Under Run Analysis, Historical Results and selecting 1965, and using a real ROR for stocks of 5.3% closely matches my real ROR of 6.6% under Tabular Projection (fixed rate), Total Savings. So, what does that mean? ????
@nc-cpl Attached is "Table 1" of the real returns derived from the various firm forecasts I posted earlier. Recall that the Horizon Actuarial returns are from a survey of up to 40 firms, which includes some of the "big boy" firms listed separately in Table 1. Generally, the real returns forcasted are less than 6%, with the exception of Global ex-US and Emerging Market equities.
On the accuracy of the forecasts, I also looked at the real returns of the Large Cap (S&P500) Equity predictions based on the Horizon Actuarial survey results. This is in "Table 2", where the 10-year and 20-year forecast returns for the period 2012 - 2022 are listed. Generally, the Large Cap real return is forcast to decrease over the time frames reported. On the right side of Table 2, the annualized "Actual" return (with dividends) for the S&P500 is listed for each year as shown. Three columns show the actual S&P500 total return over the prior 10, 20 and 30 years for a given year, as well as a column showing the total return for that year alone. (See: https://dqydj.com/sp-500-return-calculator/)
I think that this gives some sense of the randomness and economic influences on the actual market return, relative to the survey results (which here are mean values derived from some kind of model with an uncertainty and behave in a smooth manner).
To answer your question, I am looking at inputting the return which will enable my plan (~30 year horizon) which is (currently) at least a 5 % real return for stocks, 2 % real return for bonds, -0.2% cash, 3% inflation, and assuming that social security will not change for me starting at 70. I use correlated MC as well as the historical analysis for the probability bands, and often use consumption smoothing in the historical mode. I also look at the CAPE spending strategy (with "a"=1.75 following the work of Karsten Jeske: https://earlyretirementnow.com/safe-withdrawal-rate-series/ , see Parts 18 and 54). This spending strategy option is mentioned in the PRC manual, p 128. For sequence of return risk, I also use 1965 as a bad starting scenario for comparison and risk assessment.
If the firm forecasts are correct, this would imply a tilt toward international equities in the allocation is needed to juice up the stock RoR, I suppose. I have to play more with PRC to look at the scenarios and risks and find an allocation which may generate such real returns -basically following the manual guidance. Of course if these minimum returns are exceeded, then I'll deal with the gravy... I don't think a static allocation will enable the minimum RoR I need if the forecasts are correct.
I find this relatively simple ("mechanical") tactical asset allocation approach of low cost index funds intriguing for the stock part, and which eventually puts some portion of the assets in Invesco Bulletshares or the like during the de-accumulation phase. It entails a once/month rebalance of the top 3 ETFs listed, if needed.
See: https://muscularportfolios.com/
The website tracking the suggested "muscular" portfolios is free and an associated newsletter (there is a free version) is available by Brian Livingston. He also wrote a book on the concept which I recommend:
https://www.amazon.com/gp/product/194688538X/
As I understand it, this approach is derived from an approach originally developed by Faber ("Ivy Portfolio", Cambria Funds, and https://mebfaber.com/ ) which seeks to imitate university endowment behavior via low cost stock market ETFs that are rebalanced regularly.
@wallace471 So then if you are projecting out ~30 years (as am I, accounting for spouse living longer), when it comes the the Asset Classes and Allocations page - if you specify, say, 5 time periods within that 30 year projection, are you applying the -0.2%, 5% and 2% ROR's to ALL time periods?
@nc-cpl That is the case right now. This can change of course with my further learning of PRC capabilities (using those additional periods, etc.).
I just finished rereading "The Psychology of Money" by Morgan Housel, 2020. I enjoyed it even more the second time around and I highly recommend it. In it he talks about market forecasts. Excerpt - "Think about market forecasts. We're very, very bad at them. I once calculated that if you just assume that the market goes up every year by its historic average, your accuracy is better than if you follow the average annual forecasts of the top 20 market strategists from large Wall Street banks. Our ability to predict recessions isn't much better. And since big events come out of nowhere, forecasts may do more harm than good, giving the illusion of predictability in a world where unforeseen events control most outcomes. Carl Richards writes: "Risk is what's left over when you think you've thought of everything"".
Speak of the devil, "42 analysts surveyed predicted the benchmark S&P 500 could end 2023 at 4,200, which is unchanged from a similar poll conducted by the news outlet in November. That level would mark a 5% increase from Tuesday's close of 3,997." And 9% for the year 2023. https://markets.businessinsider.com/news/stocks/stock-market-outlook-sp-500-rslly-9-percent-2023-analysts-2023-2
But wait, according to Morgan Stanley analysts, in a note to clients earlier this week, the analysts — led by Michael Wilson, chief equity strategist at the firm — warned that stocks have surged to unsustainable highs. "Wilson predicts that the S&P 500 could potentially fall to as low as 3,000 points in the first half of the year. That’s a drop of nearly 25% from its close at 3,991 points on Wednesday." https://money.com/wall-street-analysts-warn-stocks-will-fall/?xid=applenews
Professionals? - Pick your poison ????
@wallace471 It looks like GMO agrees with Vanguard, Dimensional, Blackrock, and others, international should outperform US over the next ten years. Diversify!
@hines202 The real question is what are users inputting into Gold over their retirement horizon. At some point you have to put a stake in the ground.
@nc-cpl I'm putting in what Morningstar recently put in their 30-year horizon report (I recently posted the link here). It's thorough and I'm confident in their people and processes, as I am with Vanguard, but I haven't found anything beyond ten year forecast with Vanguard. You could put in period one ten year Vanguard and then the next 20 years the Morningstar but I think that taints the Morningstar data, so I don't do that. Of course, it's also a function of how you're invested. If clients have something radically other than the recommended, simple 3-fund index-based portfolio, we have to adjust as necessary based on the sector outlooks in those reports. This is why I urge simplicity for clients 🙂
@hines202 Isn't the Morningstar report a 10 yr horizon and mostly nominal, or am I thinking of a different one?
Agree it can be tricky to convey intentions online. Thanks for the follow up Pizza. Always appreciate your thoughts on topics!
@NC, the link I had posted here last week or so was for Morningstar's 30 year real projections.
@Pizzaman, this isn't a bunch of financial nerds having some sort of seance or "entertainment" like Jim Cramer, or some biased sales crap from the insurance industry. It's serious research that takes into account current world events, past/historical trends, MATH, statistical projections, and is used to make major, massive financial decisions. Serious research and projections like this have a *very* good track record (not perfect, by any means), black swan events aside (which is why you should always take them with a grain of salt). Bogle/boglehead have always advocated for international exposure in the three-fund or four-fund portfolio. That method has done very well.
Again, there's a cyclical track record of international occasionally doing better than US, and all indicators seem to say one of those is coming up. If it's wrong, what's the worst that happened, you had a more diverse portfolio that had shares of Nestle, Toyota, European pharma companies, and other great non-US companies? If Jan 6 had succeeded and our government/election was overthrown by those with an authoritarian mindset, do you have any idea what would have happened to the US stock market? If these lunatics force a default in the next few months, and our world credit rating takes a hit, do you have any idea what's going to happen to your all-US portfolio?
These are *team* research projects done by teams of the very best in the business, to very stringent standards, not some yahoos. Big houses like Vanguard, Morningstar, Dimensional, Blackrock, Fidelity put their reputation on the line.
Compare that to constantly quoting articles by a guy who is paid by the insurance industry indirectly, a hugely biased agenda, and works at a place called "The American College of Financial Services" (formerly called "The American College of Life Underwriters" before they were like, whoops, that name is way to obvious toward our agenda, and changed it).
I get it about the entertainment value, same with Cramer, but I watch movies for that. People are making real, very important decisions with their lives here. I take that very seriously.
Mutual funds (I assume actively managed ones) perform badly over time: https://www.advisorperspectives.com/articles/2023/02/13/the-failure-of-mutual-funds-over-long-horizons?bt_ee=uunjxugzqMd5gH0tK%2F7CgTcDEuQ7A1cUJ19UdhfHfD5a%2Fb6j%2FETN1YhstDtEwAHR&bt_ts=1677675978333
From the column:
It’s common for a mutual fund to outperform its benchmark over a short time horizon – a few years – as happened with Cathie Wood’s ARKK. But new research shows that mutual funds fail dismally when performance is measured over the long horizons that retirement-focused investors face.
While investment decisions can stretch over decades, much of the research on mutual fund performance has examined outperformance over relatively short horizons. Since investors are concerned about long-term outcomes, Hendrik Bessembinder, Michael Cooper and Feng Zhang, authors of the study, “Mutual Fund Performance at Long Horizons,” published in the January 2023 issue of the Journal of Financial Economics, examined the frequency with which individual mutual funds outperformed benchmarks in terms of compound (annualized) returns over various horizons.
- The percentage of funds that outperformed market benchmarks decreased with the horizon over which returns were measured.
- On average, funds were contained in the database for just 11 years.
- The excess beta-adjusted compound return was negative for the majority of funds and was even negative for some funds where the alpha estimated from monthly returns was positive – one of every six funds in the sample that had a positive monthly arithmetic mean market-adjusted return had a negative lifetime market-adjusted buy-and-hold return.
- Only 29.6% of a sample of the largest funds outperformed the SPY in terms of compound full sample returns – the finding that most funds underperformed the SPY was quite uniform across size-based samples.
- Fees had large effects over long horizons.
- Over 20% of funds failed to outperform one-month U.S. Treasury bills during the sample period, and more than 40% of those funds that were present in the data for less than five years underperformed Treasury bills over their lives – demonstrating the importance of the role that survivorship bias can play in the data.
- Mutual fund investors’ aggregate wealth decreased by $1.31 trillion relative to the SPY benchmark over the sample period 1991-2020.
Interesting analysis on corrected asset returns since about 1790 by Edward F. McQuarrie has been recently summarized by Greg Obenshain of Verdad Advisers and is attached. ( https://verdadcap.com /)
The original McQuarrie paper and data are located at these links:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3805927
https://www.edwardfmcquarrie.com/?p=579 (Also has a link to the McQuarrie data spreadsheet.)
The McQuarrie work updates the real returns produced by Siegel ("Stocks for the Long Run"- 2014) on stock (and bond) market returns since 1790.
The upshot is that the revised real returns from McQuarrie over this long period are as follows:
Stocks: 5.9% (Down from Siegel's 6.6%)
Bonds: 4.1% (Up from Siegel's 3.6% and Obenshain notes that this is aligned long-dated [15+ year maturity] very high-quality [AA and AAA] corporate bond returns)
Obenshain also notes that "the equity outperformance that seems so evident in Siegel’s data is in fact concentrated in the period from around World War II to 1982." In considering the results from McQuarrie and various annualized real returns for the full dataset (1793-2022) and specific sub-periods, Obenshain points out (see also Figs. 4 and 5): "For the first 150 years [1793-1942], stocks and bonds perform about the same [5.5% vs 5.6%]. Then for 40 years [1943-1982] stocks perform well [7.1%] and bonds lose money [-1.3%]. And after that [1983-2022] the data seems to revert to “normal,” with stocks outperforming [bonds] by 2.7% through 2022 [7.9% vs 5.2%]."
It is also noted that over time frames of interest for retirement, returns varied during relevant periods: stocks outperformed bonds, bonds outperformed stocks and sometimes they performed the same (paraphrasing McQuarrie).
Finally, Obenshain says: "The strongest takeaway is that, while our best long-run estimate of the real equity return may be closer to 5% and our best estimate of debt returns is the real yield, neither is guaranteed. Stocks will probably outperform bonds over the long term, but in the specific long term that matters to most investors (the next 10, 20 or 30 years) we cannot be certain."
