27 pm
stocknoob4111 wrote:
Thu Mar 07, 2019 8:14 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.
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.
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.

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Re: Grantham: US will return 2% real next 2 decades

Post by fennewaldaj » Fri Mar 08, 2019 11:14 pm

willthrill81 wrote:
Fri Mar 08, 2019 4:13 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.
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.
https://www.osam.com/pdfs/research/61_Q ... Letter.pdf

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Re: Grantham: US will return 2% real next 2 decades

Post by willthrill81 » Fri Mar 08, 2019 11:50 pm

fennewaldaj wrote:
Fri Mar 08, 2019 11:14 pm
willthrill81 wrote:
Fri Mar 08, 2019 4:13 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.
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.
https://www.osam.com/pdfs/research/61_Q ... Letter.pdf
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.
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Re: Grantham: US will return 2% real next 2 decades

Post by 1210sda » Sat Mar 09, 2019 12:09 am

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".

1210

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Re: Grantham: US will return 2% real next 2 decades

Post by stocknoob4111 » Sat Mar 09, 2019 1:22 am

LiterallyIronic wrote:
Fri Mar 08, 2019 3:30 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.
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.

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

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Re: Grantham: US will return 2% real next 2 decades

Post by visualguy » Sat Mar 09, 2019 3:32 am

stocknoob4111 wrote:
Sat Mar 09, 2019 1:22 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.
Economic growth has slowed down a lot in the developed world when compared to the old days...

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Re: Grantham: US will return 2% real next 2 decades

Post by Wiggums » Sat Mar 09, 2019 7:20 am

1210sda wrote:
Sat Mar 09, 2019 12:09 am
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".

1210
Me too...

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Re: Grantham: US will return 2% real next 2 decades

Post by tennisplyr » Sat Mar 09, 2019 7:35 am

Lots of hand wringing, don't worry, be happy.
Those who move forward with a happy spirit will find that things always work out.

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Re: Grantham: US will return 2% real next 2 decades

Post by grayfox » Sat Mar 09, 2019 7:59 am

fennewaldaj wrote:
Fri Mar 08, 2019 11:14 pm
willthrill81 wrote:
Fri Mar 08, 2019 4:13 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.
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.
https://www.osam.com/pdfs/research/61_Q ... Letter.pdf
That is more or less what I have found. The drivers of return depend on the time horizon.

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

Post by Grt2bOutdoors » Sat Mar 09, 2019 8:19 am

White Coat Investor wrote:
Fri Mar 08, 2019 9:27 pm
stocknoob4111 wrote:
Thu Mar 07, 2019 8:14 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.
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.
Buy a REIT and be done with it.
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Re: Grantham: US will return 2% real next 2 decades

Post by LadyGeek » Sat Mar 09, 2019 1:16 pm

This thread is now in the Investing - Theory, News & General forum (general discussion).
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Re: Grantham: US will return 2% real next 2 decades

Post by Lars_2013 » Sat Mar 09, 2019 2:30 pm

LiterallyIronic wrote:
Fri Mar 08, 2019 3:30 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.
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.

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

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Re: Grantham: US will return 2% real next 2 decades

Post by asif408 » Sat Mar 09, 2019 2:42 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.

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Re: Grantham: US will return 2% real next 2 decades

Post by gmaynardkrebs » Sat Mar 09, 2019 5:18 pm

asif408 wrote:
Sat Mar 09, 2019 2:42 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.
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.

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Re: Grantham: US will return 2% real next 2 decades

Post by jebmke » Sat Mar 09, 2019 5:51 pm

asif408 wrote:
Sat Mar 09, 2019 2:42 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.
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?
When you discover that you are riding a dead horse, the best strategy is to dismount.

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Re: Grantham: US will return 2% real next 2 decades

Post by HomerJ » Sat Mar 09, 2019 6:21 pm

asif408 wrote:
Sat Mar 09, 2019 2:42 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.
No one is confident they will be wrong. They could indeed be right.

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

Post by willthrill81 » Sat Mar 09, 2019 6:22 pm

HomerJ wrote:
Sat Mar 09, 2019 6:21 pm
asif408 wrote:
Sat Mar 09, 2019 2:42 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.
No one is confident they will be wrong. They could indeed be right.

What we're confident is that they don't really know.
I'm sure that Wade Pfau and Larry Swedroe were both confident in their low single-digit stock return predictions 7-8 years ago.
“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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Re: Grantham: US will return 2% real next 2 decades

Post by oldcomputerguy » Sat Mar 09, 2019 6:30 pm

Grt2bOutdoors wrote:
Fri Mar 08, 2019 1:33 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.
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.
:beer
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Re: Grantham: US will return 2% real next 2 decades

Post by columbia » Sat Mar 09, 2019 6:38 pm

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.

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Re: Grantham: US will return 2% real next 2 decades

Post by lostdog » Sat Mar 09, 2019 6:44 pm

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Re: Grantham: US will return 2% real next 2 decades

Post by lostdog » Sat Mar 09, 2019 6:44 pm

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Re: Grantham: US will return 2% real next 2 decades

Post by visualguy » Sat Mar 09, 2019 6:58 pm

columbia wrote:
Sat Mar 09, 2019 6:38 pm
No one is predicting strong (US) gains.
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

Post by Grt2bOutdoors » Sat Mar 09, 2019 7:49 pm

visualguy wrote:
Sat Mar 09, 2019 6:58 pm
columbia wrote:
Sat Mar 09, 2019 6:38 pm
No one is predicting strong (US) gains.
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.
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.
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Re: Grantham: US will return 2% real next 2 decades

Post by nisiprius » Sat Mar 09, 2019 8:03 pm

asif408 wrote:
Sat Mar 09, 2019 2:42 pm
...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...
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?"
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

Post by willthrill81 » Sat Mar 09, 2019 8:11 pm

Grt2bOutdoors wrote:
Sat Mar 09, 2019 7:49 pm
visualguy wrote:
Sat Mar 09, 2019 6:58 pm
columbia wrote:
Sat Mar 09, 2019 6:38 pm
No one is predicting strong (US) gains.
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.
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.
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.
“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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Re: Grantham: US will return 2% real next 2 decades

Post by dh » Sat Mar 09, 2019 9:30 pm

asif408 wrote:
Sat Mar 09, 2019 2:42 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.
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.pdf

I still hold Bogle's sage advice: Nobody knows nothing. So I simply stay diversified and rebalance back to what my IPS states. :sharebeer

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Re: Grantham: US will return 2% real next 2 decades

Post by JBTX » Sat Mar 09, 2019 9:50 pm

AlohaJoe wrote:
Thu Mar 07, 2019 9:07 pm
nisiprius wrote:
Thu Mar 07, 2019 8:38 pm
GMO (Grantham's) "forecasts" are noise. Ignore them.
In 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.
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
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.
Well said. I find his quarterlies informative, although for the most part I don't follow his advice.

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

Post by cheese_breath » Sat Mar 09, 2019 9:56 pm

stocknoob4111 wrote:
Thu Mar 07, 2019 8:28 pm
stlutz wrote:
Thu Mar 07, 2019 8:22 pm
This guy has pretty much been wrong about everything since 2008.

Example: https://www.mymoneyblog.com/gmo-asset-r ... -2018.html
oh! 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.
Everyone who appears on CNBC is respected by CNBC. [sarcasm]
The surest way to know the future is when it becomes the past.

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Re: Grantham: US will return 2% real next 2 decades

Post by visualguy » Sat Mar 09, 2019 10:00 pm

willthrill81 wrote:
Sat Mar 09, 2019 8:11 pm
Grt2bOutdoors wrote:
Sat Mar 09, 2019 7:49 pm
visualguy wrote:
Sat Mar 09, 2019 6:58 pm
columbia wrote:
Sat Mar 09, 2019 6:38 pm
No one is predicting strong (US) gains.
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.
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.
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.
Correct. The real estate market isn't really all that similar to the stock market, and it's actually many markets with different behavior.

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

Post by gmaynardkrebs » Sat Mar 09, 2019 11:01 pm

oldcomputerguy wrote:
Sat Mar 09, 2019 6:30 pm
Grt2bOutdoors wrote:
Fri Mar 08, 2019 1:33 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.
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.
:beer
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.

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Re: Grantham: US will return 2% real next 2 decades

Post by oldcomputerguy » Sun Mar 10, 2019 6:01 am

gmaynardkrebs wrote:
Sat Mar 09, 2019 11:01 pm
oldcomputerguy wrote:
Sat Mar 09, 2019 6:30 pm
Grt2bOutdoors wrote:
Fri Mar 08, 2019 1:33 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.
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.
:beer
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.
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.
"I’ve come around to this: If you’re dumb, surround yourself with smart people; and if you’re smart, surround yourself with smart people who disagree with you." (Aaron Sorkin)

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Re: Grantham: US will return 2% real next 2 decades

Post by nisiprius » Sun Mar 10, 2019 6:27 am

dh wrote:
Sat Mar 09, 2019 9:30 pm
asif408 wrote:
Sat Mar 09, 2019 2:42 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.
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.pdf

I still hold Bogle's sage advice: Nobody knows nothing. So I simply stay diversified and rebalance back to what my IPS states. :sharebeer
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.

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

Image

Since GMO's forecasts are seven-year forecasts, if we look at the last seven years we see:

Image

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):

Image

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.
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

Post by nisiprius » Sun Mar 10, 2019 6:57 am

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.

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%
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.
Last edited by nisiprius on Sun Mar 10, 2019 10:32 am, edited 2 times in total.
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Re: Grantham: US will return 2% real next 2 decades

Post by gmaynardkrebs » Sun Mar 10, 2019 7:59 am

oldcomputerguy wrote:
Sun Mar 10, 2019 6:01 am
gmaynardkrebs wrote:
Sat Mar 09, 2019 11:01 pm
oldcomputerguy wrote:
Sat Mar 09, 2019 6:30 pm
Grt2bOutdoors wrote:
Fri Mar 08, 2019 1:33 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.
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.
:beer
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.
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.
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.

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Re: Grantham: US will return 2% real next 2 decades

Post by Grt2bOutdoors » Sun Mar 10, 2019 9:03 am

gmaynardkrebs wrote:
Sat Mar 09, 2019 11:01 pm
oldcomputerguy wrote:
Sat Mar 09, 2019 6:30 pm
Grt2bOutdoors wrote:
Fri Mar 08, 2019 1:33 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.
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.
:beer
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.
No central bank wants a deflationary spiral.
"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

Post by LiterallyIronic » Sun Mar 10, 2019 11:32 am

Lars_2013 wrote:
Sat Mar 09, 2019 2:30 pm
LiterallyIronic wrote:
Fri Mar 08, 2019 3:30 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.
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.

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
That's not as bad as I would've guessed. But what's the difference between real and nominal again?

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