What long-term real return do you now expect?

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QBoy
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What long-term real return do you now expect?

Post by QBoy »

When planning ahead for several decades of retirement, it is useful to have an expected real return in mind. Historically, a balanced portfolio of about half stock and half bonds has produced a real return that averages about 5 percent per year. But bond yields are now very low, and stock valuations are now high. I would guess that a real return of 2.5 percent per year is a better number for planning purposes.

I am curious to hear what number others are using.
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JoeRetire
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Re: What long-term real return do you now expect?

Post by JoeRetire »

For planning purposes, I use 4% real. In my mind, that is being extremely conservative.

Warren Buffet said "The economy, as measured by gross domestic product, can be expected to grow at an annual rate of about 3 percent over the long term, and inflation of 2 percent would push nominal GDP growth to 5 percent. Stocks will probably rise at about that rate and dividend payments will boost total returns to 6 percent to 7 percent."
Last edited by JoeRetire on Mon Dec 21, 2020 2:58 pm, edited 1 time in total.
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aristotelian
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Re: What long-term real return do you now expect?

Post by aristotelian »

I don't find it useful to plan decades ahead since the future is uncertain when it comes to market returns. On the bond side, I would expect the nominal yield minus inflation, so for 10YT that would be slightly negative.
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willthrill81
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Re: What long-term real return do you now expect?

Post by willthrill81 »

10 year TIPS are currently yielding -1.00%, so that's a plausible estimate for bond returns over the next decade.

A regression model using CAPE data going back to 1989 is forecasting 1.6% real returns over the next decade. The more simplistic 1/CAPE is predicting 3% real. The average investor allocation to equity model is predicting 2.7% real. A simple average of those three metrics is 2.43% real.

Using the above figures, that means that a 60/40 AA would have an expected real return of about 1%. YMMV, but I'd plan for low returns over the next decade.

Going out beyond a decade, it becomes much more difficult, potentially impossible, to come up with any meaningful sort of prediction. However, it seems unlikely that bonds are going to return what they did from 1982-2012 for a very long time, if ever.
Last edited by willthrill81 on Mon Dec 21, 2020 2:36 pm, edited 1 time in total.
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Re: What long-term real return do you now expect?

Post by mptfan »

I don't use real returns for future planning, I use between 4-6 percent nominal returns. I hope that I am being too conservative.
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Re: What long-term real return do you now expect?

Post by Hebell »

willthrill81 wrote: Mon Dec 21, 2020 2:34 pm Asimple average of those three metrics is 2.43% real.
My thoughts exactly. I am using 2.5% as my working metric.
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tre3sori
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Re: What long-term real return do you now expect?

Post by tre3sori »

Nice exercise to explicitly express expectations.
portfolio as of now: 35% real estate, 43% global stocks, 15% global bonds, 5% gold, 2 % cash
expected real return: real estate 1.5%, global stocks 4%, global bonds 0.5%, gold/cash 0%
total real return: 0.35*0.015 + 0.43*0.04 + 0.15*0.005 + 0.07*0.0 = 0.0232.
=> 2 % < real portfolio return < 2.5 %
annual withdrawal rate about 1.7%
should work even for a european investor
Last edited by tre3sori on Mon Dec 21, 2020 8:40 pm, edited 2 times in total.
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AerialWombat
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Re: What long-term real return do you now expect?

Post by AerialWombat »

I accept whatever the market gives me. With a 30/70 AA, my objective is to merely beat inflation. That's all I'm after.
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Re: What long-term real return do you now expect?

Post by Hebell »

AerialWombat wrote: Mon Dec 21, 2020 2:46 pm my objective is to merely beat inflation. That's all I'm after.
Me too! And wow, what a premium we are paying for it!
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Emiliania
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Re: What long-term real return do you now expect?

Post by Emiliania »

There are many people who are paid to try to come up with an estimate all day long. Everybody knows that these are just estimates, based on history and economic study. Reality may differ significantly! But you need some number for the baseline. So, here are the numbers that have been put out. These outfits also publish explanations of how they reached these numbers:

All values "real" Vanguard JPMorgan BlackRock
Asset Classes 10Y Long Term Volatility 10Y Long Term Volatility 10Y Long Term Volatility
US Equity 3.3% 5.4% 16.9% 2.4% 5.3% 15% 2.6% 5.8% 17.8%
exUS Equity 6.7% 6.6% 18.6% 6.0% 7.9% 17% 4.5% 6.0% 18.4%
EM xxxx xxxx xxx 5.4% 7.4% 22% 3.9% 7.7% 21.0%
US T -0.6% xxx 4.1% -0.3% 1.2% 4% -2.2% 0.6% 5.5%
US Bonds -0.2% xxx 4.0% 0.2% 1.7% 4% -1.7% 1.3% 4.2%


Well, I don't know how to get a table to come out. But in summary, I use:
US Equity 2.8% 5.5% 16.6%
Global exUS Equity 5.7% 6.8% 18.0%
Emerging Markets 4.7% 7.6% 21.5%
US Treasury bonds -1.0% 0.9% 4.5%
US Bonds -0.6% 1.5% 4.1%
The first number is the 10Y CAGR real expectation, the second is the longer term expectation, the third is the volatility.
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Cyclesafe
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Re: What long-term real return do you now expect?

Post by Cyclesafe »

The value of the exercise over decades is to gain a sense of what markets must return within a given AA to fund the end of life.

Any given combination of returns is likely wrong. Probably very wrong. But also, may be good enough.

I currently use a nominal 5% for equity and a nominal 1% for fixed. I assume 1.5% for inflation and costs going up at 3X this rate each and every year. Obviously, I am not relying on recent market returns to fund my retirement.
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Ramjet
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Re: What long-term real return do you now expect?

Post by Ramjet »

6% nominal for 20+ years...GDP 3% + inflation and dividends of around 3% combined
TheDDC
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Re: What long-term real return do you now expect?

Post by TheDDC »

Expecting 7-9% depending on inflation. The S&P returns on average 10+%, so backing out for inflation from there.

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Re: What long-term real return do you now expect?

Post by Robot Monster »

BlackRock has a page on asset return expectations (including the 60/40 portfolio) over various time periods you might be interested in checking out. link
shess
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Re: What long-term real return do you now expect?

Post by shess »

QBoy wrote: Mon Dec 21, 2020 2:00 pm When planning ahead for several decades of retirement, it is useful to have an expected real return in mind. Historically, a balanced portfolio of about half stock and half bonds has produced a real return that averages about 5 percent per year. But bond yields are now very low, and stock valuations are now high. I would guess that a real return of 2.5 percent per year is a better number for planning purposes.
IMHO, aiming for an equation where you precisely know %X return and aim to run out of your last penny when you die at 89 and 7 months is not a great goal. Not saying you're doing that, but I know for myself, thinking about specific returns often lead to that kind of forecasting.

Instead, I try to look at it as a centered spread of returns, and worry about how bad the poorer scenarios are likely to be. So, say you assume the spread is centered around 5% and maybe a 95% chance of being between 1.5% and 8%. how does the 1.5% scenario work out for you? I mean, obviously not preferred, but is it too much to bear? Then you might have work to do.

IMHO this helps because the low end of the range naturally lends itself to being lower than you're happy with, but the high end of the range takes care of itself. If you planned to be in adequate shape with 1.5% returns and get 6% returns, well, you'll probably figure it out, right?
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TierArtz
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Re: What long-term real return do you now expect?

Post by TierArtz »

I know nothing, but here's what I'm guesstimating (real) for my three fund portfolio:
Stocks: 4%
Bonds: 2%
Cash: 1%

The stock number may be pessimistic and the fixed income numbers may be optimistic, but time will tell.
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GerryL
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Re: What long-term real return do you now expect?

Post by GerryL »

I created a spreadsheet to help figure out what my RMDs might look like over the next decade or so. I have columns for two different growth estimates: 5% and 8%. I also have columns for the actuals, which I update each year.

My AA is 60/40, but my IRA is heavier on the bond side since my Roth is all stock.
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Re: What long-term real return do you now expect?

Post by willthrill81 »

TierArtz wrote: Mon Dec 21, 2020 4:39 pm I know nothing, but here's what I'm guesstimating (real) for my three fund portfolio:
Stocks: 4%
Bonds: 2%
Cash: 1%

The stock number may be pessimistic and the fixed income numbers may be optimistic, but time will tell.
Considering that TIPS of all maturities are negative right now, +2% real is wildly optimistic; the market's expectation is that 10 year Treasuries will return -1% over the next decade. Cash is currently negative as well, but rising interest rates could possibly boost cash's yield to 1% real, though I suspect we won't see that happen for a long while.
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Re: What long-term real return do you now expect?

Post by JoeRetire »

willthrill81 wrote: Mon Dec 21, 2020 4:51 pm Considering that TIPS of all maturities are negative right now, +2% real is wildly optimistic; the market's expectation is that 10 year Treasuries will return -1% over the next decade. Cash is currently negative as well, but rising interest rates could possibly boost cash's yield to 1% real, though I suspect we won't see that happen for a long while.
Is 10 years what you consider long-term?
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FelixTheCat
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Re: What long-term real return do you now expect?

Post by FelixTheCat »

Okay. The answer to the ultimate question of life, the universe, and everything is...

[wild cheers from audience, then silence]

42.
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garlandwhizzer
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Re: What long-term real return do you now expect?

Post by garlandwhizzer »

4% - 5% real for stocks, 0% real for bonds.

Garland Whizzer
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Re: What long-term real return do you now expect?

Post by flyingaway »

I will just get what I will be given. I may retire if I am sure that I have enough. Otherwise I just keep working and keep saving.
I can run some calculators for fun sometimes.
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Re: What long-term real return do you now expect?

Post by TheoLeo »

For an internationally diversified all stock portfolio I expect 4 % earnings yield plus 1-2 % earnings growth plus 1 % due to PE expansion over the next 10-20 years. So in total 6-7 % nominal, inflation 1-2 % long term, therefore 4-6 % real.
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Re: What long-term real return do you now expect?

Post by Seasonal »

10 years is a typical horizon for estimates.

10 year TIPS for bonds: -1%
e/p or 1/cape for stocks: 3%
plus or minus 5-8 percentage points
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Re: What long-term real return do you now expect?

Post by Hector »

I expect stock to double every decade considering one is investing for at least 2-3 decades.
I expect short-term treasurys to lose ~1% real.
Last edited by Hector on Mon Dec 21, 2020 5:45 pm, edited 4 times in total.
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Re: What long-term real return do you now expect?

Post by willthrill81 »

JoeRetire wrote: Mon Dec 21, 2020 4:53 pm
willthrill81 wrote: Mon Dec 21, 2020 4:51 pm Considering that TIPS of all maturities are negative right now, +2% real is wildly optimistic; the market's expectation is that 10 year Treasuries will return -1% over the next decade. Cash is currently negative as well, but rising interest rates could possibly boost cash's yield to 1% real, though I suspect we won't see that happen for a long while.
Is 10 years what you consider long-term?
No, but interest rates would have to go up significantly at some point for bonds to be yielding +2% real unless inflation falls to zero or goes negative (i.e. deflation), and we all know what happens to existing bond principal when interest rates go up. +2% real annualized over even the next 20 years seems very unlikely to me, but perhaps some of the bond gurus can weigh in on the issue.
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Re: What long-term real return do you now expect?

Post by 000 »

US Treasuries: -1% real
US stock index: 2% real
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Re: What long-term real return do you now expect?

Post by afan »

I don't have an expectation. I have no idea what long term returns will be. The predictions of people who claim to have useful information are consistently terrible.

Given that, I USE 1% real for my long term planning and 2.5% real for my rosy scenario. If it turns out higher than 2.5, great! If it turns out worse than 1, then I have planned for it.

I do not assume that the Great Depression was the worst thing that could ever happen in the US and that the future will be better. I take the Depression as proof that something that bad is possible, but assume that something worse could occur during my lifetime.

Also, I run Monte Carlo to get an idea of the outliers, but this requires adding a guess about distribution of returns on top of a guess about means.

This is for a 60/40 portfolio and a horizon of 50 years.
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Re: What long-term real return do you now expect?

Post by oldfort »

I'm expecting treasury bonds to return -0.5%, 4.5% from stocks, so 2% for a 50/50 portfolio.
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Re: What long-term real return do you now expect?

Post by pasadena »

Between -20 and +20.

Joke apart, I often use the returns from 2007-2019 in my spreadsheet. Gives me a pretty bad SOR. I randomly adjust them to run different scenarios. I'm not a fan of using the same % as an average, it strikes me as unrealistic.
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Re: What long-term real return do you now expect?

Post by marcopolo »

Any of the proposed expected returns are likely to be as good as any.

Rather that try to guess at a single number number.
I run a series of different scenarios and look at the robustness of my plan, how well does it survive as I make more and more conservative/dire assumptions. I only plan to use this as guide to when I might want to trim spending a little ONLY AFTER the poor performance shows up.

I think the price is too high to become too conservative or fearful in ANTICIPATION of poor returns. We have seen too many long stretches of forecast poor returns/recessions that did not materialize.
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Re: What long-term real return do you now expect?

Post by rockstar »

It's super important to have some idea. Do you pay down your home faster or invest? If you expect a return less your effective mortgage rate, then it makes the decision easier. Right now, I have no clue. The market is up nearly 20%, and we have had quarters of negative GDP this year. It's hard to wrap your head around it.
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Re: What long-term real return do you now expect?

Post by MathWizard »

3% real overall.

This is over 30 years, not just the next 10.
The next 10 years is likely to be worse than the next 20 ,
so I am ready for having to pull back on spending,
but I am planning on an overall 3%.

Plans sometime fail, but you cannot fail to plan.
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Re: What long-term real return do you now expect?

Post by crystalbank »

rockstar wrote: Mon Dec 21, 2020 6:29 pm It's super important to have some idea. Do you pay down your home faster or invest? If you expect a return less your effective mortgage rate, then it makes the decision easier. Right now, I have no clue. The market is up nearly 20%, and we have had quarters of negative GDP this year. It's hard to wrap your head around it.
Yeah it definitely feels surreal. Market is up because it expects growth to rebound and continue the trajectory pre-covid. If it looks like that's not the case obviously markets will tank.
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Re: What long-term real return do you now expect?

Post by UpperNwGuy »

Robot Monster wrote: Mon Dec 21, 2020 4:30 pm BlackRock has a page on asset return expectations (including the 60/40 portfolio) over various time periods you might be interested in checking out. link
Expectations for Europe equities are surprisingly high.
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Re: What long-term real return do you now expect?

Post by Ice-9 »

When I use firecalc's retirement calculator, I add 2% to the expense ratio on the "Your Portfolio" tab to simulate 2% worse annually than historical real returns.

Since some people in this thread say they prefer to use nominal numbers, in my 70/30 portoflio, subtracting 2% from Vanguard's model, would translate to a 7% nominal return.
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Re: What long-term real return do you now expect?

Post by AerialWombat »

rockstar wrote: Mon Dec 21, 2020 6:29 pm It's super important to have some idea. Do you pay down your home faster or invest? If you expect a return less your effective mortgage rate, then it makes the decision easier. Right now, I have no clue. The market is up nearly 20%, and we have had quarters of negative GDP this year. It's hard to wrap your head around it.
‘Tis a reason I throw a few grand a month extra at all the mortgages, as well as invest.
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Re: What long-term real return do you now expect?

Post by Normchad »

Ice-9 wrote: Mon Dec 21, 2020 6:44 pm When I use firecalc's retirement calculator, I add 2% to the expense ratio on the "Your Portfolio" tab to simulate 2% worse annually than historical real returns.

Since some people in this thread say they prefer to use nominal numbers, in my 70/30 portoflio, subtracting 2% from Vanguard's model, would translate to a 7% nominal return.
That’s a great firecalc trick, I might steal that one.....
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Re: What long-term real return do you now expect?

Post by DSBH »

I use the Retiree Portfolio Model to plan for our 30 retirement years starting in 2020, assuming as average nominal annual return 5% for VG Total Stock Index and 1% for VG Total Bond Index - or 3% for our 50/50 AA portfolio.
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Re: What long-term real return do you now expect?

Post by HippoSir »

3% real US, 6% real ex-US developed, 7% real emerging

If bogleheads is still around in 10 years I'll come back to this post and laugh, I'm sure. :beer
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Re: What long-term real return do you now expect?

Post by Carol88888 »

willthrill81 wrote: Mon Dec 21, 2020 4:51 pm
TierArtz wrote: Mon Dec 21, 2020 4:39 pm I know nothing, but here's what I'm guesstimating (real) for my three fund portfolio:
Stocks: 4%
Bonds: 2%
Cash: 1%

The stock number may be pessimistic and the fixed income numbers may be optimistic, but time will tell.
Considering that TIPS of all maturities are negative right now, +2% real is wildly optimistic; the market's expectation is that 10 year Treasuries will return -1% over the next decade. Cash is currently negative as well, but rising interest rates could possibly boost cash's yield to 1% real, though I suspect we won't see that happen for a long while.
Would you be willing to share your positioning in light of these very low projected returns?
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Re: What long-term real return do you now expect?

Post by shess »

rockstar wrote: Mon Dec 21, 2020 6:29 pm It's super important to have some idea. Do you pay down your home faster or invest? If you expect a return less your effective mortgage rate, then it makes the decision easier. Right now, I have no clue. The market is up nearly 20%, and we have had quarters of negative GDP this year. It's hard to wrap your head around it.
I decided to pay down my mortgage, because I honestly thought that the markets were getting overvalued. It just seemed like the risk of having a recession was getting higher and there wasn't a lot of rise left to go.

That was in 2014. VTI has doubled since then - but the somewhat concentrated position I sold out of has tripled.

But the cashflow changes resulting from having a paid-off house gave me the confidence to retire early a few years later.

Your expectations are just that: expectations. Reality may unroll differently than expected, in fact I think it quite enjoys doing so.
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Re: What long-term real return do you now expect?

Post by bog007 »

who thought the market would be up this year from march. nobody i saw. nobody knows nothing. but give me 7% next 10 years.
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Re: What long-term real return do you now expect?

Post by ohboy! »

I don’t have any expectations. Too many other variable factors, like future costs. Also living life too freely to confine myself to a life in ten years. Diversifying my investments and planning not to sell them unless needed.
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Re: What long-term real return do you now expect?

Post by willthrill81 »

Carol88888 wrote: Mon Dec 21, 2020 7:56 pm
willthrill81 wrote: Mon Dec 21, 2020 4:51 pm
TierArtz wrote: Mon Dec 21, 2020 4:39 pm I know nothing, but here's what I'm guesstimating (real) for my three fund portfolio:
Stocks: 4%
Bonds: 2%
Cash: 1%

The stock number may be pessimistic and the fixed income numbers may be optimistic, but time will tell.
Considering that TIPS of all maturities are negative right now, +2% real is wildly optimistic; the market's expectation is that 10 year Treasuries will return -1% over the next decade. Cash is currently negative as well, but rising interest rates could possibly boost cash's yield to 1% real, though I suspect we won't see that happen for a long while.
Would you be willing to share your positioning in light of these very low projected returns?
My strategy, which I no longer discuss on the open forum but will gladly discuss via PM, has not changed in response to these expected returns.
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BAM55
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Re: What long-term real return do you now expect?

Post by BAM55 »

A lot of conservative estimates here - but this is a conservative site.

I'm planning 4% annually (average) over a 30 year period with a diversified 60/40 portfolio which includes international.

Inflation is what it is, so I'm not going to complicate and try to add that in for a "real" number. There will be years where the return is far greater than 4% (like this year) and inflation may be high(er) - but this year it's not, and there will be years when the return is less than 5% and inflation could be low(er). It should all shake out.
bigskyguy
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Re: What long-term real return do you now expect?

Post by bigskyguy »

US market 0-2% real over 10 years
Intl and EM 2-4% Real
10 year TIPS -0.5% real

As a very good friend once told me, “the secret to a successful life is low expectations.” Seems to fit the question, given present circumstances.
For my personal portfolio (25/75) at age 71, I’m hoping to keep up with inflation. Any more is a gift.
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Re: What long-term real return do you now expect?

Post by Cycle »

For a total world 100% equities:

I put in my calculator 4% real.
I'd be ok with -3% real
I predict closer to 8% real
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Re: What long-term real return do you now expect?

Post by whodidntante »

I'll consider myself fortunate to get 4% in USA markets. My expectations are higher for foreign markets.

It doesn't really matter though. As a rational, highly evolved primate, I have the ability to do terrible things such as continuing to wake up for 6 am Zoom calls for a few more years. If you can call a being who does that highly evolved, that is.

I expect aggregate bond funds to lose money.
RyeBourbon
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Joined: Tue Sep 01, 2020 12:20 pm
Location: NJ/Philly

Re: What long-term real return do you now expect?

Post by RyeBourbon »

I am using 4% real for my all stock accounts (e.g. Roth) and 2.5% real for my 70/30 portfolio.
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