The Single Greatest Predictor of Future Stock Market Returns

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international001
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by international001 »

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.
You forgot to mention the first decade after retirement. It's equally important because if it gives you low returns and you spend too much you'll be in trouble.

But I'm also curious, how you would make use of market valuations? My thought was that during those two decades you should have an AA with fewer stocks to overall minimize risk. But does looking at valuations (CAPE?) bring you any advantage that can be backtested?
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willthrill81
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by willthrill81 »

international001 wrote: Sat Oct 16, 2021 6:10 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.
You forgot to mention the first decade after retirement. It's equally important because if it gives you low returns and you spend too much you'll be in trouble.
Yes, the 10 years leading up retirement and the first 10 years of retirement have been referred to as the 'red zone'. It's where portfolio gains and losses have the biggest long-term impact.
international001 wrote: Sat Oct 16, 2021 6:10 pm But I'm also curious, how you would make use of market valuations? My thought was that during those two decades you should have an AA with fewer stocks to overall minimize risk. But does looking at valuations (CAPE?) bring you any advantage that can be backtested?
It sounds like you're referring to a 'bond tent' approach, where the bond allocation increases up to the point of retirement and then begins to decrease throughout retirement. It's been discussed in many prior threads, and the bottom line is that it hasn't offered consistent improvement. Intuitively, this makes sense. If stocks do well when your bond allocation is high (early in retirement) but then do poorly when your bond allocation is low (later in retirement), the outcome will be worse than if you had had a steady AA all along.

I haven't seen anyone combine a 'bond tent' approach with a valuations-based approach, nor am I clear on how that would work.
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international001
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by international001 »

willthrill81 wrote: Sat Oct 16, 2021 6:16 pm It sounds like you're referring to a 'bond tent' approach, where the bond allocation increases up to the point of retirement and then begins to decrease throughout retirement. It's been discussed in many prior threads, and the bottom line is that it hasn't offered consistent improvement. Intuitively, this makes sense. If stocks do well when your bond allocation is high (early in retirement) but then do poorly when your bond allocation is low (later in retirement), the outcome will be worse than if you had had a steady AA all along.
Yes, I was thinking of a tent bond approach. If, instead, you keep a constant AA and stocks do bad in early retirement and good in late retirement you'll also do bad. But the idea is that with the bond tent the outcomes will have less variability.
I think there are threads against it, but have not taken the time to go though them and re-consider my logic.

willthrill81 wrote: Sat Oct 16, 2021 6:16 pm I haven't seen anyone combine a 'bond tent' approach with a valuations-based approach, nor am I clear on how that would work.
So is valuation based approach good when you backtest an 'algorithm'?
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willthrill81
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by willthrill81 »

international001 wrote: Sun Oct 17, 2021 12:29 pm
willthrill81 wrote: Sat Oct 16, 2021 6:16 pm I haven't seen anyone combine a 'bond tent' approach with a valuations-based approach, nor am I clear on how that would work.
So is valuation based approach good when you backtest an 'algorithm'?
It depends entirely on the specifics. I've only ever seen one or two valuation-based AA approaches and never any good discussion on even them.
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HootingSloth
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by HootingSloth »

Now that it has been a full 10 years since the initial post popularizing this "single greatest predictor" of stock market returns, we can revisit and see how the initial prediction did. In the post, dated December 20, 2013, the author writes that the model predicts a nominal 10 year forward return for the S&P 500 of approximately 6%. Looking at the full historical sample available at the time, he wrote:
Historically, whenever the market was at the current level, the low end of the return was a tad less than 5%, and the high end was around 9%.
So what happened? The 10-year nominal return of the S&P 500 from December 31, 2013 (11 days after the post), was 11.99%.

Oh well.
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retiringwhen
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by retiringwhen »

HootingSloth wrote: Wed Feb 28, 2024 11:34 am Now that it has been a full 10 years since the initial post popularizing this "single greatest predictor" of stock market returns, we can revisit and see how the initial prediction did. In the post, dated December 20, 2013, the author writes that the model predicts a nominal 10 year forward return for the S&P 500 of approximately 6%. Looking at the full historical sample available at the time, he wrote:
Historically, whenever the market was at the current level, the low end of the return was a tad less than 5%, and the high end was around 9%.
So what happened? The 10-year nominal return of the S&P 500 from December 31, 2013 (11 days after the post), was 11.99%.

Oh well.
Another out sample failure :-)
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dogagility
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by dogagility »

Here is the graph with up to date information: https://financial-charts.effingapp.com/
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Re: The Single Greatest Predictor of Future Stock Market Returns

Post by dcabler »

Folks seem to have forgotten his follow up article, posted 3 days after the original.

https://www.philosophicaleconomics.com/ ... e-fitting/

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Re: The Single Greatest Predictor of Future Stock Market Ret

Post by StartedAt22 »

longinvest wrote: Mon Dec 23, 2013 8:58 am
Browser wrote:Does anyone have a chart of asset returns from 2014 to 2114? I've misplaced mine.
+1
Found it.

Image

Edit: I dont know how to add pictures and don't much care. It was an arrow pointing up and to the right.
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