@pizzaman My intent of a new thread is to have a fresh look at the various firm's projections of Inflation, ROR's, Volatility, Asset Allocation etc. for updating our 2024 financial plans. My preference is not to include any one year 2024 projections that some firms provide since they are not useful for 20+ year financial plans.

I also don't see a huge need to spend much forum space on historical comparisons because they are just that - historical not forward looking. If that is what some folks want to use that is fine but that data is easy to get and does not need much of a discussion.

As far as comparing a firms projected 10 year returns from 10 years ago to the actual realized 10 year returns, we need to keep in mind that many firms use a probabilistic approach. They provide an expected return along with a range of projected 10 year returns with associated probabilities so you can't just focus on the single expected 10 year return number. There is a very low probability of that number actually happening. It is more meaningful to compare actual return to a reasonable confidence interval of say 70 to 80%. if the 80% confidence interval for the next 10 years for US equities was 4% to 8% and the actual return was 4.5%, then the forecast had a broad enough range of possibilities. If the actual return was 1% or 12%, then the forecaster was not accounting for all reasonable possibilities.

I was just planning to keep track of the 10 year predictions made last year going forward (2023-2033), meaning I am going to only update once a year starting with the end of 2023.

WindomTree 2024 Economic & Market Outlook:

Equities
+ We are positive on domestic equities given our outlook for corporate earnings and advances in
technology to support productivity
+ Within U.S. equities we are tilted towards mid and small caps, dividend payers, and companies with
lower valuation multiples
+ While the S&P 500 Index trades at a steep premium to international equities, relative valuations
outside of the top-heavy market gauges are near long-term averages
+ Outside the U.S. we are underweight Europe and China but see more attractive prospects for growth
and stability elsewhere.

Fixed Income
+ We continue to add duration in a deliberate manner, moving closer to a “neutral” stance relative to
benchmarks
+ However, given the inverted nature of the yield curve and our expectation for ongoing interest rate
volatility, we remain allocated to short-duration bonds, including Treasury floating rate notes
+ We remain constructive on quality screened credit and have selectively rotated into mortgage backed securities.

Long-term bonds may do better than the S&P 500 in 2024, Howard Capital Management CEO Vance Howard said on Tuesday.

"We've seen a really good rally in the bond market," he added. "I think it's been very productive and positive, and I think people really to look at the bonds going into 2024. It may a better asset class than the S&P, even though we think the S&P is going to do very, very well."

As inflation continues to cool, Howard said he expects three rate cuts from the Federal Reserve next year, which central bankers suggested earlier this month are on the table.

Meanwhile, bonds are "incredibly oversold right now," and if the Fed starts to lower rates, that will spur a massive rally in the bond market, he said.

https://finance.yahoo.com/news/bonds-may-outperform-p-500-033633803.html

The reports below are long term market outlooks not just 2024 which I find much more useful than just a 2024 outlook for obvious reasons. The table is a summary comparison for some broad asset classes - hopefully no typos. Please read the reports if interested to ensure I did not make a mistake. There is a lot of information in these reports that some may find helpful in developing ROR expectations for planning. If others have reports that they found useful, please post.

Fidelity

Vanguard

J.P. Morgan

Invesco

Jeremy Siegel: Expect 10% to 15% Returns on Equities in 2024

https://www.advisorperspectives.com/articles/2023/12/26/jeremy-siegel-10-15-returns-equities-2024?hsid=28216572&utm_campaign=AP Newsletters&utm_medium=email&_hsmi=288145534&_hsenc=p2ANqtz-9bKqNzN3uRkQYfm1LwlO06jHs0RDvf3LpRgzG6wWA-x7wmIr1rcfjongmThQ4-xk_691AyWptE_Hs7VzaN0dd2Mw9E7A&utm_content=288145534&utm_source=hs_email

@pizzaman I am curious about how you use the information in the articles that focus only on the next year like Siegel's predictions from last year which were mostly wrong. Although I like to read/listen to these predictions but I find that there is little to no value related to the decisions I need to make. I won't act on any one year forecast but the long term forecasts can influence my thinking on what to use in my Pralana forecasts. In hindsight, this thread should have been named "Long Term Market and Asset Allocation Assumptions" not 2024.

Thanks for the clarification on what you are looking for. I provided the articles about 2024 predictions because you indicated you wanted information to help people on this forum update their 2024 financial plans, even though you stated you personally did not go by one year predictions, others may like them. I myself don't go by any predictions, especially longer term ones. I am a little confused on what benefit you are looking for from long(er) term forecasts. If one year forecasts are usually wrong then long term forecasts are....

@pizzaman, Unfortunately, there is not a short answer to your question, and I think the easiest way to answer it is to just explain how I come up with my ROR forecasts that I use in Pralana. It is only one approach and there are probably others that are just as reasonable. I think in the end, you need to be comfortable with what you use. I think we can all learn more from each other’s approach rather than debating any single firm’s or person’s numbers.

We need to use expected ROR estimates in our financial plans, and they need to be based on something. I prefer forward-looking assessments based on current financial conditions and macro-economic trends and create my own range of possible outcomes rather than rely on the single expected value in the reports since these do have a very low probability of being realized. The key is to have a wide enough range. The future is very uncertain, and we should not pretend that it is not. I use the low and to a much lesser degree the high range to stress test my plan and to check that my decisions are reasonable given the possible range of outcomes on the ROR expectations. If the plan needs the highest return in my range to make it work, that will raise a red flag. If my plan works and my decisions are sound even with a low return expectation, then I am probably in good shape.

Here is the rationale I lean on for my assessments. I like to look at the 10-year forecasts because that has the largest impact on a retiree’s plan. I tend to be conservative, so I know my forecasts are probably biased to the low end.

For bonds, the starting yields are a good proxy for future expected returns assuming a certain bond duration/maturity. Current 10-year treasury yields are a good estimate of future 10-year returns with a smaller range of uncertainty compared to equities. They may be higher or lower depending on how interest changes with time and the subsequent price impact. There is both theoretical and empirical support for this long-term forecast methodology. That is why it is important to know the ending date of the data used in the long-term forecasts because the yield at that time will have an influence on the future expected return.

For equities, the forecasting is much more uncertain, and I have a wider range for my forecasts. A building block approach used by some forecasters seems to be a reasonable methodology and there is empirical data to support the approach. The building blocks are dividend yield, earnings growth, and valuations. Since there is uncertainty in each of these, there is going to be a range of possible outcomes for each one. Using these range of outcomes, I create a range of expected future returns that is not perfect by any means, but it is a reasonable approach compared to just guessing. For example, starting valuations (P/E, Equity premium, CAPE10) can help determine if equities are significantly over or under priced compared to historical averages.

Some firms use more complex forecasting methodologies that rely on models that incorporate macro-economic factors and trends, but it is not clear to me that the added complexity is going to produce a more reasonable (not necessarily accurate or precise) forecast. But I do look at the results as a guide.

I only use two expected return estimates. One for my equities and one for my bonds. I adjust my bond estimate based on the duration of the bonds that are in portfolio, but this is not a huge adjustment for me. I don’t get into the Growth, Value, Large Cap, Small cap etc. forecasts because I utilize a total US fund and a total non-US fund in my portfolio. Since I don’t know if US or non-US equities will perform better, I just use something close to the weighted average based on my asset allocation. Yes, I do have some international equities for diversification not because I necessarily think they will outperform US.

My main use of the long-term forecasts from the providers is as a guide for creating my own assessment given my confidence in the methodology the provider uses and their rationale for it. In the end, it is my responsibility to use values in my plan that I think are reasonable and I can defend to my spouse.

I do think historical returns can provide a check against the reasonableness of the forecasts, and we should not just ignore the data that we have. I just don’t like blindly using the historical averages.

I also don’t find a one year forecast of any use – it is one year. Longer term forecasts are annualized returns meaning that in any given year, the “expected” returns that most firms report will not be realized but the long term realized returns should be within the expected range of outcomes. I am not expecting any more accuracy than that.

FYI, I now have enough secure income from pensions, SS and other sources to cover most if not all of my expenses, so I don't rely on market returns to have a successful retirement, but I do use the forecasts for making decisions like Roth conversions, SS timing etc..

Can you share your methodology?

I forgot to mention that I like Research Affiliates website and forecasting methodology as well as Asset Camp. Links below.

https://interactive.researchaffiliates.com/asset-allocation#!/?currency=USD&model=ER&scale=Linear&terms=Nominal&vs=N4IgxgrgTlCmB2AXAygCwIYAdYGED2ANnlCAFzwQEEA0IqAlgCaMICCAzu7Iu2QNoAmAQFZqAFgCME6hIDsATmoCJo5QDYZsgByaNAZlF79Y6nqXVhoifNUAGW0tt3Z1NQ4FjFI98OkiBALq0DMxsnNwAKgCe2LykfEF0TCzwHFyIOOiIsADmxPSwcQnByQj4EEhQBUWJISnllVHRsfyJsAAemOjwLIzNhfwgAKIAiiC0AAoA8gBKEeMgOABCIG2d3b2Z2XlVA-F8izMLAHIAkscAaqvUB9NzCzNDAGLXt7PztACyAJqvw2O0AAiQyuATWXR6sEYDUQUCaMT2B0BsAAbrAiNhGAshgBbWBQHL0eA5BafSiIegAWhhcOuIHYYCgEAARsz8Rd0AQIHtQGAsLBKVAsvQ8JSCETYGRQARYAAzRBkBwgKo5VAK0i2AC%2BtDyKMQlPYGIF4vgktI0rl6qVKrViu14DgjHo%2BsNeGwYolUpAMvlitoNqt9swxEQssIIvYlOwUDDUBx3TAxs95u9lr9yvoqsDms1QA

https://assetcamp.com/

@golich428 Here is an addition which is provided annually (roughly August each year) by Horizon Actuarial:

The 2023 Horizon Survey (8/2023) encompasses (averages) the modeling from 27 to 42 firms, with the "27" firms providing both 10-year and 20-year modeling results. Vanguard, JP Morgan and Invesco are among the firms participating in the survey.

https://www.horizonactuarial.com/survey-of-capital-market-assumptions

I presume that "US Equities" are Large cap and "Global Equities X-US" are Large cap X-US developed. I also converted the annualized nominal (geometric) returns provided in the survey to real returns.

The Horizon survey apparently does not explicitly provide a "US Bond Agg" return number, which is synthesized from the modeled returns produced by a combination of investment grade bonds, treasuries, and a duration criteria. Rather, returns listed in the survey are provided for "Core US Corporate Bonds" , "Long Duration US Corporate Bonds", "US Treasuries", as well as "TIPS" to provide "the interested student" a sense of the survey results for US bond returns. I provide those below as well, again converting the listed returns to real returns.

In the Horizon survey report, one can see the large uncertainty in estimating returns among the firms (see Exhibit 5, for example, where returns and the standard deviation (=volatility) are compared). The survey averaging thus attempts to reduce and diminish the variation of results to some degree.

@golich428 If there were an award for best post in 2023 I would nominate your 12:40 pm Dec 31st post, well said!!!!

As you can probably guess, I look at things a little differently (not better or worse than anyone else) 🤔. I admit I have a hard time understanding bond starting yields and future expected returns and how to work that all out. Since I am recently retired (4 years ago) I have a 30-40 year planning outlook. And like you I am not in danger of running out of money, asteroid strike not withstanding. I give a lot more weight to historical results and averages. Its actual data and shows what can happen to the market (stocks & bonds) when bad and good things happen. The world of finance has not changed enough to result in history being invalid.

Since retiring my main worry has been sequence of return risk. As a result of the run up in US stock returns from 2012 through 2021 my asset allocation got up to almost 90% stocks (mostly total US stock market mutual funds) 😮. I have now been able to basically eliminate that risk by investing in a lot of US Treasures as of the end of November of 2023 at great rates that will mature annually in the 2029-2035 range in amounts high enough to pay for living expenses. I plan on keeping the bonds through maturity. I also invested in short term (6 months to two years) CDs and US Treasuries at great rates to live on for the near term.

In March 2020 the stock market tanked and I took that opportunity to do a very large Roth conversion. As a result I can play around with our MAGI to get enhanced ACA (Obama Care) discounts and in 2024 likely get enhanced energy efficiency rebates on an electric heat pump and home insulation based again on AGI.

My actions had nothing to do with my long term planning over the past several years. I just got lucky the stock market tanked when it did and that interest rates shot up very fast at the right time. That's kind of the point I am trying to make. Luck is where preparedness and opportunity meet. Being able to take advantage of rare events that history says will happen at some point in time, has saved us a lot more money (while greatly reducing risk) then playing around with my asset allocation based on someone's forecast.

But like you said you have to start somewhere, so I use historical averages and use your thinking going forward, quoting you - The key is to have a wide enough range. The future is very uncertain, and we should not pretend that it is not. I use the low and to a much lesser degree the high range to stress test my plan and to check that my decisions are reasonable given the possible range of outcomes on the ROR expectations. If the plan needs the highest return in my range to make it work, that will raise a red flag. If my plan works and my decisions are sound even with a low return expectation, then I am probably in good shape.

Great Discussion!!!

Why Apple and the Rest of the Magnificent 7 Aren’t the Big Risk Everyone Says They Are

https://www.barrons.com/articles/magnificent-7-tech-stocks-risk-cea44f9a

@golich428 Interesting that 3 of the 4 have international (developed) significantly outperforming US over the next 10-20 years. Diversity is important. I'll be sitting in on some of the advisor-only calls shortly from Morningstar, Vanguard et al and will report back.