FYI: While some market analysts are anticipating real market returns of 1 percent or less over the next decade, investors in a recent survey by Boston-based Natixis are expecting more -- much more.
Respondents said that they would need returns 8.9 percent above inflation to meet their goals, 51 percent higher than the 5.9 percent real returns expectation of financial advisors surveyed by Natixis. When asked in 2016, respondents said that they would need 8.5 percent real annual returns.
Regards,
Ted
https://www.fa-mag.com/news/investors-need-8-9-percent-real-returns-from-their-portfolios-34967.html?print
Comments
Wondering which Natixis choices will meet the requirements of the "investors" as noted in the article.
https://ngam.natixis.com/us/funds-by-asset-class
Presuming the respondents are all Natixis account holders in this survey and use Natixis advisors, too; and yet the respondents express, IMO; very conflicted opinions of what they think they understand about investing, trusting an advisor, and risk and reward to obtain the return.
Would be interesting to actually chat with these folks about where they obtain or rationalized "their" return goals.
Anyone here know of investment vehicles/choices mix over the many years, with nominal risk/reward that would provide an annualized return of 11.9% (3% average inflation over the longer term backwards looking) and without knowing about taxes on returns?
Back testing with cherry picking investment does not count; as the article is about forward returns, yes?
Well, anyway; another coffee here and to the great outdoors.
Regards,
Catch
Earlier this morning I read the article and then looked at my portfolio. I can make it on as little as a 4% return over inflation which is less than the 8.9% stated in the article. In addition, I looked through my stack of funds; and, I have two that bettered the 8.9% objective over a ten year period. They were FDSAX and SPECX. However, remember the 2007 and 2008 returns from the Great Recession that brought the average down will soon be coming off at the end of next year. My broker has the thinking that a balanced portfolio will return somewhere between 6% to 8% on average over the next ten year period depending on it's equity allocation and positioning. He is not looking for great things from bonds.
Since, January 1, 2009 as reported by my investment brokerage account statements my master portfolio's annual return including cash has averaged 9.65% through September 29, 2017. So, this beats my brokers outlook.
I think what the article was trying to establish is that market returns are not going to meat investor expectations.
I wish all ... "Good Investing."
Old_Skeet
My first reaction to the desires of the investors noted in the article; is that they either need to get off their medications or to begin medications.
From where did they obtain these return expectations?
Yes, I understand that the stated "goal" is based upon what they think they need to satisfy future monetary needs or wants.
Gonna be too many in the 750 surveyed who will be required to change their spending habits into the future, IMO.
http://durableportfolios.com/global/understanding-investors/2017-global-survey-of-individual-investors-retirement-report
and the full Natixis press release on the US slice of that survey:
https://ngam.natixis.com/us/resources/2017-global-individual-investor-survey-press-release
(note that the table at the bottom of that US press release is global data, not data limited to US participants)
Just looking at the figures in the excerpt Ted quoted, my reaction was: what are these people smoking?
The historical real return of the US large cap market over the last century has been 7%. Depending on your source, bonds (10 year Treasuries) have returned between 2% and 6% less than stocks.
[See the stock link above: risk premium of stocks over bonds of 6%, historical nominal bond return of 5% with inflation average of 2%-3%, or simply the difference in nominal returns of stocks and bonds, which has been 2% or greater over the past 90 years.]
So even if the markets produce average real returns going forward (not expected over the next decade), you'd need a very aggressive (nearly all stock) portfolio to get to the 5.9% real return that advisors are supposedly predicting. (The 5.9%/advisors and 8.9%/investors figures are not in the Natixis releases, so they must come from the full survey.)
The FA Mag article says that there's a disconnect (51% difference) between investors and advisors, based on these two figures. If there is this disconnect, what does that say about the job that advisors are doing in educating and guiding their clients?
But there is another possibility. Investors may not understand what real return means, and are simply reporting nominal return expectations. That 3% difference would fall within a reasonable range of inflation possibilities. The Natixis report seems to support this interpretation of the data, as it observes that only 1/6 of Millennials (17%) "have factored inflation into their retirement savings planning." (The next sentence of the release hypothesizes a 3% inflation rate.)
Finally, note that the survey may not be representative of American households - just ones with money. It surveyed only investors with over $100K in investable assets. (About 30% Gen X, 30% Gen Y, 30% Boomers, 10% Retirees.) Most households don't have nearly that much in net worth let alone investable assets, though that's a whole 'nuther story.
Using the BLS figures here for annual CPI-U (inflation) annual amounts for the 10 past July's, I computed a cumulative inflation of 18.07% over the past decade.
M* reports that $10K invested in FDSAX a decade ago would be worth $25,064 today, in nominal dollars. Adjusting for inflation (dividing by 1.18066) gives a real value of $21,229. Annualized, that $10K grew at a rate of 7.82%/year to become $21,229 in real dollars. Still terrific, but not quite 8.9% real return.
While 2008 will soon drop off the 10 year chart, that won't magically make your expected returns better, at least if you're looking long term. No more so than 2000-2002 dropping off the 5 year chart helped investors when 2008 came along. Bears will still come along sooner or later, you just don't know when. Looking at bull market data alone is IMHO misleading.
Not trying to be a wet blanket here, just trying to be, from my perspective, realistic. An aging population suggests slower growth, as does the fact that companies are hoarding cash (rather than putting the money to work).
Awhile back we simplified ours by switching to diversified index funds and ETFs to reduced redundancy. Today actively managed funds constitute less than 50% of our portfolio. But then everyone is in different situation.
When investing in equities and/or bonds, often an optimistic outlook is needed to help an investor to stay the course. But that optimism should be grounded in realistic expectations. The target return numbers quoted from the Boston-based group of investors fail that simple test by a rather wide margin.
Here is a Link to a very informative chart that summarizes historical equity and bond returns since the end of WW II:
http://www.businessinsider.com/range-of-annualized-stock-bond-returns-2014-11
These data provide significant benchmarks for planning purposes. While history is never exactly repeated, it does provide a terrific point of departure for making projections.
Unless circumstances demonstrate an excessive change in economic/political conditions, returns from any 5-year or longer timeframe should not be dramatically different from the historical database. These data should be used to guide expectations.
Daydreaming might provide some comfort for some folks, but the marketplace does not deliver for these daydreamers unless they are lucky. In the investing world both luck and skill determine the outcomes. Daydreaming is not a factor. It can do substantial harm to both the portfolio and to an individual's self esteem. You gotta know the data.
Best Wishes
What stock market (US or global, S&P 500 or Wilshire 5000 or ...), and what bond market (ten year T-bonds, corporates, or ...)? If one uses returns of the S&P 500 and 10 year treasuries, the numbers don't match. They're not far off, but they show that at least this reader doesn't know quite what data were used.
What sort of rebalancing if any was done over the rolling 1, 5, 10, and 20 year periods? Nothing is said about this either.
Here's the data I used. It goes all the way back to 1928.
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
Those older figures are important, because while returns since 1950 (a few years after WWII ended) have been "okay", earlier periods showed that the market can be even worse. Not that losing 2% each year for five years (cumulative loss of 9.6%) is that great.
It used to be we were told that "the stock market" (whatever that meant) never had a loss (ignoring inflation) over any ten year period since WWII (maybe that's what you were thinking of). But then 1999 - 2008 came along. And right after that, another rolling ten year nominal loss, 2000 - 2009.
There's a problem with putting too much faith in historical data. Things change. One can either ignore that, or adjust expectations accordingly.
We've had a 35-40 year bull market in bonds (with 10 year treasury yields now bouncing around 2%), that followed a 35-40 year bear market in bonds (that started in 1941 with yields around 2%). That's a looong cycle that should be incorporated into projections. There's no way that bonds can boost a portfolio's returns - they yield virtually nothing, and if the yield goes up, the total return could turn negative.
From the end of 1940 to the end of 1956 there were only two years where the total return of 10 year treasuries broke 4% (none 5% or more). Which gets us back to the question of whether these figures include rebalancing, and more generally, why even bother with bonds now? Cash isn't yielding that much less, and if interest rates rise, cash should track bonds. (In the 1940-1956 time frame, 3 mo treasuries returned 1.6% annualized, not much worse than bonds at 2.6%, and with virtually no volatility.)
The only cherry picking I'm doing here is with the end date of 1956. Bond yields bottomed out around 1941 at 2%, just as they seem to have done now (more or less). The graph below is ten year treasury yields over time.
(See the section "The bond index portfolio is not representative of the vast majority of fixed income investors" in this 6 page pdf.)
Aside from junk, I would expect the general shape of the long term curve for US bonds (in whatever mix) to be similar to the image above, though the return should be somewhat higher (corresponding to the higher risk of some of the bonds in the mix).
Change happens; it is a certainty.
"Richard Russell, the famous Dow Theorist, once noted that over a shorter time frame almost anything can happen in the financial markets, but over much longer, meaningful periods of time (referring to years), the surest rule in the stock market is the rule called "regression to the mean.""
This quote was extracted from this regression advocating article:
https://seekingalpha.com/article/2315705-regression-to-the-mean-and-why-investors-should-not-ignore-its-importance
I am in complete agreement with the main theme of this article. There is a compelling and irresistible market pull towards a regression-to-the-mean. In any single year, almost any extreme is possible; anything can and does happen even if probabilities are low. But as the timeframe expands, the marketplace adjusts to deliver more predictable average returns. Over time, sanity rules.
I have zero confidence that I can predict tomorrow's market returns, but I am very comfortable about staying in the market for the loooong run.
Best Wishes
For example, since 1928, the S&P 500 has averaged around 400. Anyone expecting it to "regress to the mean"? I didn't think so. Why not? It's because the mean isn't a constant - the S&P has an upward bias.
On what basis are we to assume that the market rate of return doesn't also change over time?
The business insider article showed that 20 year time frames are too short a time to compute an average for "market" returns - even assuming that there is some constant long term average. The graph there showed that the average return over 20 year periods ranged from 6% to 18%. Hardly a constant average.
So now we have two questions. The original: Is there a single long term average return for the market? We now add: how long a time frame do we need to use to get even a decent approximation of that "constant" average.
Rather than explain things, "regression to the mean" shows how people take something on faith (consistency of long term returns) to circularly prove that over the long term, a certain average rate of return can be expected.
People like to assume constancy. That's the point of the seeking alpha piece. Market doing well? That will continue; not. Market return averaged X% in the past? That will continue. Maybe, maybe not.
Just for the record, "mean regression" is a short term prediction - it says that when the last value of a random variable is sufficiently far from its mean, the next value it assumes will more likely than not be closer to the mean.
http://mathworld.wolfram.com/ReversiontotheMean.html
If a random variable truly has a constant mean, then over time you'll approach that mean, not because of mean regression, but because of the law of large numbers.
http://mathworld.wolfram.com/LawofLargeNumbers.html
Thank you for your presentation.
I started this reply to the thread relative to the bond portion of this discussion. I've obviously blipped more just below.
What I'll name, The Exquisite Investor; being without much meaningful flaw as to getting the timing right 75% of the time and being patient enough to wait until the next trading (buy/sell) shows its face via technical numbers in particular, but with an understanding of real world events that can/do/may factor into why the technical numbers arrive and depart creating a more possible profitable investment.
I suppose this process could place this as to one being a "value" investor; being careful enough to try to understand that some "value" within investment sectors is cheap for a good reason and may remain cheap for a long time; a perverted "mean".
As I have expressed before, IMO; one may continue to name the ongoing markets since the big melt as still feeling the effects of policy(s) and that "this time is still different" and thus the "mean regression chart line" is progressive/dynamic, not static and has the baseline in "float" mode. The 2008/2009 market melt was/is an overwhelming shift in the financial marketplace that is still impacting and discovering its future path.
I may be completely wrong about any or all of this....tis my view at this time. @Tony may respond as to the technical side.
The below chart compare for about 10 years for EDV and SDY may surprise a few folks for total returns over the time frame. I recall @bee using EDV for reference points against other sectors for cross over points, etc. I fully expect most folks would not consider a holding as EDV or similar versus a more likely holding of a total bond fund or a 10 year Treasury fund for a bond area investment. One is able to view the movement of EDV and cross overs points relative to my pick of SDY for reference, especially during the ongoing turmoil of the markets for several years after the melt. Europe, in particular; was still attempting to find a path forward for several years, which includes events as "Greece" being in the news headlines as well as the ongoing, questionable stability of many European banks during the "recovery" period.
Yes, the 10 year Treasury will remain a reference point and this is valid for on overview of risk on or off conditions, but remains a choice of various bond types, eh?
http://stockcharts.com/freecharts/perf.php?EDV,SDY&n=2467&O=011000
Okay, time for another coffee, yes?
Regards,
Catch
Using portfolio visualizer I was able to create a third scenario, a 50/50 portfolio of LT treasuries (I used BTTRX since data wasn't available on EDV back far enough) and your EFT choice, SDY.
Compare the data in yellow. Since 2006, 50/50 portfolio has gotten you the same return as a 100% all equity dividend paying EFT like (SDY), with a lot less of a roller coaster ride.
Will this be the case going forward? I think non-correlated assets will help provide smoothness, but returns may be muted for many asset classes.
In other words, jolts to the market come along that can take years to work their way through. There may or may not be an ultra long term static "mean regression chart line", but at least for these multi-year periods, it's dynamic.
Even assuming an ultimately constant mean, because of these jolts it seems one needs an extremely long time frame to compute that average - say 100 years or more, in order to include the jolt of the Great Depression, or maybe 150 years back to the panics of the late 1800s, or ... At some point you're essentially averaging the entire "modern" history of the stock market.
More info from the 1928-present NYU/Stern data set I've cited (this table was in the spreadsheet, they're not date ranges I selected): . The S&P 500 is up "only" about 15% YTD. If it ends 2017 up 20%, that would raise arithmetic mean of 2007-2017 just to 9.68%. If you're a believer in a constant long term mean, that suggests that recovery from the 2008 jolt still has years to go.
But since BTTRX is a target date fund, its duration gets shorter and shorter. Its 2025 target date means that it now has an 8 year duration. Even a decade ago it started with just an 18 year duration.
If you just need a 10 year history (and not all of 2016), you can try using PTTRX. Identical 5 year return to EDV. Over the earlier part of EDV's lifetime, it did a little better. It was more stable in 2008 (not rising quite as much) and 2009 (not falling quite as much), and outperformed in 2010.
Other long duration funds didn't track EDV nearly as well (i.e. were not nearly as wild) over 2008-2009. Maybe WHOSX (duration ranged between 16 and 23 years over the past decade) would be a passable substitute if you need to cover all of 2006.
Hoping you (or others) have not misinterpreted my statements being against your write. I'm in agreement with your observations; and wrote my 2 cents worth of observations.
Regards,
Catch
I never anticipated that my regression-to-the-mean comment would promote such excited, inflammatory, and provocative reactions. I perceived my submittal to be rather innocuous. Apparently it was not received as such.
I was simply trying to emphasize how patience is a winning strategy when investing in either stocks or bonds. Market returns are highly volatile.
Returns in any single year vary wildly. As the investment timeframe expands to a decade or two, the average returns become much better behaved. I suppose my initial post failed to hit that nail squarely on its head. That's my fault. But I'll provide a reference to a chart that nicely illustrates the point I was trying to make:
http://www.businessinsider.com/range-of-annualized-stock-bond-returns-2014-11
The chart depicted in the reference tells the complete timeline story. In the short run, market returns are not predictable. The annual return swings defy prediction. However, in the looonger run, average market reward fluctuations dampen down to rather tight swings that most investors would find are quite tolerable.
I meant nothing more than it would be bad practice to panic after a single bad year. The next year or the year after that will soften the negative blow as a regression-to-the-mean (there I go again) comes into play. The chart in my reference provides the data to support that observation.
If you disagree, please contact the author of that piece (Sam Ro) and/or the firm that generated the basic data. I'm the wrong target. The data are the data.
Best Wishes
Wow. Whoda thought??? Seemed pretty commonplace to me.
@MJG: Hold on there... cannabis will be legally available pretty soon... should calm you down a bit.