The Single Greatest Predictor of Future Stock Market Returns

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willthrill81
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by willthrill81 »

Thesaints wrote: Thu May 20, 2021 11:15 pm
taojaxx wrote: Fri Jan 01, 2021 2:35 pm So, if we are to trust this indicator's accuracy, now is a good time to check what 2021 has in store on the basis of the 2011 indicator's level and the actual market performance over the 2012-2020 period. -/+5% is a pretty wide range but knowing where to center it is still useful.
I don't have the indicator's series but has anybody done that?
It is actually all the opposite: knowing where the center is is rather useless. It is the range that matters.

The "center" for a 6-sided die is "3.5": completely useless information.
The range for a 6-sided die is 1 to 6: quite useful instead.

The center info only becomes useful if you can throw the die many times, but in personal finance you only get one life to live. You won't get a "more or less close to average" result; you will get "one and only one of the possible results".
That's true, but as the holding period of something like stocks lengthens, your returns are likely to draw closer to the average than further away from it. The dispersion of returns for a single year has historically been potentially far greater than the dispersion of returns for a 30 year period, for instance.
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by Thesaints »

willthrill81 wrote: Thu May 20, 2021 11:26 pm
Thesaints wrote: Thu May 20, 2021 11:15 pm
taojaxx wrote: Fri Jan 01, 2021 2:35 pm So, if we are to trust this indicator's accuracy, now is a good time to check what 2021 has in store on the basis of the 2011 indicator's level and the actual market performance over the 2012-2020 period. -/+5% is a pretty wide range but knowing where to center it is still useful.
I don't have the indicator's series but has anybody done that?
It is actually all the opposite: knowing where the center is is rather useless. It is the range that matters.

The "center" for a 6-sided die is "3.5": completely useless information.
The range for a 6-sided die is 1 to 6: quite useful instead.

The center info only becomes useful if you can throw the die many times, but in personal finance you only get one life to live. You won't get a "more or less close to average" result; you will get "one and only one of the possible results".
That's true, but as the holding period of something like stocks lengthens, your returns are likely to draw closer to the average than further away from it. The dispersion of returns for a single year has historically been potentially far greater than the dispersion of returns for a 30 year period, for instance.
I'm talking about the dispersion for decades. It's not small, one can only average maybe 3 of them, and only the decades when an individual investor has a sizable portfolio really count. So, we may be looking at picking a single decade return out of the hat, or two at best..
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Re: The Single Greatest Predictor of Future Stock Market Returns

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willthrill81 wrote: Wed Jul 24, 2019 10:39 pm
sambb wrote: Wed Jul 24, 2019 10:12 pm Why has the stock market had such a nice run since Jan 2016? Is there some reason based on valuation? Or other trends?
Earnings have been strong, and we're arguably about as close to economic nirvana as we're likely to ever get.
And here we are 22 months later since your post with the S&P up another 40%. :beer
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by willthrill81 »

CyclingDuo wrote: Fri May 21, 2021 10:39 am
willthrill81 wrote: Wed Jul 24, 2019 10:39 pm
sambb wrote: Wed Jul 24, 2019 10:12 pm Why has the stock market had such a nice run since Jan 2016? Is there some reason based on valuation? Or other trends?
Earnings have been strong, and we're arguably about as close to economic nirvana as we're likely to ever get.
And here we are 22 months later since your post with the S&P up another 40%. :beer
Indeed. I don't think that we're in a more advantageous economic position now than we were then though. Do you?
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by CyclingDuo »

willthrill81 wrote: Fri May 21, 2021 10:59 am
CyclingDuo wrote: Fri May 21, 2021 10:39 am
willthrill81 wrote: Wed Jul 24, 2019 10:39 pm
sambb wrote: Wed Jul 24, 2019 10:12 pm Why has the stock market had such a nice run since Jan 2016? Is there some reason based on valuation? Or other trends?
Earnings have been strong, and we're arguably about as close to economic nirvana as we're likely to ever get.
And here we are 22 months later since your post with the S&P up another 40%. :beer
Indeed. I don't think that we're in a more advantageous economic position now than we were then though. Do you?
No. Well, at least outside of the cost of money currently being nada. That will change going forward. In addition, I wouldn't be shocked to see strong overall earnings in aggregate for the remainder of the year.

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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by sureshoe »

willthrill81 wrote: Fri May 21, 2021 10:59 am
CyclingDuo wrote: Fri May 21, 2021 10:39 am
willthrill81 wrote: Wed Jul 24, 2019 10:39 pm
sambb wrote: Wed Jul 24, 2019 10:12 pm Why has the stock market had such a nice run since Jan 2016? Is there some reason based on valuation? Or other trends?
Earnings have been strong, and we're arguably about as close to economic nirvana as we're likely to ever get.
And here we are 22 months later since your post with the S&P up another 40%. :beer
Indeed. I don't think that we're in a more advantageous economic position now than we were then though. Do you?
Of course we are. Companies have massive cash stockpiles. Debt is low. There has been lots of economic stimulus. Companies have massively cut back on expenses and further optimized productivity. There is lots of handwringing about a "labor shortage", but unemployment has a long way to run down and wages have a long way to run up.

Could it all come crashing down? Sure. It did for a minute a couple years ago... then bounced back.

The market is full of people (it seems) who expect smooth, controlled 15% YOY growth.
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by international001 »

So it looks now we are predicing -1% growth for the next 10 years. Is anybody reducing their stock allocation?
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Re: The Single Greatest Predictor of Future Stock Market Returns

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international001 wrote: Sun Jun 27, 2021 5:13 pm So it looks now we are predicing -1% growth for the next 10 years. Is anybody reducing their stock allocation?
That's an interesting point. I haven't plugged in the numbers lately, but I suspect that any regression model based on CAPE, even on only utilizing the last ~30 years of data, which result in a higher return estimate than using prior data, is going to provide a similar estimate, probably no more than +1%.

International stocks have higher expected returns, but it would take a good bit of faith to overweight international stocks now after the strong outperformance of U.S. stocks for the last decade. U.S. stocks might continue to outperform for years before a 'reckoning' occurs, if it ever does.

No easy solutions, and certainly nothing is even remotely close to guaranteed.
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by garlandwhizzer »

I believe that predicting the future of market returns based on backtesting analysis either in short or intermediate term going forward is for most of us a waste of time and effort. None of the rules work consistently including valuation, momentum, technical analysis, etc.. It is impossible to predict over any time frame which, if any, of these techniques will be most reliable at predicting future returns.

The important thing for most investors to focus on IMO is not to future predictions of returns but instead on basic strategy--wide equity and bond diversification, low cost structure, dedication making ongoing long term regular investments regardless of what market predictions are or what the market is doing at the moment, having patience sufficient to tolerate the inevitable bear markets and periods of underperformance in your strategy, and, importantly, control of living expenses. These things have always worked and are overwhelmingly likely to do so going forward. The main benefit of market predictions is to clearly demonstrate that acknowledged experts are blind to the future just like us and are often laughably in error.

Having said that, I do expect future returns on both stocks and bonds to be significantly lower than by historical standards, but how much lower is an unknown. It's important to keep in mind that when expected future stock and bond market returns are low, alternate sources of return like real estate, precious metals, collectables, long/short, leverage, active management, etc., are also expected to be commensurately low. At present all investment assets are richly valued due to the massive global tidal wave of central bank liquidity for the last 14 years, especially so in the US. You're not going to discover a secret place to hide out from investment asset inflation and get rich without taking on commensurate risk. I believe it wise to focus on getting your investment strategy attuned to your specific circumstances and stick to it, paying as little attention as possible to expert predictions and the financial media as possible.

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Re: The Single Greatest Predictor of Future Stock Market Returns

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garlandwhizzer wrote: Mon Sep 27, 2021 12:06 pm The important thing for most investors to focus on IMO is not to future predictions of returns but instead on basic strategy--wide equity and bond diversification, low cost structure, dedication making ongoing long term regular investments regardless of what market predictions are or what the market is doing at the moment, having patience sufficient to tolerate the inevitable bear markets and periods of underperformance in your strategy, and, importantly, control of living expenses. These things have always worked and are overwhelmingly likely to do so going forward. The main benefit of market predictions is to clearly demonstrate that acknowledged experts are blind to the future just like us and are often laughably in error.
I agree that investors should not focus too much on predictions of future market returns. With that said, investors need to have some kind of estimate of future returns in order to determine how much they need to save now. Some argue that investors should always use a historically low estimate of future returns in their planning, and I believe that to be a prudent approach.
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Re: The Single Greatest Predictor of Future Stock Market Returns

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willthrill81 wrote: Mon Sep 27, 2021 6:37 pm
garlandwhizzer wrote: Mon Sep 27, 2021 12:06 pm The important thing for most investors to focus on IMO is not to future predictions of returns but instead on basic strategy--wide equity and bond diversification, low cost structure, dedication making ongoing long term regular investments regardless of what market predictions are or what the market is doing at the moment, having patience sufficient to tolerate the inevitable bear markets and periods of underperformance in your strategy, and, importantly, control of living expenses. These things have always worked and are overwhelmingly likely to do so going forward. The main benefit of market predictions is to clearly demonstrate that acknowledged experts are blind to the future just like us and are often laughably in error.
I agree that investors should not focus too much on predictions of future market returns. With that said, investors need to have some kind of estimate of future returns in order to determine how much they need to save now. Some argue that investors should always use a historically low estimate of future returns in their planning, and I believe that to be a prudent approach.
Really?

Do you actually know anyone that decides how much to save based on estimate of future returns?
Maybe that makes sense from an academic perspective, but everyone I know lives life and save as much as they can beyond, or alternatively, set a savings amount and spend the rest. They do this regardless of valuation, equity allocation, price of butter in Bangladesh, or any other purported way to estimate future returns.

When the market were tanking in 2008/9, did you cut way back on your savings, and start spending more since the lower valuations implied good forward returns?
From an academic perspective, that might have been a reasonable thing to do. I don't know a single person thay did that.

So, why does someone need that to decide how much to save?
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Re: The Single Greatest Predictor of Future Stock Market Returns

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marcopolo wrote: Mon Sep 27, 2021 6:47 pm
willthrill81 wrote: Mon Sep 27, 2021 6:37 pm
garlandwhizzer wrote: Mon Sep 27, 2021 12:06 pm The important thing for most investors to focus on IMO is not to future predictions of returns but instead on basic strategy--wide equity and bond diversification, low cost structure, dedication making ongoing long term regular investments regardless of what market predictions are or what the market is doing at the moment, having patience sufficient to tolerate the inevitable bear markets and periods of underperformance in your strategy, and, importantly, control of living expenses. These things have always worked and are overwhelmingly likely to do so going forward. The main benefit of market predictions is to clearly demonstrate that acknowledged experts are blind to the future just like us and are often laughably in error.
I agree that investors should not focus too much on predictions of future market returns. With that said, investors need to have some kind of estimate of future returns in order to determine how much they need to save now. Some argue that investors should always use a historically low estimate of future returns in their planning, and I believe that to be a prudent approach.
Really?

Do you actually know anyone that decides how much to save based on estimate of future returns?
I do in large part. But I realize that I'm probably one of the few. Most accumulators just seem to save however much they want to without any regard for what they need to save to have a realistic chance of achieving their goals. I favor a more programmatic approach.

Do investors use an estimate of forward returns to determine how much to save? Generally, no.

Should investors use an estimate of forward returns to determine how much to save? Generally, I believe yes.
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by marcopolo »

willthrill81 wrote: Mon Sep 27, 2021 6:50 pm
marcopolo wrote: Mon Sep 27, 2021 6:47 pm
willthrill81 wrote: Mon Sep 27, 2021 6:37 pm
garlandwhizzer wrote: Mon Sep 27, 2021 12:06 pm The important thing for most investors to focus on IMO is not to future predictions of returns but instead on basic strategy--wide equity and bond diversification, low cost structure, dedication making ongoing long term regular investments regardless of what market predictions are or what the market is doing at the moment, having patience sufficient to tolerate the inevitable bear markets and periods of underperformance in your strategy, and, importantly, control of living expenses. These things have always worked and are overwhelmingly likely to do so going forward. The main benefit of market predictions is to clearly demonstrate that acknowledged experts are blind to the future just like us and are often laughably in error.
I agree that investors should not focus too much on predictions of future market returns. With that said, investors need to have some kind of estimate of future returns in order to determine how much they need to save now. Some argue that investors should always use a historically low estimate of future returns in their planning, and I believe that to be a prudent approach.
Really?

Do you actually know anyone that decides how much to save based on estimate of future returns?
I do in large part. But I realize that I'm probably one of the few. Most accumulators just seem to save however much they want to without any regard for what they need to save to have a realistic chance of achieving their goals. I favor a more programmatic approach.

Do investors use an estimate of forward returns to determine how much to save? Generally, no.

Should investors use an estimate of forward returns to determine how much to save? Generally, I believe yes.
So what did you do in the depths of the great recession?
Did you cut way back on your savings and spend more of your income?
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by willthrill81 »

marcopolo wrote: Mon Sep 27, 2021 6:55 pm
willthrill81 wrote: Mon Sep 27, 2021 6:50 pm
marcopolo wrote: Mon Sep 27, 2021 6:47 pm
willthrill81 wrote: Mon Sep 27, 2021 6:37 pm
garlandwhizzer wrote: Mon Sep 27, 2021 12:06 pm The important thing for most investors to focus on IMO is not to future predictions of returns but instead on basic strategy--wide equity and bond diversification, low cost structure, dedication making ongoing long term regular investments regardless of what market predictions are or what the market is doing at the moment, having patience sufficient to tolerate the inevitable bear markets and periods of underperformance in your strategy, and, importantly, control of living expenses. These things have always worked and are overwhelmingly likely to do so going forward. The main benefit of market predictions is to clearly demonstrate that acknowledged experts are blind to the future just like us and are often laughably in error.
I agree that investors should not focus too much on predictions of future market returns. With that said, investors need to have some kind of estimate of future returns in order to determine how much they need to save now. Some argue that investors should always use a historically low estimate of future returns in their planning, and I believe that to be a prudent approach.
Really?

Do you actually know anyone that decides how much to save based on estimate of future returns?
I do in large part. But I realize that I'm probably one of the few. Most accumulators just seem to save however much they want to without any regard for what they need to save to have a realistic chance of achieving their goals. I favor a more programmatic approach.

Do investors use an estimate of forward returns to determine how much to save? Generally, no.

Should investors use an estimate of forward returns to determine how much to save? Generally, I believe yes.
So what did you do in the depths of the great recession?
Did you cut way back on your savings and spend more of your income?
I was in grad school back then, living below the poverty line.
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by marcopolo »

willthrill81 wrote: Mon Sep 27, 2021 6:58 pm
marcopolo wrote: Mon Sep 27, 2021 6:55 pm
willthrill81 wrote: Mon Sep 27, 2021 6:50 pm
marcopolo wrote: Mon Sep 27, 2021 6:47 pm
willthrill81 wrote: Mon Sep 27, 2021 6:37 pm

I agree that investors should not focus too much on predictions of future market returns. With that said, investors need to have some kind of estimate of future returns in order to determine how much they need to save now. Some argue that investors should always use a historically low estimate of future returns in their planning, and I believe that to be a prudent approach.
Really?

Do you actually know anyone that decides how much to save based on estimate of future returns?
I do in large part. But I realize that I'm probably one of the few. Most accumulators just seem to save however much they want to without any regard for what they need to save to have a realistic chance of achieving their goals. I favor a more programmatic approach.

Do investors use an estimate of forward returns to determine how much to save? Generally, no.

Should investors use an estimate of forward returns to determine how much to save? Generally, I believe yes.
So what did you do in the depths of the great recession?
Did you cut way back on your savings and spend more of your income?
I was in grad school back then, living below the poverty line.
With all due respect, given how you reacted during the brief meltdown in March 2020 ("pausing" your well thought out plan), I find it unlikely you would have followed what you are saying above and lived it up, and saved less, during a major draw down with the anticipation of better future returns.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by esteen »

willthrill81 wrote: Mon Sep 27, 2021 6:58 pm
marcopolo wrote: Mon Sep 27, 2021 6:55 pm
willthrill81 wrote: Mon Sep 27, 2021 6:50 pm
marcopolo wrote: Mon Sep 27, 2021 6:47 pm
willthrill81 wrote: Mon Sep 27, 2021 6:37 pm

I agree that investors should not focus too much on predictions of future market returns. With that said, investors need to have some kind of estimate of future returns in order to determine how much they need to save now. Some argue that investors should always use a historically low estimate of future returns in their planning, and I believe that to be a prudent approach.
Really?

Do you actually know anyone that decides how much to save based on estimate of future returns?
I do in large part. But I realize that I'm probably one of the few. Most accumulators just seem to save however much they want to without any regard for what they need to save to have a realistic chance of achieving their goals. I favor a more programmatic approach.

Do investors use an estimate of forward returns to determine how much to save? Generally, no.

Should investors use an estimate of forward returns to determine how much to save? Generally, I believe yes.
So what did you do in the depths of the great recession?
Did you cut way back on your savings and spend more of your income?
I was in grad school back then, living below the poverty line.
Like willthrill81, I also use (conservative) estimates of future returns to decide how much to save. And I agree others should too. They don't have to be right, they just have to be not too wrong in one direction. It's not wise for someone to, for example, use Dave Ramsey's 12%/yr return rate to set their savings rate. They're very likely to undershoot their target. But if one uses a worst-case or very conservative return, they can plan out how much they need to save now to reach their goals... and if they reach their goals early, yippee!

I know a dual-income doctor couple who didn't do any projections, just saved in the retirement vehicles available to them (401K and IRA) and thought that was going to work out. Once we sat down and actually did some projections, they realized they needed to save more now, in taxable accounts, to reach their desired goals. If we didn't do projections, they wouldn't have changed their savings rates.
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by marcopolo »

esteen wrote: Mon Sep 27, 2021 7:13 pm
willthrill81 wrote: Mon Sep 27, 2021 6:58 pm
marcopolo wrote: Mon Sep 27, 2021 6:55 pm
willthrill81 wrote: Mon Sep 27, 2021 6:50 pm
marcopolo wrote: Mon Sep 27, 2021 6:47 pm

Really?

Do you actually know anyone that decides how much to save based on estimate of future returns?
I do in large part. But I realize that I'm probably one of the few. Most accumulators just seem to save however much they want to without any regard for what they need to save to have a realistic chance of achieving their goals. I favor a more programmatic approach.

Do investors use an estimate of forward returns to determine how much to save? Generally, no.

Should investors use an estimate of forward returns to determine how much to save? Generally, I believe yes.
So what did you do in the depths of the great recession?
Did you cut way back on your savings and spend more of your income?
I was in grad school back then, living below the poverty line.
Like willthrill81, I also use (conservative) estimates of future returns to decide how much to save. And I agree others should too. They don't have to be right, they just have to be not too wrong in one direction. It's not wise for someone to, for example, use Dave Ramsey's 12%/yr return rate to set their savings rate. They're very likely to undershoot their target. But if one uses a worst-case or very conservative return, they can plan out how much they need to save now to reach their goals... and if they reach their goals early, yippee!

I know a dual-income doctor couple who didn't do any projections, just saved in the retirement vehicles available to them (401K and IRA) and thought that was going to work out. Once we sat down and actually did some projections, they realized they needed to save more now, in taxable accounts, to reach their desired goals. If we didn't do projections, they wouldn't have changed their savings rates.
So, same question to you.

What did you do during the depth of the 2008/9 market drop? Did you cut way back on your savings and spend more money because the expected future returns went way up?
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by willthrill81 »

marcopolo wrote: Mon Sep 27, 2021 7:06 pm
willthrill81 wrote: Mon Sep 27, 2021 6:58 pm
marcopolo wrote: Mon Sep 27, 2021 6:55 pm
willthrill81 wrote: Mon Sep 27, 2021 6:50 pm
marcopolo wrote: Mon Sep 27, 2021 6:47 pm

Really?

Do you actually know anyone that decides how much to save based on estimate of future returns?
I do in large part. But I realize that I'm probably one of the few. Most accumulators just seem to save however much they want to without any regard for what they need to save to have a realistic chance of achieving their goals. I favor a more programmatic approach.

Do investors use an estimate of forward returns to determine how much to save? Generally, no.

Should investors use an estimate of forward returns to determine how much to save? Generally, I believe yes.
So what did you do in the depths of the great recession?
Did you cut way back on your savings and spend more of your income?
I was in grad school back then, living below the poverty line.
With all due respect, given how you reacted during the brief meltdown in March 2020 ("pausing" your well thought out plan), I find it unlikely you would have followed what you are saying above and lived it up, and saved less, during a major draw down with the anticipation of better future returns.
For me, it's probably a one-way adjustment. Higher returns would enable me to reach my FI goal sooner, and I would rather do that than spend the 'unnecessary' savings.

If people don't use any kind of estimate of future returns, how can they determine how much they need to save? Should they use the historic average of around 7%? What about Dave Ramsey's 12%? A number pulled out of a hat? Or should they just 'save until it hurts' and then hope for the best?
Last edited by willthrill81 on Mon Sep 27, 2021 8:10 pm, edited 1 time in total.
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by willthrill81 »

esteen wrote: Mon Sep 27, 2021 7:13 pm I know a dual-income doctor couple who didn't do any projections, just saved in the retirement vehicles available to them (401K and IRA) and thought that was going to work out. Once we sat down and actually did some projections, they realized they needed to save more now, in taxable accounts, to reach their desired goals. If we didn't do projections, they wouldn't have changed their savings rates.
My folks did the same thing although with significantly less income, maxing out a 403(b) and saving in nothing else. A very favorable sequence of returns combined with some good market timing moves on my father's part resulted in them having enough, but it could just as easily have gone the other way. I prefer not to rely too much on good luck.
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by marcopolo »

willthrill81 wrote: Mon Sep 27, 2021 8:03 pm
marcopolo wrote: Mon Sep 27, 2021 7:06 pm
willthrill81 wrote: Mon Sep 27, 2021 6:58 pm
marcopolo wrote: Mon Sep 27, 2021 6:55 pm
willthrill81 wrote: Mon Sep 27, 2021 6:50 pm

I do in large part. But I realize that I'm probably one of the few. Most accumulators just seem to save however much they want to without any regard for what they need to save to have a realistic chance of achieving their goals. I favor a more programmatic approach.

Do investors use an estimate of forward returns to determine how much to save? Generally, no.

Should investors use an estimate of forward returns to determine how much to save? Generally, I believe yes.
So what did you do in the depths of the great recession?
Did you cut way back on your savings and spend more of your income?
I was in grad school back then, living below the poverty line.
With all due respect, given how you reacted during the brief meltdown in March 2020 ("pausing" your well thought out plan), I find it unlikely you would have followed what you are saying above and lived it up, and saved less, during a major draw down with the anticipation of better future returns.
For me, it's probably a one-way adjustment. Higher returns would enable me to reach my FI goal sooner, and I would rather do that than spend the 'unnecessary' savings.

If people don't use any kind of estimate of future returns, how can they determine how much they need to save? Should they use the historic average of around 7%? What about Dave Ramsey's 12%? A number pulled out of a hat? Or should they just 'save until it hurts' and then hope for the best?
Maybe it is just semantics, but if you are not spending what would be the "unnecessary" savings, then you are just saving as much as your budget will allow. The only thing you are really changing is when (years down the line) you might stop saving.

You don't really sit down every month/year and compute expected returns, and set tour savings rate based on that. If you did that you would have times when you would be saving less. But, you are not, you save it anyway because you would rather FI early. So, despite what you said, your savings rate is not influenced by expected returns.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by Dontridetheindexdown »

We humans share a tendency to visualize patterns, to quantify correlations, and to infer predictions.

Forty years of investment experience, enhanced by graduate study in history and economics, have taught me the following:

There are no valid predictors of "future stock market returns."

We may, at the micro-economic level, make predictions for individual firms, and sometimes for economic sectors within countries or regions.

At the macro-economic level, predictions become fatuous, due to factors beyond the scope of this discussion.

Our best chance, as individuals, to survive and to thrive, is to live below our means, and to invest assiduously.

It is essential, for survival, to maintain an allocation between stable assets (hedge against deflation) and equity investments (hedge against inflation).

How many of us are willing to "lock in our gains" to maintain our asset allocation?
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by csmath »

Don’t forget that during the Great Recession the expected future returns may have been higher but the retirement account balances certainly weren’t the same after the plunge either.

Is it better to have a larger account balance now with low expectations on future returns or a much lower balance with high expectations for future returns? I think I’d personally rather have the higher balance now.
Normchad
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by Normchad »

marcopolo wrote: Mon Sep 27, 2021 6:47 pm
willthrill81 wrote: Mon Sep 27, 2021 6:37 pm
garlandwhizzer wrote: Mon Sep 27, 2021 12:06 pm The important thing for most investors to focus on IMO is not to future predictions of returns but instead on basic strategy--wide equity and bond diversification, low cost structure, dedication making ongoing long term regular investments regardless of what market predictions are or what the market is doing at the moment, having patience sufficient to tolerate the inevitable bear markets and periods of underperformance in your strategy, and, importantly, control of living expenses. These things have always worked and are overwhelmingly likely to do so going forward. The main benefit of market predictions is to clearly demonstrate that acknowledged experts are blind to the future just like us and are often laughably in error.
I agree that investors should not focus too much on predictions of future market returns. With that said, investors need to have some kind of estimate of future returns in order to determine how much they need to save now. Some argue that investors should always use a historically low estimate of future returns in their planning, and I believe that to be a prudent approach.
Really?

Do you actually know anyone that decides how much to save based on estimate of future returns?
Maybe that makes sense from an academic perspective, but everyone I know lives life and save as much as they can beyond, or alternatively, set a savings amount and spend the rest. They do this regardless of valuation, equity allocation, price of butter in Bangladesh, or any other purported way to estimate future returns.

When the market were tanking in 2008/9, did you cut way back on your savings, and start spending more since the lower valuations implied good forward returns?
From an academic perspective, that might have been a reasonable thing to do. I don't know a single person thay did that.

So, why does someone need that to decide how much to save?
Is solute,y did this. I was dumb at the time, but I did it I assumed future returns for my entire career would be 12%…. And I hatched a plan that I thought would get me to $4M at age 65. So I’ve just been keeping at it now for 28 straight years and it’s been great. (Hindsight and all). I never wavered or changed during any of the tumultuous periods.

Just for grins, I tried to WAG it in portfolio visualizer. This is very simplistic, my contributions started much lower and rise much higher, but it’s the best I could do. Since 1992, just being in VFINX has been marvelous. Starting with 10K, and adding 15K/year gets you to about 3.6M today.

It says the CAGR over the last 28 years was close to 22%. Is that really true? And if so, what were the predicted future returns back in 1992?

Nobody knows nothing. Make a plan, put your head down, keep chugging.
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by willthrill81 »

marcopolo wrote: Mon Sep 27, 2021 8:20 pm
willthrill81 wrote: Mon Sep 27, 2021 8:03 pm
marcopolo wrote: Mon Sep 27, 2021 7:06 pm
willthrill81 wrote: Mon Sep 27, 2021 6:58 pm
marcopolo wrote: Mon Sep 27, 2021 6:55 pm

So what did you do in the depths of the great recession?
Did you cut way back on your savings and spend more of your income?
I was in grad school back then, living below the poverty line.
With all due respect, given how you reacted during the brief meltdown in March 2020 ("pausing" your well thought out plan), I find it unlikely you would have followed what you are saying above and lived it up, and saved less, during a major draw down with the anticipation of better future returns.
For me, it's probably a one-way adjustment. Higher returns would enable me to reach my FI goal sooner, and I would rather do that than spend the 'unnecessary' savings.

If people don't use any kind of estimate of future returns, how can they determine how much they need to save? Should they use the historic average of around 7%? What about Dave Ramsey's 12%? A number pulled out of a hat? Or should they just 'save until it hurts' and then hope for the best?
Maybe it is just semantics, but if you are not spending what would be the "unnecessary" savings, then you are just saving as much as your budget will allow. The only thing you are really changing is when (years down the line) you might stop saving.

You don't really sit down every month/year and compute expected returns, and set tour savings rate based on that. If you did that you would have times when you would be saving less. But, you are not, you save it anyway because you would rather FI early. So, despite what you said, your savings rate is not influenced by expected returns.
If I didn't believe that my existing saving would enable me to reach FI by my target date, then I would make some kind of change to try to help me get there, probably more savings. But if my actual returns are better than my expected, I reach FI sooner. Win, win.

Again, it is mathematically impossible to determine how much you need to save without some kind of forward return estimate. Yes, people retire all the time without ever having explicitly calculated this, but they did so by more or less out of perceived necessity (i.e., 'we saved what we believed we could') and hope (i.e., that they would have enough).
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by abc132 »

Making forward predictions doesn't tell you how much to save nor does fitting past trend lines, simply because the future has enough uncertainty to make these predictions not be very actionable.

The effect of deviation in one year being +/- 20% is much smaller than say 30 year trends varying 5% to 10%. There is a factor of 4 difference in wealth generated over 30 years by 5% annual as compared to 10% annual, which is much bigger than a one year deviation of say 20%. If we look at accumulation, with 5% real and constant real wages, you need to invest 36% of your retirement expenses every year to reach 25x earnings in 30 years. If the market gives you 10% real, you only need to save 14% of your expenses to reach 25x earnings in 30 years.

You simply don't know 30 years ahead of time all of: what your salary will be over time, if you will have dual incomes, lengthy unemployment, health or illness, divorce, winning lottery ticket, specific market returns, how your future self will invest, or what you will spend annually in 30 years, all of which means the range of needed savings rate is much bigger than 14% to 36%. Something between a few percent and 60% of our retirement expenses saved annually will probably do the trick for getting 25x expenses over a 30 year period.

Whether you need to save a few percent or 60% is unknowable in advance.

We have seen 10 year returns predicting 4% that generate 10%. Someone had to save up 70% more money if they were counting on the prediction of 4%. At shorter terms such as 2-3 years before retirement, out portfolio can simply change more than we can save.

In none of these cases, 30 years, 10 years, or 2-3 years can we reasonably set a savings rate to reach a specific outcome. All we can do if we want the potential market performance of stocks is continually evaluate our desire for consumption now vs our willingness to save for later, and see how this plays out over time with the conditions that we receive.

Flexibility in our allowable range for retirement standard of living is by far the most powerful tool we have.
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by esteen »

marcopolo wrote: Mon Sep 27, 2021 7:25 pm
esteen wrote: Mon Sep 27, 2021 7:13 pm
willthrill81 wrote: Mon Sep 27, 2021 6:58 pm
marcopolo wrote: Mon Sep 27, 2021 6:55 pm
willthrill81 wrote: Mon Sep 27, 2021 6:50 pm

I do in large part. But I realize that I'm probably one of the few. Most accumulators just seem to save however much they want to without any regard for what they need to save to have a realistic chance of achieving their goals. I favor a more programmatic approach.

Do investors use an estimate of forward returns to determine how much to save? Generally, no.

Should investors use an estimate of forward returns to determine how much to save? Generally, I believe yes.
So what did you do in the depths of the great recession?
Did you cut way back on your savings and spend more of your income?
I was in grad school back then, living below the poverty line.
Like willthrill81, I also use (conservative) estimates of future returns to decide how much to save. And I agree others should too. They don't have to be right, they just have to be not too wrong in one direction. It's not wise for someone to, for example, use Dave Ramsey's 12%/yr return rate to set their savings rate. They're very likely to undershoot their target. But if one uses a worst-case or very conservative return, they can plan out how much they need to save now to reach their goals... and if they reach their goals early, yippee!

I know a dual-income doctor couple who didn't do any projections, just saved in the retirement vehicles available to them (401K and IRA) and thought that was going to work out. Once we sat down and actually did some projections, they realized they needed to save more now, in taxable accounts, to reach their desired goals. If we didn't do projections, they wouldn't have changed their savings rates.
So, same question to you.

What did you do during the depth of the 2008/9 market drop? Did you cut way back on your savings and spend more money because the expected future returns went way up?
My expected future returns didn't really go up. I was early in my career, and my time horizon was 25+ years at the time. My assets were relatively small and my future contributions far outweighed.

So even if the general market returns in the next 5-10 years were expected to go up through mean reversion, for my portfolio back then that was not very significant. Plus, I personally don't expect returns to go "way up" just because there is a crash.

Also you're mixing the phrase "estimated returns" with "expected returns" which to me are very different. I don't pretend to predict expected returns - that's a fool's errand. I do, however, estimate returns (fairly conservatively I believe) to plan.

Now a question for you: If you do not put any estimated return % on your portfolio, do you do all your planning with only your contributions, constantly losing to inflation? Or, do you not expect inflation to happen either?

Or if you don't do portfolio planning (and assuming you're in accumulation phase), do you have an estimated retirement age, or are you a "work til it works out" mentality?
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marcopolo
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by marcopolo »

esteen wrote: Tue Sep 28, 2021 2:06 am
marcopolo wrote: Mon Sep 27, 2021 7:25 pm
esteen wrote: Mon Sep 27, 2021 7:13 pm
willthrill81 wrote: Mon Sep 27, 2021 6:58 pm
marcopolo wrote: Mon Sep 27, 2021 6:55 pm

So what did you do in the depths of the great recession?
Did you cut way back on your savings and spend more of your income?
I was in grad school back then, living below the poverty line.
Like willthrill81, I also use (conservative) estimates of future returns to decide how much to save. And I agree others should too. They don't have to be right, they just have to be not too wrong in one direction. It's not wise for someone to, for example, use Dave Ramsey's 12%/yr return rate to set their savings rate. They're very likely to undershoot their target. But if one uses a worst-case or very conservative return, they can plan out how much they need to save now to reach their goals... and if they reach their goals early, yippee!

I know a dual-income doctor couple who didn't do any projections, just saved in the retirement vehicles available to them (401K and IRA) and thought that was going to work out. Once we sat down and actually did some projections, they realized they needed to save more now, in taxable accounts, to reach their desired goals. If we didn't do projections, they wouldn't have changed their savings rates.
So, same question to you.

What did you do during the depth of the 2008/9 market drop? Did you cut way back on your savings and spend more money because the expected future returns went way up?
My expected future returns didn't really go up. I was early in my career, and my time horizon was 25+ years at the time. My assets were relatively small and my future contributions far outweighed.

So even if the general market returns in the next 5-10 years were expected to go up through mean reversion, for my portfolio back then that was not very significant. Plus, I personally don't expect returns to go "way up" just because there is a crash.

Also you're mixing the phrase "estimated returns" with "expected returns" which to me are very different. I don't pretend to predict expected returns - that's a fool's errand. I do, however, estimate returns (fairly conservatively I believe) to plan.

Now a question for you: If you do not put any estimated return % on your portfolio, do you do all your planning with only your contributions, constantly losing to inflation? Or, do you not expect inflation to happen either?

Or if you don't do portfolio planning (and assuming you're in accumulation phase), do you have an estimated retirement age, or are you a "work til it works out" mentality?
I do what i think the vast majority of people do. I lived life and saved as much as I reasonably could for the future while balancing current needs/wants.
What i saved in any given year had absolutely nothing to do with some notion of expected or estimated returns. The same is largely true during retirement as well. What we spend each year is unrelated to any notion of future expected returns. We may adjust our spending, if needed, based on actual returns after they have materialized.

In my 20's I had a lot of youthful indiscretions, made good money as an engineer but spent pretty much every penny.
In my 30's I got married had a couple kids, and was busy raising a family and building a career, lots of discretionary spending, but started thinking about the future and saving in retirement plans. Never considered what returns i should expect. Invested in balanced portfolio and accepted what the market gave me.
In my 40's my income accelerated quite a bit, we only ramped up our spending modestly. All the excess went into investments, without any expectations of what returns we might be getting.

At age 51, an opportunity presented itself to engineer a generous exit package, our youngest was about to head off to college, and our portfolio had grown to a point where a sub 3% WR would support our desired spending. So, we retired.

Now in retirement, the only real expectation we have for market returns is that they are not too much worse than the worst we have seen historically except for countries that were bombed to rubble. Any adjustments we make will be based on actual returns as they materialize, not on any notion of expected/estimated future returns that are almost certain to be wrong.

I guess planning one's saving rate with a specific "estimated" return in mind is something a small percentage of people do.

What i was really questioning is the notion of adjusting your savings up/down based on expected future returns (often stated as worries about current valuations, and the need to spend less and save more). But, if you believe that such estimates are meaningfully actionable, then you should also be saving less when expected returns become higher. I have never met anyone that does that. So, i am not sure how useful those "expected return" estimate are in real life.
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by Lee_WSP »

marcopolo wrote: Mon Sep 27, 2021 6:47 pm
willthrill81 wrote: Mon Sep 27, 2021 6:37 pm
garlandwhizzer wrote: Mon Sep 27, 2021 12:06 pm The important thing for most investors to focus on IMO is not to future predictions of returns but instead on basic strategy--wide equity and bond diversification, low cost structure, dedication making ongoing long term regular investments regardless of what market predictions are or what the market is doing at the moment, having patience sufficient to tolerate the inevitable bear markets and periods of underperformance in your strategy, and, importantly, control of living expenses. These things have always worked and are overwhelmingly likely to do so going forward. The main benefit of market predictions is to clearly demonstrate that acknowledged experts are blind to the future just like us and are often laughably in error.
I agree that investors should not focus too much on predictions of future market returns. With that said, investors need to have some kind of estimate of future returns in order to determine how much they need to save now. Some argue that investors should always use a historically low estimate of future returns in their planning, and I believe that to be a prudent approach.
Really?

Do you actually know anyone that decides how much to save based on estimate of future returns?
Maybe that makes sense from an academic perspective, but everyone I know lives life and save as much as they can beyond, or alternatively, set a savings amount and spend the rest. They do this regardless of valuation, equity allocation, price of butter in Bangladesh, or any other purported way to estimate future returns.

When the market were tanking in 2008/9, did you cut way back on your savings, and start spending more since the lower valuations implied good forward returns?
From an academic perspective, that might have been a reasonable thing to do. I don't know a single person thay did that.

So, why does someone need that to decide how much to save?
Playing devil's advocate since this is theory, one could choose to start a business or second business instead of investing in the market. I'll accept the notion that shifting asset allocation would be a form of market timing and will not discuss that. But I think a business venture instead of the market is a valid alternative.
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by willthrill81 »

The statement made earlier that the needed saving rate has varied wildly over time is not supported by the data. Using the new savings rate chart available at Portfolio Charts, which admittedly only uses data going back to 1970, the needed saving rate for an investor with a $60k income that was targeting a $1.2m portfolio balance and accumulating for 35 years ranged from 15% to 23%. So in the best historic instance, a 15% saving rate was needed, and in the worst historic instance, a 23% saving rate was needed. One could easily argue that expected future returns shouldn't have much impact on the target saving rate.

But over shorter accumulation periods, the range of possible saving rates varied much more. In the above example, if the accumulation period was 25 years instead of 35, the range of saving rates was 23% to 48%. In such an instance, some measure of expected future returns, however crude it might be, could be quite informative as to what the target saving rate should be.
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by abc132 »

willthrill81 wrote: Tue Sep 28, 2021 11:03 am The statement made earlier that the needed saving rate has varied wildly over time is not supported by the data. Using the new savings rate chart available at Portfolio Charts, which admittedly only uses data going back to 1970, the needed saving rate for an investor with a $60k income that was targeting a $1.2m portfolio balance and accumulating for 35 years ranged from 15% to 23%. So in the best historic instance, a 15% saving rate was needed, and in the worst historic instance, a 23% saving rate was needed. One could easily argue that expected future returns shouldn't have much impact on the target saving rate.
I think your analysis is fine for life as a pre-set path that is known in advance and for someone with whatever AA preference you used and for someone that believes the future can not be worse than 1970-present, but this analysis ignores most of the factors I mentioned. In your own personal case, your desire to retire very early has made these values far from true. You may or may not have known this desire in advance, but for many people life is not a linear path that is preplanned, and they might be surprised by their desire to retire early.

Out of curiosity, what range of AAs do you use to reach your conclusion?

Calculating full and constant employment with no major boosts or set backs is not realistic. When you consider all factors related to what you will need to reach your goals, the savings rate is much more ambiguous. Your personal choice for savings rate reflects this.

You have set a minimum variation for someone that can predict their income and employment with no ups or downs, and only for data past 1970. While the data you present is valuable, I believe it is not actionable in the manner you present it without adding further considerations.

willthrill81 wrote: Tue Sep 28, 2021 11:03 am But over shorter accumulation periods, the range of possible saving rates varied much more. In the above example, if the accumulation period was 25 years instead of 35, the range of saving rates was 23% to 48%. In such an instance, some measure of expected future returns, however crude it might be, could be quite informative as to what the target saving rate should be.
What happens to someone that gets divorced during their preplanned path, decides 20x income is not enough or too much, or has parents that need unexpected financial support. What happens if they tire mid career of the job for which they get the highest pay? What savings rate was needed for 1929?


People will rationally and reasonably pick savings rates much lower and much higher than the range you suggest, and for very good reasons.
Last edited by abc132 on Tue Sep 28, 2021 1:00 pm, edited 2 times in total.
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by Horton »

For those interested in this sort of thing, Aleph Blog tracks this model.
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esteen
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by esteen »

marcopolo wrote: Tue Sep 28, 2021 3:40 am
esteen wrote: Tue Sep 28, 2021 2:06 am
marcopolo wrote: Mon Sep 27, 2021 7:25 pm
esteen wrote: Mon Sep 27, 2021 7:13 pm
willthrill81 wrote: Mon Sep 27, 2021 6:58 pm

I was in grad school back then, living below the poverty line.
Like willthrill81, I also use (conservative) estimates of future returns to decide how much to save. And I agree others should too. They don't have to be right, they just have to be not too wrong in one direction. It's not wise for someone to, for example, use Dave Ramsey's 12%/yr return rate to set their savings rate. They're very likely to undershoot their target. But if one uses a worst-case or very conservative return, they can plan out how much they need to save now to reach their goals... and if they reach their goals early, yippee!

I know a dual-income doctor couple who didn't do any projections, just saved in the retirement vehicles available to them (401K and IRA) and thought that was going to work out. Once we sat down and actually did some projections, they realized they needed to save more now, in taxable accounts, to reach their desired goals. If we didn't do projections, they wouldn't have changed their savings rates.
So, same question to you.

What did you do during the depth of the 2008/9 market drop? Did you cut way back on your savings and spend more money because the expected future returns went way up?
My expected future returns didn't really go up. I was early in my career, and my time horizon was 25+ years at the time. My assets were relatively small and my future contributions far outweighed.

So even if the general market returns in the next 5-10 years were expected to go up through mean reversion, for my portfolio back then that was not very significant. Plus, I personally don't expect returns to go "way up" just because there is a crash.

Also you're mixing the phrase "estimated returns" with "expected returns" which to me are very different. I don't pretend to predict expected returns - that's a fool's errand. I do, however, estimate returns (fairly conservatively I believe) to plan.

Now a question for you: If you do not put any estimated return % on your portfolio, do you do all your planning with only your contributions, constantly losing to inflation? Or, do you not expect inflation to happen either?

Or if you don't do portfolio planning (and assuming you're in accumulation phase), do you have an estimated retirement age, or are you a "work til it works out" mentality?
I do what i think the vast majority of people do. I lived life and saved as much as I reasonably could for the future while balancing current needs/wants.
What i saved in any given year had absolutely nothing to do with some notion of expected or estimated returns. The same is largely true during retirement as well. What we spend each year is unrelated to any notion of future expected returns. We may adjust our spending, if needed, based on actual returns after they have materialized.

In my 20's I had a lot of youthful indiscretions, made good money as an engineer but spent pretty much every penny.
In my 30's I got married had a couple kids, and was busy raising a family and building a career, lots of discretionary spending, but started thinking about the future and saving in retirement plans. Never considered what returns i should expect. Invested in balanced portfolio and accepted what the market gave me.
In my 40's my income accelerated quite a bit, we only ramped up our spending modestly. All the excess went into investments, without any expectations of what returns we might be getting.

At age 51, an opportunity presented itself to engineer a generous exit package, our youngest was about to head off to college, and our portfolio had grown to a point where a sub 3% WR would support our desired spending. So, we retired.

Now in retirement, the only real expectation we have for market returns is that they are not too much worse than the worst we have seen historically except for countries that were bombed to rubble. Any adjustments we make will be based on actual returns as they materialize, not on any notion of expected/estimated future returns that are almost certain to be wrong.

I guess planning one's saving rate with a specific "estimated" return in mind is something a small percentage of people do.

What i was really questioning is the notion of adjusting your savings up/down based on expected future returns (often stated as worries about current valuations, and the need to spend less and save more). But, if you believe that such estimates are meaningfully actionable, then you should also be saving less when expected returns become higher. I have never met anyone that does that. So, i am not sure how useful those "expected return" estimate are in real life.
I'm thinking we may be using similar language to talk about two different things.

Probably the majority of people (in general, maybe not Bogleheads) just save some amount they think is probably okay and then hope it works out. For many people I know that amount is at or near zero; for some it's quite a bit. I'm glad the strategy worked out well for you - you must have chose a high enough amount. For a lot of people who are less knowledgeable about the markets and less self-aware about their annual expenses, this doesn't work out. Without quite a bit of financial knowledge and awareness (which I would argue the vast majority of people don't have) this method isn't a plan- it's the financial equivalent of crossing your fingers. See my previous example of the physician couple.

Most people who are astute with their finances and/or have a financial planner create a plan for the future, they will necessarily have a return rate as one input (or range of return rates, e.g. Monte Carlo sims). Without a return rate you can't anticipate a future value (or range of future values), and can't plan much of anything for retirement. If you used any retirement calculator to help your financial planning, you used a future return rate too.

That rate of return that is used in planning is what I am referring to as an estimated future return. It generally should not move much, but it may (often due to extended periods of high returns or extended periods of low returns) be adjusted slightly in long-term forecasting if the planner (whether that is yourself or a professional) thinks it prudent. It can be done a few ways: by adjusting the rate itself, by looking to lower percentiles in an array distribution, etc. But it's the same thing in the end.

For example, from your previous post: "the only real expectation we have for market returns is that they are not too much worse than the worst we have seen historically..." That is an estimated future rate of return. It's low. And it's essentially what I use too (I'm in the accumulation phase at present).

To your point about worries re: current evaluations, I think that after this extended market run-up the majority opinion in professional circles is that due to the market's tendency to mean-revert, lower future returns are expected. That's evident in every major firms' forecasting, including Vanguard. On the flip side if we were coming out of a multi-year recession or a lost decade of sorts, there would probably be widespread sentiment that the next decade may yield higher returns. In terms of planning that doesn't mean you'll automatically swing your rates WAY up, but it might mean that you'll assume normal long-term return rates instead of less than.

I would argue that isn't done by just a small percentage of people. It is done by virtually all professional financial planners (whether they do it well or not). And all DIYers who use any planning tool or formula.

In addition to the return rate (or rate range), another input in planning is the savings amount. So yes, a change in rate will necessarily change your savings amount given other components of the plan remain the same. That's just the math.

This is very different than trying to predict a short- to medium-term market return and using it to "time" savings rates up and down. I don't think anyone does that either.

So we may be talking about somewhat different, but related, types of future rates of return.

Either way, I find it necessary to use future rates of return in my financial planning. I'm glad that it worked out for you if you did not, but I always encourage people to have a plan. While the plan doesn't usually go to plan, the planning itself is crucial to understand how today's choices affect their future and to mitigate unexpected pitfalls.
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by HootingSloth »

esteen wrote: Tue Sep 28, 2021 2:06 am Also you're mixing the phrase "estimated returns" with "expected returns" which to me are very different. I don't pretend to predict expected returns - that's a fool's errand. I do, however, estimate returns (fairly conservatively I believe) to plan.
This confusion seems to be central to a lot of these valuation discussions. CAPE, this metric, and other valuation-based models are all intended to predict expected returns, i.e. a single point estimate of the central tendency of returns (typically over a 10 year period). But what people want for planning purposes is not that at all, it is some conservative estimate. If you believe these valuation models, you should be picking some number that is substantially less than what they are spitting out to account for additional uncertainty around the central tendency. (I, personally, do not believe these models add useful information for planning purposes).
Now a question for you: If you do not put any estimated return % on your portfolio, do you do all your planning with only your contributions, constantly losing to inflation? Or, do you not expect inflation to happen either?

Or if you don't do portfolio planning (and assuming you're in accumulation phase), do you have an estimated retirement age, or are you a "work til it works out" mentality?
This question also gets raised a lot. Don't you have to make some assumptions? For what it is worth, I have talked about how I plan, while making as minimal as feasible assumptions about what future returns may look like, in a different one of these valuation threads, here. It is possible to make very limited assumptions in the right circumstances (and Bogleheads are much more likely to be in the "right circumstances" than most). For example, the plan described at that link is not derailed by (solely) a complete loss in value for stocks.
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by marcopolo »

esteen wrote: Thu Sep 30, 2021 4:15 pm
marcopolo wrote: Tue Sep 28, 2021 3:40 am
esteen wrote: Tue Sep 28, 2021 2:06 am
marcopolo wrote: Mon Sep 27, 2021 7:25 pm
esteen wrote: Mon Sep 27, 2021 7:13 pm

Like willthrill81, I also use (conservative) estimates of future returns to decide how much to save. And I agree others should too. They don't have to be right, they just have to be not too wrong in one direction. It's not wise for someone to, for example, use Dave Ramsey's 12%/yr return rate to set their savings rate. They're very likely to undershoot their target. But if one uses a worst-case or very conservative return, they can plan out how much they need to save now to reach their goals... and if they reach their goals early, yippee!

I know a dual-income doctor couple who didn't do any projections, just saved in the retirement vehicles available to them (401K and IRA) and thought that was going to work out. Once we sat down and actually did some projections, they realized they needed to save more now, in taxable accounts, to reach their desired goals. If we didn't do projections, they wouldn't have changed their savings rates.
So, same question to you.

What did you do during the depth of the 2008/9 market drop? Did you cut way back on your savings and spend more money because the expected future returns went way up?
My expected future returns didn't really go up. I was early in my career, and my time horizon was 25+ years at the time. My assets were relatively small and my future contributions far outweighed.

So even if the general market returns in the next 5-10 years were expected to go up through mean reversion, for my portfolio back then that was not very significant. Plus, I personally don't expect returns to go "way up" just because there is a crash.

Also you're mixing the phrase "estimated returns" with "expected returns" which to me are very different. I don't pretend to predict expected returns - that's a fool's errand. I do, however, estimate returns (fairly conservatively I believe) to plan.

Now a question for you: If you do not put any estimated return % on your portfolio, do you do all your planning with only your contributions, constantly losing to inflation? Or, do you not expect inflation to happen either?

Or if you don't do portfolio planning (and assuming you're in accumulation phase), do you have an estimated retirement age, or are you a "work til it works out" mentality?
I do what i think the vast majority of people do. I lived life and saved as much as I reasonably could for the future while balancing current needs/wants.
What i saved in any given year had absolutely nothing to do with some notion of expected or estimated returns. The same is largely true during retirement as well. What we spend each year is unrelated to any notion of future expected returns. We may adjust our spending, if needed, based on actual returns after they have materialized.

In my 20's I had a lot of youthful indiscretions, made good money as an engineer but spent pretty much every penny.
In my 30's I got married had a couple kids, and was busy raising a family and building a career, lots of discretionary spending, but started thinking about the future and saving in retirement plans. Never considered what returns i should expect. Invested in balanced portfolio and accepted what the market gave me.
In my 40's my income accelerated quite a bit, we only ramped up our spending modestly. All the excess went into investments, without any expectations of what returns we might be getting.

At age 51, an opportunity presented itself to engineer a generous exit package, our youngest was about to head off to college, and our portfolio had grown to a point where a sub 3% WR would support our desired spending. So, we retired.

Now in retirement, the only real expectation we have for market returns is that they are not too much worse than the worst we have seen historically except for countries that were bombed to rubble. Any adjustments we make will be based on actual returns as they materialize, not on any notion of expected/estimated future returns that are almost certain to be wrong.

I guess planning one's saving rate with a specific "estimated" return in mind is something a small percentage of people do.

What i was really questioning is the notion of adjusting your savings up/down based on expected future returns (often stated as worries about current valuations, and the need to spend less and save more). But, if you believe that such estimates are meaningfully actionable, then you should also be saving less when expected returns become higher. I have never met anyone that does that. So, i am not sure how useful those "expected return" estimate are in real life.
I'm thinking we may be using similar language to talk about two different things.

Probably the majority of people (in general, maybe not Bogleheads) just save some amount they think is probably okay and then hope it works out. For many people I know that amount is at or near zero; for some it's quite a bit. I'm glad the strategy worked out well for you - you must have chose a high enough amount. For a lot of people who are less knowledgeable about the markets and less self-aware about their annual expenses, this doesn't work out. Without quite a bit of financial knowledge and awareness (which I would argue the vast majority of people don't have) this method isn't a plan- it's the financial equivalent of crossing your fingers. See my previous example of the physician couple.

Most people who are astute with their finances and/or have a financial planner create a plan for the future, they will necessarily have a return rate as one input (or range of return rates, e.g. Monte Carlo sims). Without a return rate you can't anticipate a future value (or range of future values), and can't plan much of anything for retirement. If you used any retirement calculator to help your financial planning, you used a future return rate too.

That rate of return that is used in planning is what I am referring to as an estimated future return. It generally should not move much, but it may (often due to extended periods of high returns or extended periods of low returns) be adjusted slightly in long-term forecasting if the planner (whether that is yourself or a professional) thinks it prudent. It can be done a few ways: by adjusting the rate itself, by looking to lower percentiles in an array distribution, etc. But it's the same thing in the end.

For example, from your previous post: "the only real expectation we have for market returns is that they are not too much worse than the worst we have seen historically..." That is an estimated future rate of return. It's low. And it's essentially what I use too (I'm in the accumulation phase at present).

To your point about worries re: current evaluations, I think that after this extended market run-up the majority opinion in professional circles is that due to the market's tendency to mean-revert, lower future returns are expected. That's evident in every major firms' forecasting, including Vanguard. On the flip side if we were coming out of a multi-year recession or a lost decade of sorts, there would probably be widespread sentiment that the next decade may yield higher returns. In terms of planning that doesn't mean you'll automatically swing your rates WAY up, but it might mean that you'll assume normal long-term return rates instead of less than.

I would argue that isn't done by just a small percentage of people. It is done by virtually all professional financial planners (whether they do it well or not). And all DIYers who use any planning tool or formula.

In addition to the return rate (or rate range), another input in planning is the savings amount. So yes, a change in rate will necessarily change your savings amount given other components of the plan remain the same. That's just the math.

This is very different than trying to predict a short- to medium-term market return and using it to "time" savings rates up and down. I don't think anyone does that either.

So we may be talking about somewhat different, but related, types of future rates of return.

Either way, I find it necessary to use future rates of return in my financial planning. I'm glad that it worked out for you if you did not, but I always encourage people to have a plan. While the plan doesn't usually go to plan, the planning itself is crucial to understand how today's choices affect their future and to mitigate unexpected pitfalls.
:sharebeer
Yes. I think we are using the terminology for different things. What you are suggesting (some gross estimate of returns that does not really change much used to plan savings) makes sense, and I suspect a lot of people do that. I am sure I also did it without giving it much thought during accumulation, and certainly did when deciding if we could retire.

That is very different than what I commented on that started this exchange. If you go back, you will see what people were talking about is more akin to micro-managing savings rate by adjusting, presumably much more frequently, by looking at valuation measures, bond yields, or what ever metric is the current flavor of the day to predict medium term expected returns (usually something like 5-10 years).

The current such metric under discussion was the retail investor's equity allocation which is supposed to be strongly negatively correlated medium term future returns. The suggestion was that one should increase their savving because this metric was forecasting lower expected returns.

My assertion was that if you believed in such things than you should also believe you could lower your savings rate when these purported indicators forecast higher expected returns. My position is that virtually no one does that. I then asked individuals if any of them actually do that. Somehow, in response i got responses like yours that, well you have to have something to plan around. I agree that is useful at a broad level. But, you don't need valuation models or equity alloocation models to tell you any of that.
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by willthrill81 »

marcopolo wrote: Thu Sep 30, 2021 5:52 pm The current such metric under discussion was the retail investor's equity allocation which is supposed to be strongly negatively correlated medium term future returns. The suggestion was that one should increase their savving because this metric was forecasting lower expected returns.
That's not correct. Below is the post where I believe you think that I said that, but I actually did not.
willthrill81 wrote: Mon Sep 27, 2021 6:37 pm
garlandwhizzer wrote: Mon Sep 27, 2021 12:06 pm The important thing for most investors to focus on IMO is not to future predictions of returns but instead on basic strategy--wide equity and bond diversification, low cost structure, dedication making ongoing long term regular investments regardless of what market predictions are or what the market is doing at the moment, having patience sufficient to tolerate the inevitable bear markets and periods of underperformance in your strategy, and, importantly, control of living expenses. These things have always worked and are overwhelmingly likely to do so going forward. The main benefit of market predictions is to clearly demonstrate that acknowledged experts are blind to the future just like us and are often laughably in error.
I agree that investors should not focus too much on predictions of future market returns. With that said, investors need to have some kind of estimate of future returns in order to determine how much they need to save now. Some argue that investors should always use a historically low estimate of future returns in their planning, and I believe that to be a prudent approach.
I never stated nor even implied that anyone should increase their saving rate now due to the metric in the OP implying lower than historically average forward returns. Rather, I stated that "investors need to have some kind of estimate of future returns in order to determine how much they need to save now." And that is mathematically accurate.
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by marcopolo »

willthrill81 wrote: Fri Oct 01, 2021 10:58 am
marcopolo wrote: Thu Sep 30, 2021 5:52 pm The current such metric under discussion was the retail investor's equity allocation which is supposed to be strongly negatively correlated medium term future returns. The suggestion was that one should increase their savving because this metric was forecasting lower expected returns.
That's not correct. Below is the post where I believe you think that I said that, but I actually did not.
willthrill81 wrote: Mon Sep 27, 2021 6:37 pm
garlandwhizzer wrote: Mon Sep 27, 2021 12:06 pm The important thing for most investors to focus on IMO is not to future predictions of returns but instead on basic strategy--wide equity and bond diversification, low cost structure, dedication making ongoing long term regular investments regardless of what market predictions are or what the market is doing at the moment, having patience sufficient to tolerate the inevitable bear markets and periods of underperformance in your strategy, and, importantly, control of living expenses. These things have always worked and are overwhelmingly likely to do so going forward. The main benefit of market predictions is to clearly demonstrate that acknowledged experts are blind to the future just like us and are often laughably in error.
I agree that investors should not focus too much on predictions of future market returns. With that said, investors need to have some kind of estimate of future returns in order to determine how much they need to save now. Some argue that investors should always use a historically low estimate of future returns in their planning, and I believe that to be a prudent approach.
I never stated nor even implied that anyone should increase their saving rate now due to the metric in the OP implying lower than historically average forward returns. Rather, I stated that "investors need to have some kind of estimate of future returns in order to determine how much they need to save now." And that is mathematically accurate.
Fair point.

I took your response in context of garlandwhizzer's post. He was basically saying people should not be so focused on these predictions, but rather develop a good long term plan. You seemed to take exception to that in your response. Perhaps I was inferring more than you were implying.

Your follow-up responses to my posts also seemed to indicate that you think there is benefit in using the various prediction to adjust one's saving rate.

Just to be clear, are you now (and perhaps all along) saying that a stable long term saving plan works, and there is no need to consider these prediction model when setting your savings goals?
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by willthrill81 »

marcopolo wrote: Fri Oct 01, 2021 12:27 pm
willthrill81 wrote: Fri Oct 01, 2021 10:58 am
marcopolo wrote: Thu Sep 30, 2021 5:52 pm The current such metric under discussion was the retail investor's equity allocation which is supposed to be strongly negatively correlated medium term future returns. The suggestion was that one should increase their savving because this metric was forecasting lower expected returns.
That's not correct. Below is the post where I believe you think that I said that, but I actually did not.
willthrill81 wrote: Mon Sep 27, 2021 6:37 pm
garlandwhizzer wrote: Mon Sep 27, 2021 12:06 pm The important thing for most investors to focus on IMO is not to future predictions of returns but instead on basic strategy--wide equity and bond diversification, low cost structure, dedication making ongoing long term regular investments regardless of what market predictions are or what the market is doing at the moment, having patience sufficient to tolerate the inevitable bear markets and periods of underperformance in your strategy, and, importantly, control of living expenses. These things have always worked and are overwhelmingly likely to do so going forward. The main benefit of market predictions is to clearly demonstrate that acknowledged experts are blind to the future just like us and are often laughably in error.
I agree that investors should not focus too much on predictions of future market returns. With that said, investors need to have some kind of estimate of future returns in order to determine how much they need to save now. Some argue that investors should always use a historically low estimate of future returns in their planning, and I believe that to be a prudent approach.
I never stated nor even implied that anyone should increase their saving rate now due to the metric in the OP implying lower than historically average forward returns. Rather, I stated that "investors need to have some kind of estimate of future returns in order to determine how much they need to save now." And that is mathematically accurate.
Fair point.

I took your response in context of garlandwhizzer's post. He was basically saying people should not be so focused on these predictions, but rather develop a good long term plan. You seemed to take exception to that in your response. Perhaps I was inferring more than you were implying.

Your follow-up responses to my posts also seemed to indicate that you think there is benefit in using the various prediction to adjust one's saving rate.

Just to be clear, are you now (and perhaps all along) saying that a stable long term saving plan works, and there is no need to consider these prediction model when setting your savings goals?
If an investor has used for decades a historically conservative rate of return to determine how much to save and has stuck to that plan through good and bad returns (and is very likely to have a money-weighted rate of return at least equal to the estimated return), then I don't believe that it's likely to be very helpful for such a person to be concerned about any model of future returns for the purpose of adjusting the amount saved. We both know, however, that many investors, including those on this forum, have not actually taken this course of action for any number of reasons.

But if an investor needs a significantly higher rate of return to achieve the desired goal in a decade or less than is implied by multiple models of future returns (e.g., an investor needs 7% real returns for the last 8 years of accumulation in order to retire and there is no desire or ability to change the time frame much, while models of future returns are estimating real returns of 2%), then it may be prudent for such an investor to increase the amount saved. Other options are to find ways to potentially delay retirement or spend less in retirement.

Alternatively, an investor faced with the opposite situation and is far ahead of where they 'need' to be (e.g., they need 1% real returns but the models are estimating 6% real) is in the enviable position of having several good options available: reduce the amount saved, retire earlier, have greater spending capacity in retirement, or some combination of the first three.
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by international001 »

Normchad wrote: Mon Sep 27, 2021 10:00 pm

It says the CAGR over the last 28 years was close to 22%. Is that really true? And if so, what were the predicted future returns back in 1992?
Huh?

https://www.portfoliovisualizer.com/bac ... ion1_1=100
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by international001 »

marcopolo wrote: Tue Sep 28, 2021 3:40 am
In my 40's my income accelerated quite a bit, we only ramped up our spending modestly. All the excess went into investments, without any expectations of what returns we might be getting.

At age 51, an opportunity presented itself to engineer a generous exit package, our youngest was about to head off to college, and our portfolio had grown to a point where a sub 3% WR would support our desired spending. So, we retired.
It seems yo got your big salary hike and started saving after the 2008 recession. This was good for you, but a distorted result that cannot be generalized

I think many folks are overcomplicating it. Even with CAPE or the OP predictor have some value of predicting, this is different from saying that you can improve market returns. I think it's good to do a rough estimate but plan for a range of outcomes. Investment is great but it has a wide range.
I like this graph https://www.reddit.com/r/dataisbeautifu ... p500_with/, that shows you should expect x2 or /2 returns respect the average

Image
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by international001 »

ArthurDent wrote: Sun Dec 22, 2013 5:19 pm Saw this interesting blog post today on a supply-demand framework for stock prices rather than a valuations framework.
http://philosophicaleconomics.wordpress ... t-returns/
Do we have an updated link?
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by marcopolo »

international001 wrote: Tue Oct 12, 2021 6:36 pm
marcopolo wrote: Tue Sep 28, 2021 3:40 am
In my 40's my income accelerated quite a bit, we only ramped up our spending modestly. All the excess went into investments, without any expectations of what returns we might be getting.

At age 51, an opportunity presented itself to engineer a generous exit package, our youngest was about to head off to college, and our portfolio had grown to a point where a sub 3% WR would support our desired spending. So, we retired.
It seems yo got your big salary hike and started saving after the 2008 recession. This was good for you, but a distorted result that cannot be generalized

I think many folks are overcomplicating it. Even with CAPE or the OP predictor have some value of predicting, this is different from saying that you can improve market returns. I think it's good to do a rough estimate but plan for a range of outcomes. Investment is great but it has a wide range.
I like this graph https://www.reddit.com/r/dataisbeautifu ... p500_with/, that shows you should expect x2 or /2 returns respect the average

Image
I started saving large chunks of our income around 2004. By 2008, we were in the 2 comma club, but then reverted just below that. So, we did feel the pain of that recession. But, I agree that one should expect a large possible set of outcomes. I just question how actionable that is. My point is that most people either can't, or simply don't, change their savings habits that much based on valuations, or any other metrics of future returns. If anything i think they do the opposite. When markets crash, future expected returns are higher, so maybe you could cut back on savings rate. But, in reality, i think people tighten their belts and probably save more. I think the planning discussed as applies to accumulation is more theoretical. Most people i know just lived their lives, busy building their careers and raising a family, and saved as much as they reasonably could, regardless of what any valuation metric told them future returns might be. When it comes to deciding to retire, or planning retirement spending, perhaps it is more pertinent.
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by willthrill81 »

marcopolo wrote: Tue Oct 12, 2021 6:58 pm Most people i know just lived their lives, busy building their careers and raising a family, and saved as much as they reasonably could, regardless of what any valuation metric told them future returns might be.
I don't think that anyone would argue that "most people" do just that. But what "most people" do is probably not a good standard of ideal behavior.

While it's certainly possible to ignore any and all market conditions when determining how much to save and even very plausible to do so when one has decades of accumulation left, it makes less sense to me to ignore any and all market conditions when the accumulation period grows relatively short (e.g., the last decade of accumulation). This is especially true when the returns one needs far exceed what market conditions, based on whatever metrics one believes are appropriate, imply to be likely, as I noted above.

Remember how important the last decade of accumulation is for most investors. Despite having potentially saved for 40+ years, the returns of the last decade have a disproportionately large impact on the balance at the intended retirement age. The only thing that accumulators potentially have going for them is the ability to delay retirement, but considering that around half of retirees report having retired involuntarily or at least with significant pressure to do so, there's a strong possibility that even that won't be an option.
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by marcopolo »

willthrill81 wrote: Tue Oct 12, 2021 7:10 pm
marcopolo wrote: Tue Oct 12, 2021 6:58 pm Most people i know just lived their lives, busy building their careers and raising a family, and saved as much as they reasonably could, regardless of what any valuation metric told them future returns might be.
I don't think that anyone would argue that "most people" do just that. But what "most people" do is probably not a good standard of ideal behavior.

While it's certainly possible to ignore any and all market conditions when determining how much to save and even very plausible to do so when one has decades of accumulation left, it makes less sense to me to ignore any and all market conditions when the accumulation period grows relatively short (e.g., the last decade of accumulation). This is especially true when the returns one needs far exceed what market conditions, based on whatever metrics one believes are appropriate, imply to be likely, as I noted above.

Remember how important the last decade of accumulation is for most investors. Despite having potentially saved for 40+ years, the returns of the last decade have a disproportionately large impact on the balance at the intended retirement age. The only thing that accumulators potentially have going for them is the ability to delay retirement, but considering that around half of retirees report having retired involuntarily or at least with significant pressure to do so, there's a strong possibility that even that won't be an option.
Can you show me a few examples of when people said "it's ok to save less because expected returns are higher now"?
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by willthrill81 »

marcopolo wrote: Tue Oct 12, 2021 7:14 pm
willthrill81 wrote: Tue Oct 12, 2021 7:10 pm
marcopolo wrote: Tue Oct 12, 2021 6:58 pm Most people i know just lived their lives, busy building their careers and raising a family, and saved as much as they reasonably could, regardless of what any valuation metric told them future returns might be.
I don't think that anyone would argue that "most people" do just that. But what "most people" do is probably not a good standard of ideal behavior.

While it's certainly possible to ignore any and all market conditions when determining how much to save and even very plausible to do so when one has decades of accumulation left, it makes less sense to me to ignore any and all market conditions when the accumulation period grows relatively short (e.g., the last decade of accumulation). This is especially true when the returns one needs far exceed what market conditions, based on whatever metrics one believes are appropriate, imply to be likely, as I noted above.

Remember how important the last decade of accumulation is for most investors. Despite having potentially saved for 40+ years, the returns of the last decade have a disproportionately large impact on the balance at the intended retirement age. The only thing that accumulators potentially have going for them is the ability to delay retirement, but considering that around half of retirees report having retired involuntarily or at least with significant pressure to do so, there's a strong possibility that even that won't be an option.
Can you show me a few examples of when people said "it's ok to save less because expected returns are higher now"?
Whether that has happened or not is beside the point, a red herring.
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by marcopolo »

willthrill81 wrote: Tue Oct 12, 2021 7:14 pm
marcopolo wrote: Tue Oct 12, 2021 7:14 pm
willthrill81 wrote: Tue Oct 12, 2021 7:10 pm
marcopolo wrote: Tue Oct 12, 2021 6:58 pm Most people i know just lived their lives, busy building their careers and raising a family, and saved as much as they reasonably could, regardless of what any valuation metric told them future returns might be.
I don't think that anyone would argue that "most people" do just that. But what "most people" do is probably not a good standard of ideal behavior.

While it's certainly possible to ignore any and all market conditions when determining how much to save and even very plausible to do so when one has decades of accumulation left, it makes less sense to me to ignore any and all market conditions when the accumulation period grows relatively short (e.g., the last decade of accumulation). This is especially true when the returns one needs far exceed what market conditions, based on whatever metrics one believes are appropriate, imply to be likely, as I noted above.

Remember how important the last decade of accumulation is for most investors. Despite having potentially saved for 40+ years, the returns of the last decade have a disproportionately large impact on the balance at the intended retirement age. The only thing that accumulators potentially have going for them is the ability to delay retirement, but considering that around half of retirees report having retired involuntarily or at least with significant pressure to do so, there's a strong possibility that even that won't be an option.
Can you show me a few examples of when people said "it's ok to save less because expected returns are higher now"?
Whether that has happened or not is beside the point, a red herring.
Not really. If the outcome of looking at these so called predictive metrics is always "save more", then they are information-free with respect to saving behavior. It is only if they can modulate both up and down that they provide useful information.
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by willthrill81 »

marcopolo wrote: Tue Oct 12, 2021 7:17 pm
willthrill81 wrote: Tue Oct 12, 2021 7:14 pm
marcopolo wrote: Tue Oct 12, 2021 7:14 pm
willthrill81 wrote: Tue Oct 12, 2021 7:10 pm
marcopolo wrote: Tue Oct 12, 2021 6:58 pm Most people i know just lived their lives, busy building their careers and raising a family, and saved as much as they reasonably could, regardless of what any valuation metric told them future returns might be.
I don't think that anyone would argue that "most people" do just that. But what "most people" do is probably not a good standard of ideal behavior.

While it's certainly possible to ignore any and all market conditions when determining how much to save and even very plausible to do so when one has decades of accumulation left, it makes less sense to me to ignore any and all market conditions when the accumulation period grows relatively short (e.g., the last decade of accumulation). This is especially true when the returns one needs far exceed what market conditions, based on whatever metrics one believes are appropriate, imply to be likely, as I noted above.

Remember how important the last decade of accumulation is for most investors. Despite having potentially saved for 40+ years, the returns of the last decade have a disproportionately large impact on the balance at the intended retirement age. The only thing that accumulators potentially have going for them is the ability to delay retirement, but considering that around half of retirees report having retired involuntarily or at least with significant pressure to do so, there's a strong possibility that even that won't be an option.
Can you show me a few examples of when people said "it's ok to save less because expected returns are higher now"?
Whether that has happened or not is beside the point, a red herring.
Not really. If the outcome of looking at these so called predictive metric is always "save more", then they are information-free with respect to saving behavior. It is only if they can modulate both up and down that they provide useful information.
I noted a few posts above that an investor in that situation could do just that (e.g., save less due to metrics indicating the ability to robustly do so).

It seems that you're confusing what people do (e.g., how do most people determine how much to save) with behaviors that should be purposefully emulated.

Whether people do something or not does not mean that their behavior is optimal in any way.
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by Normchad »

international001 wrote: Tue Oct 12, 2021 5:53 pm
Normchad wrote: Mon Sep 27, 2021 10:00 pm

It says the CAGR over the last 28 years was close to 22%. Is that really true? And if so, what were the predicted future returns back in 1992?
Huh?

https://www.portfoliovisualizer.com/bac ... ion1_1=100
I think you’re correct. I must have been smoking something……
marcopolo
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by marcopolo »

willthrill81 wrote: Tue Oct 12, 2021 7:20 pm
marcopolo wrote: Tue Oct 12, 2021 7:17 pm
willthrill81 wrote: Tue Oct 12, 2021 7:14 pm
marcopolo wrote: Tue Oct 12, 2021 7:14 pm
willthrill81 wrote: Tue Oct 12, 2021 7:10 pm

I don't think that anyone would argue that "most people" do just that. But what "most people" do is probably not a good standard of ideal behavior.

While it's certainly possible to ignore any and all market conditions when determining how much to save and even very plausible to do so when one has decades of accumulation left, it makes less sense to me to ignore any and all market conditions when the accumulation period grows relatively short (e.g., the last decade of accumulation). This is especially true when the returns one needs far exceed what market conditions, based on whatever metrics one believes are appropriate, imply to be likely, as I noted above.

Remember how important the last decade of accumulation is for most investors. Despite having potentially saved for 40+ years, the returns of the last decade have a disproportionately large impact on the balance at the intended retirement age. The only thing that accumulators potentially have going for them is the ability to delay retirement, but considering that around half of retirees report having retired involuntarily or at least with significant pressure to do so, there's a strong possibility that even that won't be an option.
Can you show me a few examples of when people said "it's ok to save less because expected returns are higher now"?
Whether that has happened or not is beside the point, a red herring.
Not really. If the outcome of looking at these so called predictive metric is always "save more", then they are information-free with respect to saving behavior. It is only if they can modulate both up and down that they provide useful information.
I noted a few posts above that an investor in that situation could do just that (e.g., save less due to metrics indicating the ability to robustly do so).

It seems that you're confusing what people do (e.g., how do most people determine how much to save) with behaviors that should be purposefully emulated.

Whether people do something or not does not mean that their behavior is optimal in any way.
Like I said, a nice academic excersize, but not actionable to real people. I believe you yourself have not done this. I don't recall any prognosticators coming out and advising this in real time (as opposed to nice hindsight view of what a theoretical investor could have done). I am open to being shown some examples.

If smart people like you, Prof Shiller, the philosophicalinvestor, Larry, Rick, and whoever else can't articulate when an investor should be advised, in real time, to save less because, you know "this metric (which is x% predictive) says we should have better expect future returns", then who exactly is this supposed to be actionable to?!?
Once in a while you get shown the light, in the strangest of places if you look at it right.
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willthrill81
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by willthrill81 »

marcopolo wrote: Tue Oct 12, 2021 7:39 pm
willthrill81 wrote: Tue Oct 12, 2021 7:20 pm
marcopolo wrote: Tue Oct 12, 2021 7:17 pm
willthrill81 wrote: Tue Oct 12, 2021 7:14 pm
marcopolo wrote: Tue Oct 12, 2021 7:14 pm

Can you show me a few examples of when people said "it's ok to save less because expected returns are higher now"?
Whether that has happened or not is beside the point, a red herring.
Not really. If the outcome of looking at these so called predictive metric is always "save more", then they are information-free with respect to saving behavior. It is only if they can modulate both up and down that they provide useful information.
I noted a few posts above that an investor in that situation could do just that (e.g., save less due to metrics indicating the ability to robustly do so).

It seems that you're confusing what people do (e.g., how do most people determine how much to save) with behaviors that should be purposefully emulated.

Whether people do something or not does not mean that their behavior is optimal in any way.
Like I said, a nice academic excersize, but not actionable to real people. I believe you yourself have not done this. I don't recall any prognosticators coming out and advising this in real time (as opposed to nice hindsight view of what a theoretical investor could have done). I am open to being shown some examples.

If smart people like you, Prof Shiller, the philosophicalinvestor, Larry, Rick, and whoever else can't articulate when an investor should be advised, in real time, to save less because, you know "this metric (which is x% predictive) says we should have better expect future returns", then who exactly is this supposed to be actionable to?!?
Like I said, I provided a clear example already of when an investor could indeed save less due to higher expected future returns. I don't know what more you want from me at least.

For quite a while now, I've specifically recommended using valuation metrics like CAPE to help estimate forward returns in the ABW method, and very few have quibbled about that yet.

During my time on this forum, U.S. valuations as measured by any metric have steadily risen, so it's not quite fair to point out that experts haven't been telling people to expect higher returns going forward.

We both know that Shiller is a perma-bear and has been for decades, so expecting him to say otherwise is probably not realistic.
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marcopolo
Posts: 8445
Joined: Sat Dec 03, 2016 9:22 am

Re: The Single Greatest Predictor of Future Stock Market Returns

Post by marcopolo »

willthrill81 wrote: Tue Oct 12, 2021 7:47 pm
marcopolo wrote: Tue Oct 12, 2021 7:39 pm
willthrill81 wrote: Tue Oct 12, 2021 7:20 pm
marcopolo wrote: Tue Oct 12, 2021 7:17 pm
willthrill81 wrote: Tue Oct 12, 2021 7:14 pm

Whether that has happened or not is beside the point, a red herring.
Not really. If the outcome of looking at these so called predictive metric is always "save more", then they are information-free with respect to saving behavior. It is only if they can modulate both up and down that they provide useful information.
I noted a few posts above that an investor in that situation could do just that (e.g., save less due to metrics indicating the ability to robustly do so).

It seems that you're confusing what people do (e.g., how do most people determine how much to save) with behaviors that should be purposefully emulated.

Whether people do something or not does not mean that their behavior is optimal in any way.
Like I said, a nice academic excersize, but not actionable to real people. I believe you yourself have not done this. I don't recall any prognosticators coming out and advising this in real time (as opposed to nice hindsight view of what a theoretical investor could have done). I am open to being shown some examples.

If smart people like you, Prof Shiller, the philosophicalinvestor, Larry, Rick, and whoever else can't articulate when an investor should be advised, in real time, to save less because, you know "this metric (which is x% predictive) says we should have better expect future returns", then who exactly is this supposed to be actionable to?!?
Like I said, I provided a clear example already of when an investor could indeed save less due to higher expected future returns. I don't know what more you want from me at least.

For quite a while now, I've specifically recommended using valuation metrics like CAPE to help estimate forward returns in the ABW method, and very few have quibbled about that yet.

During my time on this forum, U.S. valuations as measured by any metric have steadily risen, so it's not quite fair to point out that experts haven't been telling people to expect higher returns going forward.

We both know that Shiller is a perma-bear and has been for decades, so expecting him to say otherwise is probably not realistic.
With all due respect, and I mean that sincerely, saying that now is easy. I am talking about making that recommendation, or even better, acting in such a way, while it is happening. Like in 2008/9 going out and spending more saving less because valuations were dropping, and the financial system was close to melting down. That would be convincing. I agree there has not really been an opportunity to test that premise, either way, in recent years. But, I am skeptical many people acted that way, or advised others to do that in 2008/9.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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