FYI: (Sorry St. Jack, the Linkster doesn't agree with your prediction of a 4% return on stocks going forward. As indicated below the historical averages since 1928 are higher, and I believe they will continue in the future at a least a 6% or higher.)
One of the biggest questions facing retirement investors right now is what to expect from stocks over the coming decade.
It matters the most if you're at or near retirement, since that number will affect your ability to finance a reasonable life after work.
That's the disconnect many long-term investors feel right now. After decades of double-digit returns from the stock market, some market observers — among them Vanguard Group Founder John Bogle — warn that stocks could fall short of expectations.
Bogle puts the number at 4%, a return many investors once associated with bonds, not stocks. He predicted lower returns in an interview published by CNBC.
Regards,
Ted
http://www.marketwatch.com/story/what-if-john-bogle-is-right-about-4-stock-returns-2017-04-25/printS&P 500 Arithmetic Average:
1928-2016 11.42%
1967-2016 11.45%
2007-2016 8.65%
S&P 500 Geometric Average:
1928-2016 9.53%
1967-2016 10.09%
2007-2016 6.88%
Comments
Derf
I "think", I "believe", I "predict", turns quickly into "I hope" and but only for the one receiving the message. It never affects the person putting the message out.
There are of course a number of wildcards here, but one thing Bogle doesn't do is make short term predictions. In the short-term markets always move on speculation. In the long-term, fundamentalists like Bogle believe stocks move on earnings yields--which is the inverse of the p/e ratio--and dividend yields relative to inflation and interest rates. Inflation, interest rates, taxes--this year's wild cards--and geopolitical events are always unpredictable and could throw any prediction off--long or short. Ideally, a prediction based on fundamentals should be made for a full market/economic cycle--at least five years--and factor in some sort of inflation and interest rate expectation. And still those can be grossly off. But at least making a prediction based on current stock valuation and yields is forward looking as opposed to simply looking at historical performance which is backwards looking.
Over 35 years, shifting the assumed annual return from 4% to 6% annual return changes your end value by 100%. (That's a simple compounding calculation assuming nothing other than a fixed amount invested and held for 35 years.)
I'd also be cautious about taking double-digit growth in the stock market as an entitlement. It might return 15% a year this century and the dividend checks might be delivered by unicorns, but I'm not sure that's the way to plan. Market returns are a combination of capital appreciation plus dividends. Capital appreciation is a combination of economic growth plus P/E expansion (a/k/a the supply of greater fools). The lower your starting P/E, the greater the prospect of expansion.
In the 20th century, per capita US GDP grew 2.3% annually; in the current century, it's been about 1%. P/Es in the 20th century averaged in the low teens; in the 21st, they're in the mid 20s.
Perhaps the rise of our Robot Overlords will change everything. Perhaps The Chinese Century will be different. Perhaps Mr. Trump's tax package will sail through Congress unscathed by partisans or lobbyists, hundreds of billions in overseas earnings will be repatriated and American corporations will again be the envy of the world.
Don't know. For me, the question is just, do I want to bet my future security on it?
David
He may not be right in a day, a week, or even a year or two. But he's got a great decade time span track record, and as Graham said, "In the short run, the market is a voting machine but in the long run, it is a weighing machine." After a decade on a treadmill of more modest returns, the currently rotund market may slim down to a more normal weight.
Bogle's talking about nominal return. He could be right - but that presupposes he knows something about what the inflation rate will be. Actually, 4% nominal with 1% inflation wouldn't look too bad. 4% nominal with 10% inflation would be a losing proposition. I think @Derf alludes to this issue in his above post.
Who knows? I sure don't. But I invest to protect myself against future inflation whether it materializes or not. And if you look at the current sizzling housing market, I'd lay my bet on greater, not less, inflation down the road.
Don't undersell "the Linkster". He's been both bullish and correct on his market calls for as long as I can remember. If anyone here has a better predictive record I challenge them to prove it.
Reported that the baby boomers (born 1946-1964) are retiring at a rate of 10,000/day (don't know if this counts weekends, too). Although also reported that only 1/3 saved enough for a decent retirement, one may suspect this bunch put away a lot of money via the normal investment vehicles of 401k, 403b, 457 and IRA's during the lots of jobs and money decades.
These folks will also hit the RMD stage, and start pulling money from these accounts, as well as some folks who will need to pull money before RMD.
So, my question is whether this money leaving the investment system will be offset by new investment money from the current working folks?
If there is more "out" money, versus "in" money, is the amount enough to affect the outcome of continued returns going forward, being 4%/annual or whatever.
What say you?
Thank you,
Catch
All the predictions for low returns are based on interpretations of current valuations, economic growth, and other guesses. And keep in mind that the prediction in question is for the S&P 500. What about other U.S. markets, developed international, and emerging markets, not to mention non-traditional investments? It seems to me that there is no way to predict this with any accuracy - heck, the weather people can't even get it right for the next 24 hours, and they have all sorts of ways to monitor things. The best thing is to assume your portfolio will achieve a very conservative return during your retirement years, and then run some scenarios to see if your dollars will outlast you. I would urge a similar strategy for the accumulation phase up to retirement. If the numbers turn out to be better, wonderful. You will have saved "too much".
I think that works for me.
On a $300,000 portfolio, that would require $75,000 be in cash/CDs/short-term bonds. Have at least 6-12 months of this in cash or CDs maturing in the near term. The remaining portfolio can be invested as aggressively as your risk profile and time horizon allow. In years when the stock markets are good, you would capture gains from your equity investments to replenish the $75,000. In lean years, you use dollars from your set-aside stash. The last two market crashes have meant recovery of values in about 5 years or less for our clients. The stash means you won't have to sell devalued assets in a down market.
Does this work? Yes. We have used this strategy with many clients for 30 years. The variables are the dollars needed, the number of years selected for protection, whether to withhold taxes from distributions in retirement accounts. Many clients reduce spending in years when returns are not good or negative. Some do not have that option. The key is to establish a very conservative total return projection for your retirement, and be able to adjust your cash flow need. If you base your lifetime income projection (to age 100) on a 7% annual return, you may be asking for a rude awakening.
The numbers seem to have borne him out. Here's a total return chart comparing VFINX and VBMFX from 1/1/2000 to 1/1/2010. Bonds win the total return race, +80% vs. -9.8%. In case you think that this was just luck with the stock market peaking in 2000, here's the comparison from 1/1/2001 to 1/1/2011, bonds winning +72% vs. + 13.9%. Even the comparison from 1/1/2002 to 1/1/2012 shows bonds winning +71% vs. +32%. In the current decade (to date), stocks have outperformed +147% to +28%. IRA distributions and asset allocations are essentially independent concepts. If you want to pull money out of the market you can do that while keeping your money inside your IRA.
Not that Bogle has ever suggested significantly adjusting allocations based on market conditions, let alone pulling money out of IRA, which wouldn't be necessary for that purpose. For example, "Fix your proper allocation and either leave it completely unchanged, irrespective of circumstances, or change it, but never more than 10 percentage points. Never be 100% in the market or 100% out of the market."
http://premium.working-money.com/wm/display.asp?art=107
Thank you all for a very informative discussion with a wide range of opinions well represented and well defended. I learned much.
Forecasting is dangerous business. Forecasting follies is well documented, especially when the forecast is made by a very knowledgeable and respected expert, I do read these forecasts, but I'm reluctant to act on them.
I mostly believe what Lao Tzu said that "Those who have knowledge, don't predict. Those who predict, don't have knowledge". More recently, Nils Bohr observed that "Prediction is very difficult, especially if it's about the future." So true.
Bear market risks are always a possibility. How possible? How deep? For how long to recovery? These are all relevant questions. History doesn't yield definitive answers, but it does help to scope the risks. Here is a Link to a useful summary:
http://www.mooncap.com/wp-content/uploads/2016/04/bear-markets-Mar2016.pdf
This reference helped me to scope the possibilities. It is a short presenration with excellent charts that nicely summarize the data. No guarantees, but these data help to put numbers on the risks. I hope it helps you guys too.
ADDED THOUGHT: The ultimate test is always the outcome. As famous physicist Richard Feynman said: "It doesn't matter how beautiful the guess is, or how smart the guesser is, or how famous the guesser is; if the experiment disagrees with the guess, then the guess is wrong. That's all there is to it." Amen to that!
Best Wishes
Bloomberg story: https://www.bloomberg.com/news/articles/2016-04-27/be-afraid-be-very-afraid-if-you-re-investing-for-the-long-run
McKinsey summary (containing link to full report pdf):
http://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/why-investors-may-need-to-lower-their-sights
The study is about 40 pages, excluding intro and technical appendices. Haven't read yet, but looks interesting and informative.
Bloomberg video (2 min) summarizing study and presenting investment alternative (go global, esp. EM):
"Buy and Hold", "Value Investing", etc. may have merits of their own, but they are in Isolation. Financial Advisors (telling people where to invest), Financial Planners (how to generate income stream for retirees), etc. are professions that have been "created" by the industry.
Some of us like me learnt it the hard way and I think the long way. And that is if one is going to invest in the market, don't do it because his neighbor is doing it. One HAS to go and get an understanding of how investing/markets/etc work. One does not have to get a PhD in it, but one has to have enough knowledge. My better half has a PhD, but has no clue about any of this. I wake up in the middle of most nights in a cold sweat with the scenario I'm dead, and she is the hapless victim various Financial Asswisers and Financial Plunderers.
You know how much money you have. You know how much loss you can tolerate. Educate yourself on the RISK of various investments. THAT is in your control. RETURNS are NOT in your control. So stop making assumptions, worse, stop letting OTHERS makes assumptions on your behalf what/if/how etc. you will need. I'm simply appalled when I hear "How much money do you think you need in retirement" question is asked by Financial Planner to an individual. If the individual does not know the answer to that question, then I'm very sorry, but I have no sympathy for them, and they deserve what they get. I've even shared that opinion with my wife, unfortunately she's my wife, so while I may not sympathize with her after I'm dead, which would be impossible, I still worry about it.
WAKE UP PEOPLE! Sometimes unemployment rate has to go up. Let's put most Financial Bullshitters out of business.