Are we entering an era of diminishing returns ?

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HomerJ
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Re: Are we entering an era of diminishing returns ?

Post by HomerJ »

Destiple wrote: Wed Jul 21, 2021 12:11 pm Which sector will be a better place for investment for next 10 yrs ?
No one knows. It's impossible to know. Anyone who tells you they know is lying.

Look, are you retired today? Are you retiring in the next 10 years? Or is retirement farther out?

If retirement is 10-20 or more years away, you just stay the course. The next 10 years might indeed have low returns. But then low returns are usually followed by years with good returns.

The long-term 10% nominal historical average annual return of the stock market INCLUDES all the crashes and the bad years.

We don't get 10% during the good years, and 2% during the bad years.

We get like 18% during the good years and 2% during the bad years, and it still averages out to 10% a year over the long-run.

Sure, it would be great if one could get out of the stock market during those 2% years, and invest in something else, but it's very difficult to time the market successfully. And if you miss a few of the good years if you get out early because you're expecting bad years, it can really cost you.

Just staying in over the long-run, so far, has made us rich. Will the future repeat? Nothing is for sure. But, so far, bad years are followed by good years are followed by bad years are followed by good years.

Now, if you're about to retire, you need a good chunk of your money in safer assets like CDs, or a bond fund. They don't pay much interest today, but they are still safer than stocks. You still need some money in stocks for the long-term gains, but you need some money in the safe assets now to buy food if stocks crash next year.

I'm close to retirement and I'm 50/50 stocks/bonds... I'm not worried about the stock side doing poorly for the next 5-10 years because even if it does, I have plenty of money on the bond side to get me through the bad years.
Last edited by HomerJ on Wed Jul 21, 2021 12:36 pm, edited 2 times in total.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
ivgrivchuck
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Re: Are we entering an era of diminishing returns ?

Post by ivgrivchuck »

Destiple wrote: Wed Jul 21, 2021 12:11 pm
ivgrivchuck wrote: Wed Jul 21, 2021 11:23 am
Destiple wrote: Fri Jul 09, 2021 4:36 pm Are we headed to an era in which stock market will offer meager returns for decades? With no major downturns and exponential inflation
Obviously no one has a crystal ball but let’s share opinions and why you think that way
Thanks
Not for decades, but perhaps for a decade.

In his book "Little Book of Common sense investing" John C. Bogle says roughly that the true return of stocks is "dividend yield + earnings growth" and everything else is just noise (speculative gains/losses) which will average out to zero over many decades. He also made a point (2017 edition) that since dividend yields are at historic lows relative to stock valuations, the expected return for stocks over the next decade or so will be significantly lower than the historical averages.

The fact that the stocks have kept climbing since 2017 like crazy has lowered the expected returns more and more.
In such a situation where do you think one should park his assets for a decade of diminishing returns ?
Bonds? TIPs?
Gold
Crypto
Commodities
REITS
Or energy stocks
Which sector will be a better place for investment for next 10 yrs ?
Thanks
If you support efficient market hypothesis (as I do; and mr. Bogle did), then all those asset classes are fairly priced.
While the expected returns of stocks have gone down, money has flown into other assets and also their expected returns have gone down.

In other words, you can't do anything. Just stick with your standard AA.

The exception are products which are only available to retail investors: CDs, I-bonds, EE-bonds, MYGAs. In an environment where treasury yields are near zero, they do provide some advantage over market rates. They might be good bond replacements.
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HomerJ
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Re: Are we entering an era of diminishing returns ?

Post by HomerJ »

Destiple wrote: Wed Jul 21, 2021 12:13 pm
HomerJ wrote: Wed Jul 21, 2021 10:26 am
Destiple wrote: Sat Jul 10, 2021 9:38 am
zaboomafoozarg wrote: Sat Jul 10, 2021 8:20 am I always plan for 2% stock real returns and 0% bond real returns. Anything over that is a bonus.
Please explain how can you sustain yourself based on such low returns ?
You spend the money you saved.

If you have 2 million dollars, even if you get 0% real on all your investments, you can still sustain yourself with $50,000 a year for 40 years until the money runs out.
I have only 700k saved , if I spend 50k a yr how long can I last ? Only 14 yrs ?
How did you calculate that ? Please share if you can
Yes, only 14 years. 700/50. That's assuming no real growth (i.e. you match inflation and that's it). If you get any growth at all, the money can last longer.

Will you get any Social Security? If you are 62, and you will get $25k a year at age 65, then the money will last longer. Because you will only need to pull $25,000 a year after you start getting Social Security.

You could spend $150k ($50k a year) from now until 65, and then spend $25k a year for another 22 years. ($550,000 left / $25,000 = 22)

So that's 25 years with zero growth. If there is any growth at all, it will last longer.

The other answer is work longer, and save more. Or spend less in retirement.

$700k might be enough if you have Social Security coming soon. But if you are 55, you'll have to keep working... Or retire and only spend $30k a year.

And remember, all this is assuming zero growth. It's a good place to start to be super conservative (and the math is easy), but recognize that there will be some growth, so don't be discouraged by the numbers too much.

(On the other hand, if your plan works with zero real growth, you're probably in great shape).
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
StartedAt22
Posts: 27
Joined: Sat Mar 06, 2021 10:26 pm

Re: Are we entering an era of diminishing returns ?

Post by StartedAt22 »

Destiple wrote: Wed Jul 21, 2021 12:13 pm
HomerJ wrote: Wed Jul 21, 2021 10:26 am
Destiple wrote: Sat Jul 10, 2021 9:38 am
zaboomafoozarg wrote: Sat Jul 10, 2021 8:20 am I always plan for 2% stock real returns and 0% bond real returns. Anything over that is a bonus.
Please explain how can you sustain yourself based on such low returns ?
You spend the money you saved.

If you have 2 million dollars, even if you get 0% real on all your investments, you can still sustain yourself with $50,000 a year for 40 years until the money runs out.
I have only 700k saved , if I spend 50k a yr how long can I last ? Only 14 yrs ?
How did you calculate that ? Please share if you can
This is simple. $2MM / $50,000 per year = 40 years

In your example: $700k / $50,000 per year = 14 years
A task begun is nearly half complete | Enough is as good as a feast | Relationships are the single most important thing to me in my life
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Destiple
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Re: Are we entering an era of diminishing returns ?

Post by Destiple »

ivgrivchuck wrote: Wed Jul 21, 2021 12:33 pm
Destiple wrote: Wed Jul 21, 2021 12:11 pm
ivgrivchuck wrote: Wed Jul 21, 2021 11:23 am
Destiple wrote: Fri Jul 09, 2021 4:36 pm Are we headed to an era in which stock market will offer meager returns for decades? With no major downturns and exponential inflation
Obviously no one has a crystal ball but let’s share opinions and why you think that way
Thanks
Not for decades, but perhaps for a decade.

In his book "Little Book of Common sense investing" John C. Bogle says roughly that the true return of stocks is "dividend yield + earnings growth" and everything else is just noise (speculative gains/losses) which will average out to zero over many decades. He also made a point (2017 edition) that since dividend yields are at historic lows relative to stock valuations, the expected return for stocks over the next decade or so will be significantly lower than the historical averages.

The fact that the stocks have kept climbing since 2017 like crazy has lowered the expected returns more and more.
In such a situation where do you think one should park his assets for a decade of diminishing returns ?
Bonds? TIPs?
Gold
Crypto
Commodities
REITS
Or energy stocks
Which sector will be a better place for investment for next 10 yrs ?
Thanks
If you support efficient market hypothesis (as I do; and mr. Bogle did), then all those asset classes are fairly priced.
While the expected returns of stocks have gone down, money has flown into other assets and also their expected returns have gone down.

In other words, you can't do anything. Just stick with your standard AA.

The exception are products which are only available to retail investors: CDs, I-bonds, EE-bonds, MYGAs. In an environment where treasury yields are near zero, they do provide some advantage over market rates. They might be good bond replacements.
MYGA is a long term commitment or a relatively fluid asset ?
And TIPS gets hammered too when stocks decline despite rise in inflation? So TIPS is always a bad choice unless there is inflation but economy and stocks bonds are doing well ? When does it makes sense to hold TIPS
Last edited by Destiple on Wed Jul 21, 2021 1:10 pm, edited 1 time in total.
Monsterflockster
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Re: Are we entering an era of diminishing returns ?

Post by Monsterflockster »

The wealthy will always have ways to make more money. My guess the stock market returns will be just fine... but if not there will be something else to make money on.
Topic Author
Destiple
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Re: Are we entering an era of diminishing returns ?

Post by Destiple »

Monsterflockster wrote: Wed Jul 21, 2021 1:09 pm The wealthy will always have ways to make more money. My guess the stock market returns will be just fine... but if not there will be something else to make money on.
True question is this something else will it be accessible to poor ones like me or just the rich
KlangFool
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Re: Are we entering an era of diminishing returns ?

Post by KlangFool »

StartedAt22 wrote: Wed Jul 21, 2021 11:29 am
KlangFool wrote: Fri Jul 09, 2021 6:50 pm
Destiple wrote: Fri Jul 09, 2021 6:40 pm So let’s go with the assumption the next 10 years we’re gonna have minimal returns on the market what should be the investing strategy you would adopt?
Just thinking out loud here I totally understand this is not a substitute for financial advice
Destiple,

Why do you think that we need a new investing strategy?

I have a very simple answer. I saved 1 year of expense every year. I can be FI in less than 20 years with near 0% real return. I never have a problem. It is a saving rate problem. It is not a return rate problem.

This is not the answer that most people like to hear. They hope that the return rate can solve their saving rate problem. But, the market return is always unpredictable.

KlangFool
But Klangfool, you will only have 20x expenses? By what metric will you be FI with only 20x expenses and near 0% returns?
My portfolio is 27X and my EF is 3X. I am 30X. Near 0% is not 0%.

KlangFool
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StartedAt22
Posts: 27
Joined: Sat Mar 06, 2021 10:26 pm

Re: Are we entering an era of diminishing returns ?

Post by StartedAt22 »

KlangFool wrote: Wed Jul 21, 2021 1:56 pm
StartedAt22 wrote: Wed Jul 21, 2021 11:29 am
KlangFool wrote: Fri Jul 09, 2021 6:50 pm
Destiple wrote: Fri Jul 09, 2021 6:40 pm So let’s go with the assumption the next 10 years we’re gonna have minimal returns on the market what should be the investing strategy you would adopt?
Just thinking out loud here I totally understand this is not a substitute for financial advice
Destiple,

Why do you think that we need a new investing strategy?

I have a very simple answer. I saved 1 year of expense every year. I can be FI in less than 20 years with near 0% real return. I never have a problem. It is a saving rate problem. It is not a return rate problem.

This is not the answer that most people like to hear. They hope that the return rate can solve their saving rate problem. But, the market return is always unpredictable.

KlangFool
But Klangfool, you will only have 20x expenses? By what metric will you be FI with only 20x expenses and near 0% returns?
My portfolio is 27X and my EF is 3X. I am 30X. Near 0% is not 0%.

KlangFool
Klangfool, what if you started when you were 21? Then by your premise you would have a portfolio of approx. 27x @ 41 years old. Are you FI then?
Last edited by StartedAt22 on Wed Jul 21, 2021 2:03 pm, edited 1 time in total.
A task begun is nearly half complete | Enough is as good as a feast | Relationships are the single most important thing to me in my life
mptfan
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Re: Are we entering an era of diminishing returns ?

Post by mptfan »

I predict the stock market will fluctuate. And I predict that 10 years from now the total stock market index will be higher than it is now.
KlangFool
Posts: 21536
Joined: Sat Oct 11, 2008 12:35 pm

Re: Are we entering an era of diminishing returns ?

Post by KlangFool »

StartedAt22 wrote: Wed Jul 21, 2021 2:01 pm
KlangFool wrote: Wed Jul 21, 2021 1:56 pm
StartedAt22 wrote: Wed Jul 21, 2021 11:29 am
KlangFool wrote: Fri Jul 09, 2021 6:50 pm
Destiple wrote: Fri Jul 09, 2021 6:40 pm So let’s go with the assumption the next 10 years we’re gonna have minimal returns on the market what should be the investing strategy you would adopt?
Just thinking out loud here I totally understand this is not a substitute for financial advice
Destiple,

Why do you think that we need a new investing strategy?

I have a very simple answer. I saved 1 year of expense every year. I can be FI in less than 20 years with near 0% real return. I never have a problem. It is a saving rate problem. It is not a return rate problem.

This is not the answer that most people like to hear. They hope that the return rate can solve their saving rate problem. But, the market return is always unpredictable.

KlangFool
But Klangfool, you will only have 20x expenses? By what metric will you be FI with only 20x expenses and near 0% returns?
My portfolio is 27X and my EF is 3X. I am 30X. Near 0% is not 0%.

KlangFool
Klangfool, what if you started when you were 21? Then by your premise you would have a portfolio of approx. 27x @ 41 years old. Are you FI then?
I would had FI if I didn't gamble in Telecom stocks and lost 50% of my portfolio in the process.

FYI. Both my older brother and older sister early retired at 49 years old. The average gross saving rate of my community is 30+%. Many of my family members are self-made millionaires.

KlangFool

P.S.: I have a BSEE and MSEE and so I didn't start at 21 years old.
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StartedAt22
Posts: 27
Joined: Sat Mar 06, 2021 10:26 pm

Re: Are we entering an era of diminishing returns ?

Post by StartedAt22 »

KlangFool wrote: Wed Jul 21, 2021 3:22 pm
StartedAt22 wrote: Wed Jul 21, 2021 2:01 pm
KlangFool wrote: Wed Jul 21, 2021 1:56 pm
StartedAt22 wrote: Wed Jul 21, 2021 11:29 am
KlangFool wrote: Fri Jul 09, 2021 6:50 pm

Destiple,

Why do you think that we need a new investing strategy?

I have a very simple answer. I saved 1 year of expense every year. I can be FI in less than 20 years with near 0% real return. I never have a problem. It is a saving rate problem. It is not a return rate problem.

This is not the answer that most people like to hear. They hope that the return rate can solve their saving rate problem. But, the market return is always unpredictable.

KlangFool
But Klangfool, you will only have 20x expenses? By what metric will you be FI with only 20x expenses and near 0% returns?
My portfolio is 27X and my EF is 3X. I am 30X. Near 0% is not 0%.

KlangFool
Klangfool, what if you started when you were 21? Then by your premise you would have a portfolio of approx. 27x @ 41 years old. Are you FI then?
I would had FI if I didn't gamble in Telecom stocks and lost 50% of my portfolio in the process.

FYI. Both my older brother and older sister early retired at 49 years old. The average gross saving rate of my community is 30+%. Many of my family members are self-made millionaires.

KlangFool

P.S.: I have a BSEE and MSEE and so I didn't start at 21 years old.
My point is that in your original comment, you said 20 years at a 50% SR will grant you FI. My question for you, in hopes to challenge your initial premise, is that if you start @ 21, save 50% of income for 20 years, then isn't it possible you will not achieve FI without the help of market returns?
A task begun is nearly half complete | Enough is as good as a feast | Relationships are the single most important thing to me in my life
KlangFool
Posts: 21536
Joined: Sat Oct 11, 2008 12:35 pm

Re: Are we entering an era of diminishing returns ?

Post by KlangFool »

StartedAt22 wrote: Wed Jul 21, 2021 3:27 pm
KlangFool wrote: Wed Jul 21, 2021 3:22 pm
StartedAt22 wrote: Wed Jul 21, 2021 2:01 pm
KlangFool wrote: Wed Jul 21, 2021 1:56 pm
StartedAt22 wrote: Wed Jul 21, 2021 11:29 am

But Klangfool, you will only have 20x expenses? By what metric will you be FI with only 20x expenses and near 0% returns?
My portfolio is 27X and my EF is 3X. I am 30X. Near 0% is not 0%.

KlangFool
Klangfool, what if you started when you were 21? Then by your premise you would have a portfolio of approx. 27x @ 41 years old. Are you FI then?
I would had FI if I didn't gamble in Telecom stocks and lost 50% of my portfolio in the process.

FYI. Both my older brother and older sister early retired at 49 years old. The average gross saving rate of my community is 30+%. Many of my family members are self-made millionaires.

KlangFool

P.S.: I have a BSEE and MSEE and so I didn't start at 21 years old.
My point is that in your original comment, you said 20 years at a 50% SR will grant you FI. My question for you, in hopes to challenge your initial premise, is that if you start @ 21, save 50% of income for 20 years, then isn't it possible you will not achieve FI without the help of market returns?
StartedAt22,

My reverse question to you is this. If I cannot achieve FI in 20 years by saving 1 year of expense every year, then, we have a bigger problem. It means that the world economy is doing badly for 20 years. Then, it is no longer a money problem. Most people would not survive.

In order for that to be true, the average nominal annual return rate has to be less than 2.5% over 20 years.

Starting Net Worth 0%
Annual Savings 100%
Years
Annual Return Rate 20
1.00% 2202%
1.50% 2312%
2.00% 2430%
2.50% 2554%

KlangFool
Last edited by KlangFool on Wed Jul 21, 2021 8:04 pm, edited 1 time in total.
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ivgrivchuck
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Re: Are we entering an era of diminishing returns ?

Post by ivgrivchuck »

Destiple wrote: Wed Jul 21, 2021 1:04 pm MYGA is a long term commitment or a relatively fluid asset ?
Long term commitment.
And TIPS gets hammered too when stocks decline despite rise in inflation? So TIPS is always a bad choice unless there is inflation but economy and stocks bonds are doing well ? When does it makes sense to hold TIPS
TIPS are used mainly for liability matching portfolios.

This forum advocates for a passive investing approach. It seems to me that you have not yet fully grasped that concept.
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Topic Author
Destiple
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Joined: Tue Aug 18, 2020 11:31 am

Re: Are we entering an era of diminishing returns ?

Post by Destiple »

ivgrivchuck wrote: Wed Jul 21, 2021 3:57 pm
Destiple wrote: Wed Jul 21, 2021 1:04 pm MYGA is a long term commitment or a relatively fluid asset ?
Long term commitment.
And TIPS gets hammered too when stocks decline despite rise in inflation? So TIPS is always a bad choice unless there is inflation but economy and stocks bonds are doing well ? When does it makes sense to hold TIPS
TIPS are used mainly for liability matching portfolios.

This forum advocates for a passive investing approach. It seems to me that you have not yet fully grasped that concept.
Not really I’ve a LOT to learn
I have no background in finance and before 35 I didn’t pay much attention to it unfortunately
Caduceus
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Re: Are we entering an era of diminishing returns ?

Post by Caduceus »

I would say yes, if by diminishing returns you're referring to a broad market indexed return.

I think the main macroeconomic driver of equity returns over the next decade or two will largely be what happens to interest rates. Equities have had an incredible tailwind with the drop in interest rates. If they stay low, or rise more slowly than the impact of real corporate earnings growth, things may be alright.

It's quite possible we'll get another of those historical scenarios Buffett described in his article for Fortune many decades ago, where constantly rising interest rates result in extremely poor real returns for investors.
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HanSolo
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Re: Are we entering an era of diminishing returns ?

Post by HanSolo »

ivgrivchuck wrote: Wed Jul 21, 2021 11:23 am In his book "Little Book of Common sense investing" John C. Bogle says roughly that the true return of stocks is "dividend yield + earnings growth" and everything else is just noise (speculative gains/losses) which will average out to zero over many decades. He also made a point (2017 edition) that since dividend yields are at historic lows relative to stock valuations, the expected return for stocks over the next decade or so will be significantly lower than the historical averages.
There's another variable, and that's multiple expansion.

It appears that the predictions of diminishing returns have a built-in assumption that PE ratios (and/or other valuation metrics, e.g., CAPE, price-to-book, price-to-sales, market-cap-to-GDP, etc.) will "revert to the mean". Maybe they will. Or maybe there are secular shifts. It seems that, during the 21st century, some of those metrics are running at about double of their 20th-century averages. Speculation about diminishing returns seems to assume that those elevated valuations will not be sustained. It also assumes that we won't go to an even higher sustained plateau (like triple or quadruple of the 20th-century averages). While it may be true that "trees don't grow to the sky", I'm not sure there's any law of nature prohibiting trees, in the aggregate, from growing to quadruple of their previous average heights.

Frankly, I don't know what to assume about multiple (valuation) expansion, one way or the other.
ivgrivchuck wrote: Wed Jul 21, 2021 12:33 pm In other words, you can't do anything. Just stick with your standard AA.
The above may actually be the "bottom line" for this kind of question (at least as far as equities are concerned).

In that case, one might consider putting one's long-term investment assets into something like a three-fund portfolio, or a Target Retirement fund, or a LifeStrategy fund that's consistent with one's tolerance for volatility. It could be argued that doing otherwise constitutes a bet that one's own opinions about the market are better than the aggregate of market participants, and that's going out on a limb.
Destiple wrote: Wed Jul 21, 2021 6:21 pm Not really I’ve a LOT to learn
I have no background in finance and before 35 I didn’t pay much attention to it unfortunately
If you haven't already read this page on the Bogleheads Investment Philosophy, I highly recommend it. It doesn't cover everything discussed above, but it's a pretty good starting point.
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