John Bogle’s formula says 1% real stock returns likely over next decade

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ukbogler
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John Bogle’s formula says 1% real stock returns likely over next decade

Post by ukbogler » Wed Oct 09, 2019 3:34 am

This article is from a 'financial adviser' who advocates (among other things) a momentum strategy over 5 asset classes. Now while he claims to have found a simple way to ratchet returns upwards using that strategy, [OT comment removed -- mod oldcomputerguy], his article about the US markets seems more sensible to me (probably because he's built it on Bogle's work, which is why I mention it here).

If correct, the whole 'buy total US markets and hold' strategy is punxatawny'd big time for 10 years or more, and 'far better values are on offer overseas, where even developed countries like the UK and Singapore are priced for 6-9% nominal returns'. Anyone spot a problem here?

https://michaelritger.com/2018/11/30/jo ... la-decade/


He follows it up in a more recent article here.

https://michaelritger.com/2019/05/20/us ... nd-beyond/

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by FIREchief » Wed Oct 09, 2019 3:43 am

I'm guessing that "the market" knew about everything in this article before it was shared with us. So, zzzzzzz……. 8-)

(also, it appears that instead of using actual TTM P/E or forecast P/E, the author is using that silly CAPE 10; so the whole thing is just ridiculous)
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: John Bogle’s formula says 1% real stock returns likely over next decade

Post by ukbogler » Wed Oct 09, 2019 4:41 am

Don't get me wrong, I think he's barking mad too, but if you plug the numbers into Bogle's formula as he suggests, you get a lousy 1%.

So where do you think future capital appreciation will come from then? An increase in earnings growth when the rest of the world is slowing down? Or an expansion of multiples from where we currently are, namely high to very high? Something else?

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by Grt2bOutdoors » Wed Oct 09, 2019 4:46 am

ukbogler wrote:
Wed Oct 09, 2019 4:41 am
Don't get me wrong, I think he's barking mad too, but if you plug the numbers in as he suggests, you get a lousy 1%.

So where do you think future capital appreciation will come from then? An increase in earnings growth when the rest of the world is slowing down? Or an expansion of multiples from where we currently are, namely high to very high? Something else?
No one knows, crystal ball is cloudy. I didn’t read the linked post, but what gives you comfort that UK will outperform? Isn’t Europe a shambles right now? That market has gone nowhere in the last what 10 years? I hold international and am still patiently waiting.
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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by ukbogler » Wed Oct 09, 2019 4:56 am

Grt2bOutdoors wrote:
Wed Oct 09, 2019 4:46 am
what gives you comfort that UK will outperform?
I don't. the author of the article does. Although if you plug the UK figures into Bogle's formula, you might be interested to see what comes out the other end.

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by columbia » Wed Oct 09, 2019 5:18 am

Future returns will likely be much higher, if the market significantly drops. Those things happen and haven’t happen in over a decade....

How lucky are you feeling about that prospect?

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by ukbogler » Wed Oct 09, 2019 5:33 am

columbia wrote:
Wed Oct 09, 2019 5:18 am
Future returns will likely be much higher, if the market significantly drops. Those things happen and haven’t happen in over a decade....

How lucky are you feeling about that prospect?

Looking at the numbers from the Bogle formula, seems to me that barring some kind of unexpected tech revolution, the simplest way for the market to sidestep a decade of stagnation is to have a correction, which, as you say, provides the opportunity for better returns, at least for those who weren't already holding it.

BTW, here's the great man himself in an article, presumably where the other fella nicked the idea from. This was late 2017, and frankly, he seems almost prescient now (although he denies it in the article) because we're looking at not much difference since then, despite the ups and downs.

https://www.thewealthadvisor.com/articl ... et-returns

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by Forester » Wed Oct 09, 2019 7:36 am

In the short to medium term, UK possibly has more currency & stock market upside vs the USA.

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by JoMoney » Wed Oct 09, 2019 8:00 am

Current P/E: 21.53

P/E Ratios for past decade:

Jan 1, 2019 19.60
Jan 1, 2018 24.97
Jan 1, 2017 23.59
Jan 1, 2016 22.18
Jan 1, 2015 20.02
Jan 1, 2014 18.15
Jan 1, 2013 17.03
Jan 1, 2012 14.87
Jan 1, 2011 16.30
Jan 1, 2010 20.70
https://www.multpl.com/s-p-500-pe-ratio/table/by-year
The average P/E ratio for the past decade was 19.74

IF (big 'IF' as even the author admits its entirely speculation) over the next 10 years we go from P/E 21.53 to 19.74 , that represents a change of -0.84% annualized
Not the -4.2% annualized the writer suggested.


Total Future Returns = 1.9% + 5.35% – 4.2% .84
= 3.05% 6.41% before inflation
Last edited by JoMoney on Wed Oct 09, 2019 8:04 am, edited 1 time in total.
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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by ukbogler » Wed Oct 09, 2019 8:02 am

JoMoney wrote:
Wed Oct 09, 2019 8:00 am
Current P/E: 21.53

P/E Ratios for past decade:

Jan 1, 2019 19.60
Jan 1, 2018 24.97
Jan 1, 2017 23.59
Jan 1, 2016 22.18
Jan 1, 2015 20.02
Jan 1, 2014 18.15
Jan 1, 2013 17.03
Jan 1, 2012 14.87
Jan 1, 2011 16.30
Jan 1, 2010 20.70
https://www.multpl.com/s-p-500-pe-ratio/table/by-year
The average P/E ratio for the past decade was 19.74

IF (big 'IF' as even the author admits its entirely speculation) over the next 10 years we go from P/E 21.53 to 19.74 , that represents a change of -0.84% annualized
Not the -4.2% annualized the writer suggested.
AFAIR, he's using the CAPE, and he explains why.

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by JoMoney » Wed Oct 09, 2019 8:10 am

ukbogler wrote:
Wed Oct 09, 2019 8:02 am
...

AFAIR, he's using the CAPE, and he explains why.
That wouldn't be "John Bogle's Formula" then, nor does it represent the actual price multiple people are buying stocks at today, relative to the P/E multiple of 20 that he's predicting for the future.
"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: John Bogle’s formula says 1% real stock returns likely over next decade

Post by ukbogler » Wed Oct 09, 2019 8:18 am

JoMoney wrote:
Wed Oct 09, 2019 8:10 am
ukbogler wrote:
Wed Oct 09, 2019 8:02 am
...

AFAIR, he's using the CAPE, and he explains why.
That wouldn't be "John Bogle's Formula" then, nor does it represent the actual price multiple people are buying stocks at today, relative to the P/E multiple of 20 that he's predicting for the future.
As I said, he explains why in the article.

Bogle himself also had something to say about it in the other article.

"Now the other part of it is not investment return, but what I call speculative return. That is valuations. If a valuation goes from 10 times earnings to 20, that adds 7% a year over a decade. It's kind of amazing. We're not in anywhere near that extreme territory, but I think valuations will probably take 2 percentage points a year off that 6, getting to 4.

Where does that come from? Well, we're looking at a price/earnings multiple on the S&P. By my standards, past reported earnings, not by Wall Street's standards, future operating earnings--there's a big difference between the two--so, I have the P/E at about 25 right now. If it goes down to 18, we'll lose a couple of points in valuation, which will take that 6 down to 4."

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by Hydromod » Wed Oct 09, 2019 8:25 am

I come to the same conclusion using a related approach, which relates the fraction of all investments as equities to the future returns (Now is a good time to be an early accumulator). The data from 1945 on suggest returns will be -3.3 to 4.7 percent over the next decade (most likely around 1 percent), reaching a trough after around 5 years, and starting to uptick after a decade or so. I think that this represents nominal returns, not real returns, though.

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by JoMoney » Wed Oct 09, 2019 8:37 am

The data at multpl.com is already using reported earnings, not operating earnings...
The change in the average over the past decade isn't going to make a difference as long as your consistent with using the same set of numbers.

What is likely to change soon though, is the CAPE is still using earnings from some quarters at the end of 2009 when earnings were extremely low... it wasn't until 2011-2012 that earnings really started to recover.
(Not that CAPE even matters for the formula calculation)
Last edited by JoMoney on Wed Oct 09, 2019 8:39 am, edited 1 time in total.
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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by firebirdparts » Wed Oct 09, 2019 8:38 am

If there are no returns in the stock market, then that decade could still have significant volatility, as we saw for instance in 2000 to 2010. It may not look the same, but that is a nice tidy example of a decade of no returns. A reasonable person could have made a lot of money during that period by rebalancing a nice diversified portfolio. Accumulators would also see some happy times.

I am surprised you say you think he's barking mad. Lots of people are expecting this. The amount of international holdings in Vanguard target date funds is just one example of people expecting it.

Now, do their expectations stop it from coming? That usually works for me, ha ha.
Last edited by firebirdparts on Wed Oct 09, 2019 8:42 am, edited 1 time in total.
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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by ukbogler » Wed Oct 09, 2019 8:40 am

Hydromod wrote:
Wed Oct 09, 2019 8:25 am
I come to the same conclusion using a related approach, which relates the fraction of all investments as equities to the future returns (Now is a good time to be an early accumulator). The data from 1945 on suggest returns will be -3.3 to 4.7 percent over the next decade (most likely around 1 percent), reaching a trough after around 5 years, and starting to uptick after a decade or so. I think that this represents nominal returns, not real returns, though.
"a swoon for the next ten years, with the worst decline around five years from now"

Ouch. Interesting that you came to the same conclusion using another method...

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by dh » Wed Oct 09, 2019 8:45 am

firebirdparts wrote:
Wed Oct 09, 2019 8:38 am
If there are no returns in the stock market, then that decade could still have significant volatility, as we saw for instance in 2000 to 2010. It may not look the same, but that is a nice tidy example of a decade of no returns. A reasonable person could have made a lot of money during that period by rebalancing a nice diversified portfolio. Accumulators would also see some happy times.
I appreciate your post firebirdparts! It reminded me of an HR professional's comments about our defined contribution plan during my first week. She said if you are just starting to invest in the DC, you will benefit from a long bear market (sharing all of our optimism that in the long run, the stock market will offer the highest returns). At the time I didn't like the sound of putting money in and seeing balances go down (I haven't through my investing lifetime), but her words make sense to me now. As you said, even if we do have a decade like 2000-2010 "accumulators would also see some happy times." I wish I was starting over today! :sharebeer

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by KyleAAA » Wed Oct 09, 2019 8:46 am

I don't see compelling evidence that we should expect lower real returns than the norm. All such low return predictions are every bit as speculative as the high return predictions of the late 90s.

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by ukbogler » Wed Oct 09, 2019 8:46 am

JoMoney wrote:
Wed Oct 09, 2019 8:37 am
(Not that CAPE even matters for the formula calculation)
As I understand his reasoning, he uses CAPE because he's trying to extrapolate a decade into the future. Extrapolating 10 years using a single previous year's P/E is kind of brave. Hence use the CAPE because it's an average that reveals the trend. Or it could be he just likes the acronym. Like I said, in most other respects he seems loony.

Firebird, I call him mad because the main thrust of his site seems to be to sell his magic 'momentum strategy' that outperforms buy and hold by an order of magnitude with lower risk. Sounds legit.

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by rich126 » Wed Oct 09, 2019 10:19 am

Over the last 12 months 1% would look good compared to the 1 point the SPY has risen (287.4 to 288.5). I think that is about 0.3% for the year ending 10/8/2019.

I wouldn't be surprised if the market has a rough decade. And I'm not saying overseas will do well but just because it seems to be a mess right now doesn't mean much. Sometimes when markets are a mess, they present the best buying opportunities.

Personally I think this is a dangerous investment time with the low rates, world and domestic issues, march of technology, aging population, and many other factors. The advantages the US had in the past are disappearing and it seems like industries are trying to squeeze profits out of things that can't last instead of finding new products and innovations. Also population growth slowing is not a positive thing for the economy. You have pension plans that are under funded and counting on returns that are unlikely to be achievable.

I've gone to a much more conservative portfolio (at least in some ways) since retirement is hopefully nearby (3 years) with acquiring long term treasuries, international stocks and even gold for the first time in many years (I'm guessing I've purchased it sometime in the past but can't really recall). 1% probably wouldn't be a disaster for me but I'd prefer 2-3%.

And any formula is only a guideline. It certainly could be negative or something higher.

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by StandingRock » Wed Oct 09, 2019 10:20 am

Better than 0%.

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by ukbogler » Wed Oct 09, 2019 12:28 pm

rich126 wrote:
Wed Oct 09, 2019 10:19 am
Over the last 12 months 1% would look good compared to the 1 point the SPY has risen (287.4 to 288.5). I think that is about 0.3% for the year ending 10/8/2019.

I wouldn't be surprised if the market has a rough decade. [snip]
Nice thoughts, thanks. Mind sharing your asset allocations in more detail? I agree with pretty much everything you pointed out...

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by petulant » Wed Oct 09, 2019 12:56 pm

ukbogler wrote:
Wed Oct 09, 2019 8:46 am
As I understand his reasoning, he uses CAPE because he's trying to extrapolate a decade into the future. Extrapolating 10 years using a single previous year's P/E is kind of brave. Hence use the CAPE because it's an average that reveals the trend. Or it could be he just likes the acronym. Like I said, in most other respects he seems loony.
If using 2018 data to extrapolate returns to 2028 is "brave," why is it any more sane to use 2009 data? It seems by that measure, CAPE10 is more brave!
JoMoney wrote:
Wed Oct 09, 2019 8:37 am
The data at multpl.com is already using reported earnings, not operating earnings...
The change in the average over the past decade isn't going to make a difference as long as your consistent with using the same set of numbers.

What is likely to change soon though, is the CAPE is still using earnings from some quarters at the end of 2009 when earnings were extremely low... it wasn't until 2011-2012 that earnings really started to recover.
(Not that CAPE even matters for the formula calculation)
Exactly! Not only that, but comparing CAPE10 between U.S. and other jurisdictions is surely disastrous (EDIT: in this instance) because of the differing accounting treatment in the wake of the financial crisis. Many banks in Europe are still carrying sovereign debt and other assets that are considered toxic--just see reports over the summer of the German government trying to convince Commerzbank and Deutsche Bank to merge, or for Deutsche Bank to create a toxic assets bank separated from the core bank. Banks in America expensed that stuff ten years ago. What that means is that the CAPE10 is leading you to a fundamentally wrong conclusion in this instance because it's telling you the U.S. stocks actually have a lower earning capacity, when the reality is they got those assets off the books, and it's the European stocks that have toxic assets! Hence the relative prices might be justified.
Last edited by petulant on Wed Oct 09, 2019 1:01 pm, edited 1 time in total.

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by Jags4186 » Wed Oct 09, 2019 1:00 pm

I simply have a hunch that returns will be good for the next 10 years or so. I have no math to back this up. But you need to ask yourself if you think that on 12/31/2029 we will have just completed the *worst* 30 year period in US equity performance. Not a bad one, not a not so great one, but the absolute worst. Because unless we continue to have great returns for the next 10 years, that is what we will have just gone through.

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by visualguy » Wed Oct 09, 2019 1:09 pm

Jags4186 wrote:
Wed Oct 09, 2019 1:00 pm
I simply have a hunch that returns will be good for the next 10 years or so. I have no math to back this up. But you need to ask yourself if you think that on 12/31/2029 we will have just completed the *worst* 30 year period in US equity performance. Not a bad one, not a not so great one, but the absolute worst. Because unless we continue to have great returns for the next 10 years, that is what we will have just gone through.
It's possible with economic growth that's worse than what we saw in previous such periods. Growth is anemic while valuations are high.

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by willthrill81 » Wed Oct 09, 2019 1:16 pm

FIREchief wrote:
Wed Oct 09, 2019 3:43 am
(also, it appears that instead of using actual TTM P/E or forecast P/E, the author is using that silly CAPE 10; so the whole thing is just ridiculous)
Even using 1/CAPE as an estimate for forward returns, that implies real returns of 3.5%, far better than 1%.

The current P/E ratio is 21.73, so using 1/P/E implies real returns of 4.6%.

So if earnings per share didn't grow at all over the next decade, 3.5%-4.6% seems like a reasonable 'likely' range to me.

Perhaps coincidentally and FWIW, the real returns of U.S. stocks (i.e. VTSMX) over the last 20 years, month-to-month, were 4.49%.
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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by TomCat96 » Wed Oct 09, 2019 1:26 pm

ukbogler wrote:
Wed Oct 09, 2019 3:34 am
This article is from a 'financial adviser' who advocates (among other things) a momentum strategy over 5 asset classes. Now while he claims to have found a simple way to ratchet returns upwards using that strategy, [OT comment removed -- mod oldcomputerguy], his article about the US markets seems more sensible to me (probably because he's built it on Bogle's work, which is why I mention it here).

If correct, the whole 'buy total US markets and hold' strategy is punxatawny'd big time for 10 years or more, and 'far better values are on offer overseas, where even developed countries like the UK and Singapore are priced for 6-9% nominal returns'. Anyone spot a problem here?

https://michaelritger.com/2018/11/30/jo ... la-decade/


He follows it up in a more recent article here.

https://michaelritger.com/2019/05/20/us ... nd-beyond/
I don't put any stock into market predictions like this, especially "market predictions for the next decade."
I don't care who it comes from, Bogle, Vanguard, Schiller, Fama, French, whoever...

We should be doubly wary of predictions such as this that toe the line between concrete information you can make deductions off of, and "something to be wary of"

Concrete information you can perform subsequent deductions upon include the laws of nature, concrete facts concerning people and their whereabouts, the time the bank closes, the percentage a stock went up in a day.

For a prediction such as this, with the lack of certainty it's given, this information is completely useless.
In other words, is that prediction good enough to actually base future plans off of? Or are you going to say, "well now, I'm not sure. It's just something to keep in mind"

If 1% real returns were a 100% certainty for the next decade, there is much you can do with that information. You could probably form exotic trading strategies based on TIPS. You could purchase items which would return more than 1.01^10 in real returns and beat the market for the next decade.

The point is that you can't do that. The information is deductively useless. I can't start conclusions that begin with "given the fact that the stock market is going to return 1% real for the next decade we should enact the following"

It causes consternation that is undue. It is undue because such predictions are treated with enough "weight" to be used to induce panic, alter moods, create general sentiments---but is not concrete enough to use in any concrete plans.

In my opinion, you have to cut through the BS very quickly. If the information "is just something to throw out there" but can't actually be acted upon, I don't dignify it with a second glance.

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by garlandwhizzer » Wed Oct 09, 2019 1:30 pm

=
rich126 wrote:

I wouldn't be surprised if the market has a rough decade. And I'm not saying overseas will do well but just because it seems to be a mess right now doesn't mean much. Sometimes when markets are a mess, they present the best buying opportunities.

Personally I think this is a dangerous investment time with the low rates, world and domestic issues, march of technology, aging population, and many other factors. The advantages the US had in the past are disappearing and it seems like industries are trying to squeeze profits out of things that can't last instead of finding new products and innovations. Also population growth slowing is not a positive thing for the economy. You have pension plans that are under funded and counting on returns that are unlikely to be achievable.

I've gone to a much more conservative portfolio (at least in some ways) since retirement is hopefully nearby (3 years) with acquiring long term treasuries, international stocks and even gold for the first time in many years (I'm guessing I've purchased it sometime in the past but can't really recall). 1% probably wouldn't be a disaster for me but I'd prefer 2-3%.

And any formula is only a guideline. It certainly could be negative or something higher.
1+

I believe this states the problem well, lower expected returns going forward for all US major asset classes. INTL equities are significantly less expensive. Many market forecasters (Larry, Bogle, Arnott, Grantham, Bernstein) predict higher future equity returns overseas than in the US over the next decade or so. That may turn out to be true or like all predictions about the future it may miss the mark. US equities have massively outperformed INTL for a lot more than a decade which accounts for these valuation differences. Investors rush into whatever has worked well in their remembered past. Market segments however tend to through alternating cycles of underperformance and outperformance. Perhaps the time has come for INTL equity to rise from its grave. On the other hand, perhaps not. INTL has very visible macroeconomic problems at present, more so than US, which have driven their prices down. The tough thing about predictions, Yogi Berra is reputed to have said, is the future.

A few things about the future do look likely including lower than historical returns from both stocks and bonds in the US. There is so much uncertainty however that IMO it is prudent to not put all your eggs into the basket you expect to outperform but instead spread out your bets into both US and INTL in the proportion you're comfortable with, and of course hols some high quality bonds which in my case is US bonds only. DM bonds are more expensive (yield less) than US bonds and have the currency issue. EM bonds are more like equity exposure, too volatile to provide an anchor in the storm. I suspect that most of us already have such a portfolio, so current market conditions are for them IMO not actionable. Just keep on keeping on and hope for the best. Over a long time frame that has consistently worked in the past and is very likely to do go going forward relative to other options.

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by WhiteMaxima » Wed Oct 09, 2019 1:31 pm

Yes, it is very like this: market down 30% from current level. Then up 4% in real term in next decade. So it is a 1% real return YOY avg in next decade.

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by ukbogler » Wed Oct 09, 2019 1:41 pm

petulant wrote:
Wed Oct 09, 2019 12:56 pm

If using 2018 data to extrapolate returns to 2028 is "brave," why is it any more sane to use 2009 data?
To construct a trend you need more than one data point. Allegedly.

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by ukbogler » Wed Oct 09, 2019 1:44 pm

TomCat96 wrote:
Wed Oct 09, 2019 1:26 pm

I don't put any stock into market predictions like this, especially "market predictions for the next decade."
I don't care who it comes from, Bogle, Vanguard, Schiller, Fama, French, whoever...
Would you 'put stock into it' if we were at the end of the predicted period and it turned out to be right?

I only ask because it's 2 years since the prediction, and so far, Bogle was right. Despite the massive volatility since last fall, here we are, back where we started. How many years of him being right would convince you to 'put stock into it'? After all, we're 20% in already.

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by alex_686 » Wed Oct 09, 2019 1:51 pm

TomCat96 wrote:
Wed Oct 09, 2019 1:26 pm
If 1% real returns were a 100% certainty for the next decade, there is much you can do with that information. You could probably form exotic trading strategies based on TIPS. You could purchase items which would return more than 1.01^10 in real returns and beat the market for the next decade. ... In my opinion, you have to cut through the BS very quickly. If the information "is just something to throw out there" but can't actually be acted upon, I don't dignify it with a second glance.
There is a fair amount one can do with this information without resorting to exotic strategies.

Let me ask a few questions. What is your Asset Allocation? Well, I assume it is based on some type of minimum risk / maximize return to meet your goal under assumptions of current savings and future expenditures. To get this you need to have some expected market returns. Either implicit or explicit. A point or a range of possibilities.

CAPE 10 suggests low returns for the foreseeable future. At a minimum this suggests increasing savings or lower your goals. I would call this actionable.

I personally like the CAPE 10 model. Very simple to use and gives actionable information. It has more power of prediction the CAPE 1, forward P/E, dividend yields, or historical returns. There are better models out there, but you can cram the CAPE 10 model, its assumptions, its strengths and weaknesses, and its input onto a 3x5 card.

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by willthrill81 » Wed Oct 09, 2019 1:57 pm

ukbogler wrote:
Wed Oct 09, 2019 1:44 pm
TomCat96 wrote:
Wed Oct 09, 2019 1:26 pm

I don't put any stock into market predictions like this, especially "market predictions for the next decade."
I don't care who it comes from, Bogle, Vanguard, Schiller, Fama, French, whoever...
Would you 'put stock into it' if we were at the end of the predicted period and it turned out to be right?

I only ask because it's 2 years since the prediction, and so far, Bogle was right. Despite the massive volatility since last fall, here we are, back where we started. How many years of him being right would convince you to 'put stock into it'? After all, we're 20% in already.
Bogle had a record of consistently underestimating stock returns. If you'll pardon the metaphor, even a broken clock is right twice a day. This no disrespect for the gentleman that Bogle was.
“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: John Bogle’s formula says 1% real stock returns likely over next decade

Post by TomCat96 » Wed Oct 09, 2019 2:00 pm

ukbogler wrote:
Wed Oct 09, 2019 1:44 pm
TomCat96 wrote:
Wed Oct 09, 2019 1:26 pm

I don't put any stock into market predictions like this, especially "market predictions for the next decade."
I don't care who it comes from, Bogle, Vanguard, Schiller, Fama, French, whoever...
Would you 'put stock into it' if we were at the end of the predicted period and it turned out to be right?

I only ask because it's 2 years since the prediction, and so far, Bogle was right. Despite the massive volatility since last fall, here we are, back where we started. How many years of him being right would convince you to 'put stock into it'? After all, we're 20% in already.

No. This is still junk information.

-Are you going to change your asset allocation?

-Are you going to say, due to the fact that we will likely see 1% real stock returns over the next decade, this alteration to my--lifestyle, stock choices, financial decisions, etc, is going to change?

-Is that prediction you're offering concrete enough to be actionable? Do you want to act on it, or do you merely want to discuss it?

Junk Information Category:
A prediction about the market where we talk and discuss.
We create general sentiments.
We conclude "one should keep in mind"

Concrete Information Category:
Information solid enough to form secondary deductions.
Deductions themselves are useful because they strategize based on the concreteness of the prior information.

Here's an example of concrete information:
Stocks outpace inflation.

Now how solid is that? Certainly on any given day it might not be true. But it's solid. How solid is it? So solid that I can:
1) Deduce that if stocks outpace inflation, investing in stocks should preserve your investment from inflation in the long run.
2) Offer that up as a coherent financial strategy, or as a piece of an overarching strategy see Bogle "invest we must"
3) Offer that coherent strategy to the masses at large and have it be beneficial to them.

In other words, the general statement "stocks outpace inflation" is true enough, and solid enough you can formulate a financial strategy around it, have it work, offer it to others, and have it work for them.

Now when I look at Bogle says "1% real stock returns likely for the next decade" I see that as junk information. Information that can be discussed. But no one is going to advocate building strategies off of it. Unless what you have to offer is the certainty of that information. Then you can build strategies off it.

Edit: This is not a personal attack on you.
What I'm offering is that we (bogleheads, long term investors, people, etc) are bombarded multiple times daily with predictions, fear mongering, posturing, and sometimes outright lies. We have to have filtering mechanisms. Some say ignore everything. That's not a bad way to go to be honest. But I take an interest in this stuff, so rather than ignore everything, I filter. I filter because most of what comes out is just junk.

And you have to be able to identify junk quickly, for your own mental sanity, and to stay the course in the very long term.
Last edited by TomCat96 on Wed Oct 09, 2019 2:08 pm, edited 1 time in total.

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by ukbogler » Wed Oct 09, 2019 2:02 pm

willthrill81 wrote:
Wed Oct 09, 2019 1:57 pm
Bogle had a record of consistently underestimating stock returns. If you'll pardon the metaphor, even a broken clock is right twice a day. This no disrespect for the gentleman that Bogle was.
If you don't rate his abilities, why are you on a Bogle forum?

Anyhoo, you don't have to agree or disagree with Bogle. All you have to do to invalidate the idea is point out why the formula is wrong. Or why the inputs into it need tweaking. Which would involve explaining why you think earnings will grow more rapidly, or why multiples will expand past the currently high level.

Both of which would involve predictions about the future. :-)

To tomcat - 'junk information'. Mmmm... the dividend yield is a matter of historical record, as is its trend. The earnings growth likewise. The CAPE is also historical fact, and reversion to the mean is observable pretty much everywhere, not just in the stock market. I'm curious why anyone would regard those fact as 'junk', unless they simply didn't like the number that came out of the equation, but couldn't think of a 'non junk' method of refuting it... :-)
Last edited by ukbogler on Wed Oct 09, 2019 2:05 pm, edited 1 time in total.

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by EddyB » Wed Oct 09, 2019 2:04 pm

ukbogler wrote:
Wed Oct 09, 2019 1:44 pm
TomCat96 wrote:
Wed Oct 09, 2019 1:26 pm

I don't put any stock into market predictions like this, especially "market predictions for the next decade."
I don't care who it comes from, Bogle, Vanguard, Schiller, Fama, French, whoever...
Would you 'put stock into it' if we were at the end of the predicted period and it turned out to be right?

I only ask because it's 2 years since the prediction, and so far, Bogle was right. Despite the massive volatility since last fall, here we are, back where we started. How many years of him being right would convince you to 'put stock into it'? After all, we're 20% in already.
I don't know if I would, but the article linked in the OP was dated November 30, 2018, less than 11 months ago, not two years ago. According to this calculator (https://dqydj.com/sp-500-return-calculator/), annualized returns from December 2018 to September 2019 (using an average of closing prices in those two months) has exceeded 20%. If you're not going to conclude he was crazy wrong based on that, I'm not sure why you'd think being "right" after two years would have mattered, either. For the record, though, if you use the same calculator to go back two years (September 2017 to September 2019), you see annualized returns just under 10% (over 11% with dividends reinvested), so I'm not even sure why you claim it to have been right after two years.
Last edited by EddyB on Wed Oct 09, 2019 2:08 pm, edited 2 times in total.

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by willthrill81 » Wed Oct 09, 2019 2:05 pm

ukbogler wrote:
Wed Oct 09, 2019 2:02 pm
willthrill81 wrote:
Wed Oct 09, 2019 1:57 pm
Bogle had a record of consistently underestimating stock returns. If you'll pardon the metaphor, even a broken clock is right twice a day. This no disrespect for the gentleman that Bogle was.
If you don't rate his abilities, why are you on a Bogle forum?
Very few people on this forum believe that everything Bogle said was absolute truth.
ukbogler wrote:
Wed Oct 09, 2019 2:02 pm
Anyhoo, you don't have to agree or disagree with Bogle. All you have to do to invalidate the idea is point out why the formula is wrong. Or why the inputs into it need tweaking. Which would involve explaining why you think earnings will grow more rapidly, or why multiples will expand past the currently high level.
I don't have to point out the flaws in the formula. I can just point to Bogle's predictions consistently underestimating stock returns. If the data don't support a model, then there's a strong likelihood that the model is wrong.
“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: John Bogle’s formula says 1% real stock returns likely over next decade

Post by ukbogler » Wed Oct 09, 2019 2:09 pm

EddyB wrote:
Wed Oct 09, 2019 2:04 pm
I don't know if I would, but the article linked in the OP was dated November 30, 2018,
the Bogle article dates from Oct 2017. Unless he meant it to begin the moment the article went to print, we can assume he meant 'shortly'. From start of 2018, the S&P was at 28 and change. Remind me again where it is in a few months when we pass the 2 year mark.

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by TomCat96 » Wed Oct 09, 2019 2:11 pm

ukbogler wrote:
Wed Oct 09, 2019 2:02 pm
willthrill81 wrote:
Wed Oct 09, 2019 1:57 pm
Bogle had a record of consistently underestimating stock returns. If you'll pardon the metaphor, even a broken clock is right twice a day. This no disrespect for the gentleman that Bogle was.
If you don't rate his abilities, why are you on a Bogle forum?

Anyhoo, you don't have to agree or disagree with Bogle. All you have to do to invalidate the idea is point out why the formula is wrong. Or why the inputs into it need tweaking. Which would involve explaining why you think earnings will grow more rapidly, or why multiples will expand past the currently high level.

Both of which would involve predictions about the future. :-)

To tomcat - 'junk information'. Mmmm... the dividend yield is a matter of historical record, as is its trend. The earnings growth likewise. The CAPE is also historical fact, and reversion to the mean is observable pretty much everywhere, not just in the stock market. I'm curious why anyone would regard those fact as 'junk', unless they simply didn't like the number that came out of the equation, but couldn't think of a 'non junk' method of refuting it... :-)
No no no.
Let's focus on one thing and ONE THING ONLY.

The stock market is going to grow at 1% real a year for the next decade.

What are you going to do with that?
Dont talk to me about historical records, facts, etc. That's not the topic of the day. The topic of the day is the reason you posted. Its the reason I responded. If you want, I will now hereforth concede all historical data and facts. You win. ok. you win.
Now lets talk about this:

The stock market is going to grow at 1% real a year for the next decade.

What are we going to do about that now that we know it? Alter boglehead strategy?

Focus focus focus.

This is not about winning.

How do I know you think this is about winning? Because your point was "TOMcat, i guess you cant find any other way to refute my point other than calling it junk. Ha ha shame on you."

This is my position.
Alright I lose.

Given your point, where do we go from here. What can we build on your information? What we can deduce and offer the rest?
How do we grow from the certainty:

The stock market is going to grow at 1% real a year for the next decade.

Build deductions. Build. Build. Build.
Last edited by TomCat96 on Wed Oct 09, 2019 2:14 pm, edited 2 times in total.

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by ukbogler » Wed Oct 09, 2019 2:13 pm

willthrill81 wrote:
Wed Oct 09, 2019 2:05 pm
I don't have to point out the flaws in the formula. I can just point to Bogle's predictions consistently underestimating stock returns. If the data don't support a model, then there's a strong likelihood that the model is wrong.
Unfortunately, it's unscientific to say "I don't like the fella who came up with this so its wrong".

You falsify it methodically. Which is going to be difficult given that it's logically consistent. Your on;y option is to argue about the data going into it, really. Good luck!

Tomcat - no no no no no. Happy? No? No no? No no no no no no no?
What do you think anyone should do with information that an asset class is going to systematically underperform for a long time? No? idea? No? No no no? Try and focus. The obvious answer is to modify asset allocation.

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by TomCat96 » Wed Oct 09, 2019 2:15 pm

ukbogler wrote:
Wed Oct 09, 2019 2:13 pm
willthrill81 wrote:
Wed Oct 09, 2019 2:05 pm
I don't have to point out the flaws in the formula. I can just point to Bogle's predictions consistently underestimating stock returns. If the data don't support a model, then there's a strong likelihood that the model is wrong.
Unfortunately, it's unscientific to say "I don't like the fella who came up with this so its wrong".

You falsify it methodically. Which is going to be difficult given that it's logically consistent. Your on;y option is to argue about the data going into it, really. Good luck!

Tomcat - no no no no no. Happy? No? No no? No no no no no no no?
What do you think anyone should do with information that an asset class is going to systematically underperform for a long time? No? idea? No? No no no? Try and focus. The obvious answer is to modify asset allocation.

Are you going to do that?
Are you that certain you are going to modify your asset allocation based on what you wrote? namely that
The stock market is going to grow at 1% real a year for the next decade.

If you're not serious about it, then that uncertainty is precisely what I am talking about.
To the extent you are unwilling to modify your asset allocation based on it, is precisely the degree I choose not to take heed to such predictions.

If I can't make cogent deductions, it's nothing more than a talking point.

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by EddyB » Wed Oct 09, 2019 2:22 pm

ukbogler wrote:
Wed Oct 09, 2019 2:09 pm
EddyB wrote:
Wed Oct 09, 2019 2:04 pm
I don't know if I would, but the article linked in the OP was dated November 30, 2018,
the Bogle article dates from Oct 2017. Unless he meant it to begin the moment the article went to print, we can assume he meant 'shortly'. From start of 2018, the S&P was at 28 and change. Remind me again where it is in a few months when we pass the 2 year mark.
October 2017 to September 2019, the annualized return of S&P 500, adjusted for CPI, was 6.5%, or 8.3% with dividends reinvested. From January 2018 to last month (again, adjusted for CPI), the annualized return was 2.4%, or 4.1% with dividends reinvested.

Even if you do get some date pair in January that makes your factual claims more accurate, I'd still point at the periods I just reported to say that one snapshot of two years doesn't tell you much about ten years.

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by Hydromod » Wed Oct 09, 2019 2:42 pm

I'm cutting and pasting from the thread I started, which basically agrees with the conclusions from the Bogle formula.

The following is from a predictive model for the future market returns based on the average investor portfolio allocation to equities the-single-greatest-predictor-of-future-stock-market-returns. In essence, the idea is that a substantial fraction of the market response is based on the investor desire to maintain a portfolio percentage as equities, as opposed to bonds and cash, which drives the overall pricing. There is a follow-up post showing why caution is needed in the interpretation valuation-and-returns-adventures-in-curve-fitting.

Additional discussion includes a link to an online chart updating the prediction.

This was discussed here before (The Single Greatest Predictor of Future Stock Market Returns, Here's what the boglehead mind said about it when it first came out). A mix of comments ranging from bah! to interesting!

Nick Maggiuli (why-the-best-predictor-of-future-stock-market-returns-is-useless) has a pessimistic viewpoint of how actionable this information would be for an investor, essentially because it would be hard for an investor to have the appropriate patience.

The original 2013 post points to data from FRED that is used to calculate equity fraction, and uses 10-year S&P 500 total return. I decided to check out the idea a bit more.

I used the online Schiller monthly database for the S&P and dividends and the FRED data, which starts October 1945. I assign the values to the middle of their respective periods (the middle of the month for the S&P, middle of the quarter for FRED data), and linearly interpolate the FRED data to the S&P dates. Then I calculate the future returns for a fixed duration in years (4 years, 6 years, etc.) for each valid month. I calculate the present equity fraction is approximately 0.44.

Image

The figure shows scatter plots of historical returns given starting equity fraction for various durations. The dots are color coded according to whether the equity fraction is decreasing (blue), steady (gray), or increasing (red). The range in CAGR is where the present equity fraction contacts the convex hull surrounding all of the points (the contact of the amber line with the light gray polygon), which represents the extremes that have been observed.

The big square is a regressed value (labeled E[CAGR]) based on the set of data points, with the regression fit indicated with the R-squared value.

The d[CAGR] label indicates the CAGR for the current period assuming that the expected CAGR values are realized. For example, the plot with nyr = 6 has a two-year window (4 years to 6 years); the d[CAGR] value is what is needed to get E[CAGR] = 0.9 percent after six years given that CAGR was 1.5 percent for the first four years. Actually getting the d[CAGR] value would be highly unexpected, given the possible range of returns.

These data are consistent with the idea that it is very hard to predict the next few years, but it is less hard when considering longer periods.

What the numbers suggest is a swoon for the next ten years, arguably with the worst decline around five years from now, and some gradual recovery afterwards. Presumably this is more likely to manifest as bouncing around rather than a smooth blah. I did the same in five-year chunks up to 20 years, the estimate showed increasing returns the final five years.

I don’t get exactly the same forward prediction as others; my E[CAGR] for ten years is 1.1 percent, compared with 3.6 percent by several others. The R-squared value is identical, so I may generated a different regression with three times as many points, may have a different period of data, or may have botched the return calculation somehow. But I think the overall conclusions are consistent.

From this information, I would conclude that those with a retirement horizon of ten to fifteen years out should rely more heavily on contributions than maybe we've been conditioned to recently. However, the silver lining is that there is a good chance that the following period should be better.

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by Vulcan » Wed Oct 09, 2019 2:50 pm

TomCat96 wrote:
Wed Oct 09, 2019 2:11 pm
What are we going to do about that now that we know it? Alter boglehead strategy?

Focus focus focus.
:D

I suppose one might decide they need to increase their savings rate.
If you torture the data long enough, it will confess to anything. ~Ronald Coase

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by Jebediah » Wed Oct 09, 2019 2:59 pm

willthrill81 wrote:
Wed Oct 09, 2019 1:16 pm

Even using 1/CAPE as an estimate for forward returns, that implies real returns of 3.5%, far better than 1%.

The current P/E ratio is 21.73, so using 1/P/E implies real returns of 4.6%.

So if earnings per share didn't grow at all over the next decade, 3.5%-4.6% seems like a reasonable 'likely' range to me.

Perhaps coincidentally and FWIW, the real returns of U.S. stocks (i.e. VTSMX) over the last 20 years, month-to-month, were 4.49%.
It makes intuitive sense that E/P implies real returns.

But does that mean Value always has higher expected returns than growth, by definition?

Even though Value has lower SD?

And despite the outcome of Value underperforming for 30 years? (not to play results but 30 years is a long time).

I'm not sure a better P/E ratio actually means better expected returns even though intuitively it should.

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by YogurtRunner » Wed Oct 09, 2019 3:01 pm

EddyB wrote:
Wed Oct 09, 2019 2:22 pm
ukbogler wrote:
Wed Oct 09, 2019 2:09 pm
EddyB wrote:
Wed Oct 09, 2019 2:04 pm
I don't know if I would, but the article linked in the OP was dated November 30, 2018,
the Bogle article dates from Oct 2017. Unless he meant it to begin the moment the article went to print, we can assume he meant 'shortly'. From start of 2018, the S&P was at 28 and change. Remind me again where it is in a few months when we pass the 2 year mark.
October 2017 to September 2019, the annualized return of S&P 500, adjusted for CPI, was 6.5%, or 8.3% with dividends reinvested. From January 2018 to last month (again, adjusted for CPI), the annualized return was 2.4%, or 4.1% with dividends reinvested.

Even if you do get some date pair in January that makes your factual claims more accurate, I'd still point at the periods I just reported to say that one snapshot of two years doesn't tell you much about ten years.
You are right, but one year isn't what Bogle was talking about. When you start looking across decades you start to realize how homgenized the returns really are and this relates to why Bogle says (and demonstrates) indexing is better than managed funds. It all comes out in the wash over the long horizon. I keep getting all excited because this or that fund had an 18% rise YTD and then I remember that simple lesson.

I really think we're kidding ourselves believing we can get rich doing the exact same thing the herd is doing. When I read things like "50% of a portfolio's value are contributions made" I wonder whether all of this is just an insane daydream. Because while on the one hand you doubled your money, on the other hand, all you did was double your money. It's better than losing money, of course. But I look at my portfolio and made the same money 2-3 times already this year and it is depressing, quite frankly, watching myself stay in neutral. Last year completely sucked -3% return, basically. Hence my comment about a crowded trade. I think the volatility traders have buy and holders fixed in their sights. I'm looking for a way to break from it.


To the extent you are unwilling to modify your asset allocation based on it, is precisely the degree I choose not to take heed to such predictions.
And what asset allocation change would do anything to help given the correlations? Bonds? The impending and then the fact of the inverted yield curve has played hell with bonds all this year. If you're not timing bond purchases, you're likely losing on whatever bond funds you bought.
Last edited by YogurtRunner on Wed Oct 09, 2019 3:04 pm, edited 1 time in total.

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by willthrill81 » Wed Oct 09, 2019 3:01 pm

ukbogler wrote:
Wed Oct 09, 2019 2:13 pm
willthrill81 wrote:
Wed Oct 09, 2019 2:05 pm
I don't have to point out the flaws in the formula. I can just point to Bogle's predictions consistently underestimating stock returns. If the data don't support a model, then there's a strong likelihood that the model is wrong.
Unfortunately, it's unscientific to say "I don't like the fella who came up with this so its wrong".
I never said that, and I'll ask you to refrain from putting words in my mouth. I admire Bogle's work and have said so in this thread. The fact that there are points where I disagree with some of his conclusions is a totally separate issue.

Bogle's model has consistently underestimated stock market returns. Therefore, it is very reasonable to question whether the model is valid, even if it seems intuitively correct. Intuition should be ignored, but neither should it be treated as gospel.

It was considered to be intuitive, common sense at one time that the flies came directly from garbage, the world was flat, and that gravity affects heavy objects more so than lighter objects.
“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: John Bogle’s formula says 1% real stock returns likely over next decade

Post by willthrill81 » Wed Oct 09, 2019 3:04 pm

Jebediah wrote:
Wed Oct 09, 2019 2:59 pm
willthrill81 wrote:
Wed Oct 09, 2019 1:16 pm

Even using 1/CAPE as an estimate for forward returns, that implies real returns of 3.5%, far better than 1%.

The current P/E ratio is 21.73, so using 1/P/E implies real returns of 4.6%.

So if earnings per share didn't grow at all over the next decade, 3.5%-4.6% seems like a reasonable 'likely' range to me.

Perhaps coincidentally and FWIW, the real returns of U.S. stocks (i.e. VTSMX) over the last 20 years, month-to-month, were 4.49%.
It makes intuitive sense that E/P implies real returns.

But does that mean Value always has higher expected returns than growth, by definition?

Even though Value has lower SD?

And despite the outcome of Value underperforming for 30 years? (not to play results but 30 years is a long time).

I'm not sure a better P/E ratio actually means better expected returns even though intuitively it should.
Your point is a very good one and has led many others to come to the conclusion that valuations are not reliably mean reverting, nor are they very good predictors of future market returns. 'High' valuations can be followed by very good returns, and 'low' valuations can be followed by very poor returns. As such, I personally pay little attention to valuations in my own planning.
“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: John Bogle’s formula says 1% real stock returns likely over next decade

Post by alex_686 » Wed Oct 09, 2019 3:13 pm

Jebediah wrote:
Wed Oct 09, 2019 2:59 pm
But does that mean Value always has higher expected returns than growth, by definition?
I don't think so. CAPE rests on very broad strokes. The averaging out the rough edges of discretionary accounting charges should give us a better picture of prior returns, that should let us project forward. Part of the trick is that he is lumping everything together. Companies with negative earnings, large one off accounting charges, etc. The more in the pot the better the averages are. I can't think of any theoretical basis that would let us cut that pot into a value bucket and a growth bucket.

You would need to haul out a factor model to do that.

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Re: John Bogle’s formula says 1% real stock returns likely over next decade

Post by owenmia » Wed Oct 09, 2019 3:16 pm

Why risk your life savings for 1%?

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