Long term low returns predicted

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homebuyer6426
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Re: Long term low returns predicted

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More Vanguard prediction analysis.

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willthrill81
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Re: Long term low returns predicted

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homebuyer6426 wrote: Fri Sep 24, 2021 12:32 pm More Vanguard prediction analysis.

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Excellent post.
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skierincolorado
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Re: Long term low returns predicted

Post by skierincolorado »

atdharris wrote: Thu Sep 23, 2021 2:25 pm
skierincolorado wrote: Thu Sep 23, 2021 10:48 am
atdharris wrote: Thu Sep 23, 2021 10:46 am No one knows anything. I believe the same thing has been said for a decade now, and the last decade of returns has been pretty good in my opinion
People might have said the same thing a decade ago but the argument was weak. Valuations like cape were much lower in 2011. Even a few years ago valuations were still much lower.
Maybe this time they are right, who knows. But I have a 30 year time horizon, so even if we see lower returns, I anticipate all things will even out.
It's not "this time". Valuations have never been this high before. 3 years ago they were much lower. 8 years ago they a little over half what they are today. It doesn't "even out" over 30 years. If valuations return to normal in 10 years (and by "normal" I mean the 21st century normal - if they fell to the 20th century normal we'd have severely negative 10 year returns and very low 30 year returns), then the remaining 20 years would be expected to have normal 8-10% nominal returns, not 15% to make up for the previous 10.
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Re: Long term low returns predicted

Post by skierincolorado »

homebuyer6426 wrote: Fri Sep 24, 2021 12:32 pm More Vanguard prediction analysis.

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It's a 25th percentile. There is always huge uncertainty. Vanguard should be applauded for acknowledging the large uncertainty rather than the false confidence of other prognisticators. Valuations *can* increase even higher than they were in 2015 - and they did. Likewise, valuations *can* increase higher than they are today, and they might, but they cannot increase forever.
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jeffyscott
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Re: Long term low returns predicted

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vanbogle59 wrote: Fri Sep 24, 2021 11:52 am
jeffyscott wrote: Fri Sep 24, 2021 11:41 am I would assume that no one is relying on or expecting future bond returns to be similar to historical returns (5-6% :?: ). It seems easier for people to recognize that bonds are at very high valuations and what that means for expected returns, than it is to do so for stocks. Though they may not even realize that that is what they doing, when they estimate that the expected return for the total bond market fund is about equal to the SEC yield (with, of course, a range of possible actual outcomes, but not as wide as that for stocks).
historical returns (5-6% :?: ) :confused

I just played the firecalc game again.
This time 0/100 for 30 years
Low: -1.5%
Median: 2%
High: 6.2%

Seems like a "reasonable" place to start to me :beer
Are those real or nominal returns?

5-6% is nominal and I just used the since inception figures for VBMFX, so it's the past 35 years.
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Re: Long term low returns predicted

Post by absolute zero »

jeffyscott wrote: Fri Sep 24, 2021 11:15 am
HomerJ wrote: Fri Sep 24, 2021 9:30 am
absolute zero wrote: Thu Sep 23, 2021 11:30 pm GMO is pretty impressively bearish. They say -7.5% real CAGR for next 7 years for US equities. If you follow those 7 years with 23 years of 6% real (just a made up assumption) it comes out to 2.5% real over the full 30 year period. I don’t know what GMO thinks will happen over 30 years (nor do I care to be honest) but based off this simple math I would not be surprised if their forecast for even a long time period was in the ballpark of 2% real.
People always say that, but that's never how it works.

It COULD work that way in the future, but, so far, we haven't ever gotten 23 years of "average".

If get -50% over the next 7 years, some of the following years, based on history, will be in 12%-30% range, not just 6%

The long-term average, so far, of 6%-7% real, INCLUDES all the bad years.

So the good years, so far, are very good, not average.

But who knows what the future holds? Not GMO, not me, not you, not anyone. It definitely could be different from past.
No one is saying that the real returns for each year will be 6%, 6%, 6%...6%. (Not sure if that is what you intended to imply there.)
Who knows what he intended to imply. Whatever it was, it didn't seem to have anything to do with my post...

Someone said something along the lines of "no way anyone is pessimistic on a 30 year horizon." And I showed some simple math that suggested "yes, it's quite likely that RA is bearish even over a 30 year time frame. Not as bearish as they are over a shorter time frame....but still bearish."

I certainly wasn't arguing for/against the validity of RA projections. But you can bet that if they expect horrible returns for 7 years, they're going to follow that with "normal" returns, not with a strong bounce-back so that the the whole 30 year time period averages out to 6-7% real. They build their expectations around partial mean reversion. So they wouldn't expect valuations to deflate, then to re-inflate again. That's not how their forecasting works.
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Re: Long term low returns predicted

Post by jeffyscott »

absolute zero wrote: Fri Sep 24, 2021 1:56 pm
jeffyscott wrote: Fri Sep 24, 2021 11:15 am
HomerJ wrote: Fri Sep 24, 2021 9:30 am
absolute zero wrote: Thu Sep 23, 2021 11:30 pm GMO is pretty impressively bearish. They say -7.5% real CAGR for next 7 years for US equities. If you follow those 7 years with 23 years of 6% real (just a made up assumption) it comes out to 2.5% real over the full 30 year period. I don’t know what GMO thinks will happen over 30 years (nor do I care to be honest) but based off this simple math I would not be surprised if their forecast for even a long time period was in the ballpark of 2% real.
People always say that, but that's never how it works.

It COULD work that way in the future, but, so far, we haven't ever gotten 23 years of "average".

If get -50% over the next 7 years, some of the following years, based on history, will be in 12%-30% range, not just 6%

The long-term average, so far, of 6%-7% real, INCLUDES all the bad years.

So the good years, so far, are very good, not average.

But who knows what the future holds? Not GMO, not me, not you, not anyone. It definitely could be different from past.
No one is saying that the real returns for each year will be 6%, 6%, 6%...6%. (Not sure if that is what you intended to imply there.)
Who knows what he intended to imply. Whatever it was, it didn't seem to have anything to do with my post...

Someone said something along the lines of "no way anyone is pessimistic on a 30 year horizon." And I showed some simple math that suggested "yes, it's quite likely that RA is bearish even over a 30 year time frame. Not as bearish as they are over a shorter time frame....but still bearish."

I certainly wasn't arguing for/against the validity of RA projections. But you can bet that if they expect horrible returns for 7 years, they're going to follow that with "normal" returns, not with a strong bounce-back so that the the whole 30 year time period averages out to 6-7% real. They build their expectations around partial mean reversion. So they wouldn't expect valuations to deflate, then to re-inflate again. That's not how their forecasting works.
Of course, you meant GMO there, but the same would apply to RA. Except they use 10 years and are more average than bearish, I think.

Could extend GMO with their 7 years, by adding 3 normal years to that in order to see how their presumed 10 would compare to RA.
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Re: Long term low returns predicted

Post by absolute zero »

jeffyscott wrote: Fri Sep 24, 2021 2:05 pm
absolute zero wrote: Fri Sep 24, 2021 1:56 pm
jeffyscott wrote: Fri Sep 24, 2021 11:15 am
HomerJ wrote: Fri Sep 24, 2021 9:30 am
absolute zero wrote: Thu Sep 23, 2021 11:30 pm GMO is pretty impressively bearish. They say -7.5% real CAGR for next 7 years for US equities. If you follow those 7 years with 23 years of 6% real (just a made up assumption) it comes out to 2.5% real over the full 30 year period. I don’t know what GMO thinks will happen over 30 years (nor do I care to be honest) but based off this simple math I would not be surprised if their forecast for even a long time period was in the ballpark of 2% real.
People always say that, but that's never how it works.

It COULD work that way in the future, but, so far, we haven't ever gotten 23 years of "average".

If get -50% over the next 7 years, some of the following years, based on history, will be in 12%-30% range, not just 6%

The long-term average, so far, of 6%-7% real, INCLUDES all the bad years.

So the good years, so far, are very good, not average.

But who knows what the future holds? Not GMO, not me, not you, not anyone. It definitely could be different from past.
No one is saying that the real returns for each year will be 6%, 6%, 6%...6%. (Not sure if that is what you intended to imply there.)
Who knows what he intended to imply. Whatever it was, it didn't seem to have anything to do with my post...

Someone said something along the lines of "no way anyone is pessimistic on a 30 year horizon." And I showed some simple math that suggested "yes, it's quite likely that RA is bearish even over a 30 year time frame. Not as bearish as they are over a shorter time frame....but still bearish."

I certainly wasn't arguing for/against the validity of RA projections. But you can bet that if they expect horrible returns for 7 years, they're going to follow that with "normal" returns, not with a strong bounce-back so that the the whole 30 year time period averages out to 6-7% real. They build their expectations around partial mean reversion. So they wouldn't expect valuations to deflate, then to re-inflate again. That's not how their forecasting works.
Of course, you meant GMO there, but the same would apply to RA. Except they use 10 years and are more average than bearish, I think.

Could extend GMO with their 7 years, by adding 3 normal years to that in order to see how their presumed 10 would compare to RA.
Yeah thanks for clarifying. They are both bearish and they both love emerging markets, so I guess I get them mixed up.
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Re: Long term low returns predicted

Post by HomerJ »

jeffyscott wrote: Fri Sep 24, 2021 1:55 pm
vanbogle59 wrote: Fri Sep 24, 2021 11:52 am
jeffyscott wrote: Fri Sep 24, 2021 11:41 am I would assume that no one is relying on or expecting future bond returns to be similar to historical returns (5-6% :?: ). It seems easier for people to recognize that bonds are at very high valuations and what that means for expected returns, than it is to do so for stocks. Though they may not even realize that that is what they doing, when they estimate that the expected return for the total bond market fund is about equal to the SEC yield (with, of course, a range of possible actual outcomes, but not as wide as that for stocks).
historical returns (5-6% :?: ) :confused

I just played the firecalc game again.
This time 0/100 for 30 years
Low: -1.5%
Median: 2%
High: 6.2%

Seems like a "reasonable" place to start to me :beer
Are those real or nominal returns?

5-6% is nominal and I just used the since inception figures for VBMFX, so it's the past 35 years.
Past 35 years is not "the historical returns".

1982-2021 was a period of falling interest rates and higher than normal returns.

The 30-40 years before that, bonds did only okay, and in real terms were hurt badly by double-digit inflation in the 70s.

Average bond returns over the whole 100+ years are nowhere near the average bond returns of the past 35 years.
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Re: Long term low returns predicted

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jeffyscott wrote: Fri Sep 24, 2021 1:55 pm
vanbogle59 wrote: Fri Sep 24, 2021 11:52 am
jeffyscott wrote: Fri Sep 24, 2021 11:41 am I would assume that no one is relying on or expecting future bond returns to be similar to historical returns (5-6% :?: ). It seems easier for people to recognize that bonds are at very high valuations and what that means for expected returns, than it is to do so for stocks. Though they may not even realize that that is what they doing, when they estimate that the expected return for the total bond market fund is about equal to the SEC yield (with, of course, a range of possible actual outcomes, but not as wide as that for stocks).
historical returns (5-6% :?: ) :confused

I just played the firecalc game again.
This time 0/100 for 30 years
Low: -1.5%
Median: 2%
High: 6.2%

Seems like a "reasonable" place to start to me :beer
Are those real or nominal returns?

5-6% is nominal and I just used the since inception figures for VBMFX, so it's the past 35 years.
Real, I think: https://calculator.ficalc.app/
I didn't spend a lot of time on it. (The actual numbers aren't that important to me. :happy )
Just wanted to grasp for some sort of "hey, what is the historical range for 30 years of bond returns?"
Cuz I don't think 5-6% real is anywhere near the answer. I'd be happy to learn of a more thorough analysis.
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Re: Long term low returns predicted

Post by HomerJ »

absolute zero wrote: Fri Sep 24, 2021 1:56 pm I certainly wasn't arguing for/against the validity of RA projections. But you can bet that if they expect horrible returns for 7 years, they're going to follow that with "normal" returns, not with a strong bounce-back so that the the whole 30 year time period averages out to 6-7% real. They build their expectations around partial mean reversion. So they wouldn't expect valuations to deflate, then to re-inflate again.
Which is why their forecasts fail.

Stock market runs in cycles. Human emotions are involved. The pendulum always swings too far in both directions.

There is no historical precedent to assume that things will swing back, and then stop swinging.

Economists exist to make astrologers look good. That includes RA.
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Re: Long term low returns predicted

Post by jeffyscott »

vanbogle59 wrote: Fri Sep 24, 2021 2:12 pm
jeffyscott wrote: Fri Sep 24, 2021 1:55 pm
vanbogle59 wrote: Fri Sep 24, 2021 11:52 am
jeffyscott wrote: Fri Sep 24, 2021 11:41 am I would assume that no one is relying on or expecting future bond returns to be similar to historical returns (5-6% :?: ). It seems easier for people to recognize that bonds are at very high valuations and what that means for expected returns, than it is to do so for stocks. Though they may not even realize that that is what they doing, when they estimate that the expected return for the total bond market fund is about equal to the SEC yield (with, of course, a range of possible actual outcomes, but not as wide as that for stocks).
historical returns (5-6% :?: ) :confused

I just played the firecalc game again.
This time 0/100 for 30 years
Low: -1.5%
Median: 2%
High: 6.2%

Seems like a "reasonable" place to start to me :beer
Are those real or nominal returns?

5-6% is nominal and I just used the since inception figures for VBMFX, so it's the past 35 years.
Real, I think: https://calculator.ficalc.app/
I didn't spend a lot of time on it. (The actual numbers aren't that important to me. :happy )
Just wanted to grasp for some sort of "hey, what is the historical range for 30 years of bond returns?"
Cuz I don't think 5-6% real is anywhere near the answer. I'd be happy to learn of a more thorough analysis.
So the 2% real is probably around 5% nominal.

Also found annual returns from 1928 to 2020 for Bonds = +4.9% and 1.9% real
https://awealthofcommonsense.com/2021/0 ... 1928-2020/

And that seems to be for treasury bonds only, so a bond index would be a bit higher, based on:
https://pages.stern.nyu.edu/~adamodar/N ... retSP.html

Growth of $100 here confirms, with a similar result for Treasury bonds, Corp Baa are at about 7%.

So the figure for the past 35 years is not so different, after all. Now whose expecting 5% nominal or 2% real from Treasuries and maybe 6% nominal or 3% real from the bond index fund, based on history?
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Re: Long term low returns predicted

Post by vanbogle59 »

jeffyscott wrote: Fri Sep 24, 2021 2:39 pm So the figure for the past 35 years is not so different, after all. Now whose expecting 5% nominal or 2% real from Treasuries and maybe 6% nominal or 3% real from the bond index fund, based on history?
I may be beating a dead horse, but out of respect for you analysis, I want to ensure we are not just talking about 2 different things.

I don't really have an opinion on what real bond yields will be for the next 30 years. (Others might,and some may actually be prescient, but not me.)

I was only trying to say that the RANGE of possible outcomes is not 5-6%. It is much wider than that.
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Re: Long term low returns predicted

Post by skierincolorado »

HomerJ wrote: Fri Sep 24, 2021 2:12 pm
absolute zero wrote: Fri Sep 24, 2021 1:56 pm I certainly wasn't arguing for/against the validity of RA projections. But you can bet that if they expect horrible returns for 7 years, they're going to follow that with "normal" returns, not with a strong bounce-back so that the the whole 30 year time period averages out to 6-7% real. They build their expectations around partial mean reversion. So they wouldn't expect valuations to deflate, then to re-inflate again.
Which is why their forecasts fail.

Stock market runs in cycles. Human emotions are involved. The pendulum always swings too far in both directions.

There is no historical precedent to assume that things will swing back, and then stop swinging.

Economists exist to make astrologers look good. That includes RA.
Except that's not how it works. If you select historical 10 year periods with the lowest returns, and then look at the subsequent 20 years, the average of the whole 30 years is below the long-term average.

Your argument is premised on the impossibility that valuations go up forever. Even if valuations remain high, returns will be lower than historical because the dividend yield is less.
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Re: Long term low returns predicted

Post by jeffyscott »

absolute zero wrote: Fri Sep 24, 2021 2:07 pm
jeffyscott wrote: Fri Sep 24, 2021 2:05 pm
absolute zero wrote: Fri Sep 24, 2021 1:56 pm
jeffyscott wrote: Fri Sep 24, 2021 11:15 am
HomerJ wrote: Fri Sep 24, 2021 9:30 am

People always say that, but that's never how it works.

It COULD work that way in the future, but, so far, we haven't ever gotten 23 years of "average".

If get -50% over the next 7 years, some of the following years, based on history, will be in 12%-30% range, not just 6%

The long-term average, so far, of 6%-7% real, INCLUDES all the bad years.

So the good years, so far, are very good, not average.

But who knows what the future holds? Not GMO, not me, not you, not anyone. It definitely could be different from past.
No one is saying that the real returns for each year will be 6%, 6%, 6%...6%. (Not sure if that is what you intended to imply there.)
Who knows what he intended to imply. Whatever it was, it didn't seem to have anything to do with my post...

Someone said something along the lines of "no way anyone is pessimistic on a 30 year horizon." And I showed some simple math that suggested "yes, it's quite likely that RA is bearish even over a 30 year time frame. Not as bearish as they are over a shorter time frame....but still bearish."

I certainly wasn't arguing for/against the validity of RA projections. But you can bet that if they expect horrible returns for 7 years, they're going to follow that with "normal" returns, not with a strong bounce-back so that the the whole 30 year time period averages out to 6-7% real. They build their expectations around partial mean reversion. So they wouldn't expect valuations to deflate, then to re-inflate again. That's not how their forecasting works.
Of course, you meant GMO there, but the same would apply to RA. Except they use 10 years and are more average than bearish, I think.

Could extend GMO with their 7 years, by adding 3 normal years to that in order to see how their presumed 10 would compare to RA.
Yeah thanks for clarifying. They are both bearish and they both love emerging markets, so I guess I get them mixed up.
Well, I guess there's Reasonably bearish RA and then there's Grizzly BEARISH GMO :) .

GMO with 7 years at -8.4% followed by 3 at 5.7%, ends up at -36% cumulative (real). While RA would be at about -9% cumulative (real). That's probably something like -11% nominal vs. about +16%, again cumulative over 10 years.
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Re: Long term low returns predicted

Post by jeffyscott »

vanbogle59 wrote: Fri Sep 24, 2021 2:47 pm
jeffyscott wrote: Fri Sep 24, 2021 2:39 pm So the figure for the past 35 years is not so different, after all. Now whose expecting 5% nominal or 2% real from Treasuries and maybe 6% nominal or 3% real from the bond index fund, based on history?
I may be beating a dead horse, but out of respect for you analysis, I want to ensure we are not just talking about 2 different things.

I don't really have an opinion on what real bond yields will be for the next 30 years. (Others might,and some may actually be prescient, but not me.)

I was only trying to say that the RANGE of possible outcomes is not 5-6%. It is much wider than that.
I see, I missed what you meant maybe. I'm not saying anything about a range. I'm saying that 5-6% nominal or 2-3% real would not be a reasonable median value for the range of expected returns for bonds over the next 30 years. But, if you were basing a projection on the historical data, that is what it would be.

The 30 year bond is at 1.9% nominal, the 30 year TIPS is at -0.30% real. Those might be reasonable median values for expected returns over the next 30 year. Even better would be to find the zero coupon bond yield and use that.
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Re: Long term low returns predicted

Post by David Jay »

UpperNwGuy wrote: Thu Sep 23, 2021 7:42 am
alex123711 wrote: Wed Sep 22, 2021 8:50 pm Seeing a lot of predictions (including on this forum) about low returns for a prolonged period (30+ yrs) some predictions are only 1% - 2% above inflation/ CPI.
Can you give us some examples of these predictions? I haven't seen any that are so pessimistic.
Whoa, Alex - Where did you go? We are still waiting for one actual prediction of 1% real for 30 years...
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Re: Long term low returns predicted

Post by JPM »

Looking at the very long term, the first mechanical steam-driven pump intended to pump mines dry came into use in Spain in 1606. It couldn't lift the water very far but you could mine silver and gold a little deeper. From 1618-1648 there was a general war in Europe and very little nonmilitary technological advance occurred before Europe recovered from those wars. In the early 18th century, the Newcomen engine came into wide use and though inefficient, it pumped the coal mines dry below the water table so coal could be supplied in large quantities to move the industrial revolution (i.e the productivity revolution) forward. Canal systems were begun in Europe to move commercial traffic efficiently in terms of time and cost. Again from 1792 to 1815 another period of general European war largely brought a halt to industrial scientific and engineering progress there. From 1820 until 1914, a long period of general peace and prosperity (excepting the brief localized wars of the American Civil War and the wars of Prussian expansion in the 1860-1871 period) enabled rapid advances in industrial science and technology permitting the development of new products, means of transportation, and vast enhancements of productivity. Bismarck's decision to give German state support to basic science research bore fruit in further developments in chemistry and engineering from 1870s onward. The long war of the early 20th century may have slowed development somewhat but the seeds of nuclear power were sown in the theoretical and experimental physics labs of the 1930s. By the 1940s industrial productivity has expanded immensely from what it had been at the turn of the 20th century.

We are currently enjoying the 76th year of peace and prosperity since the last general war ended. Some believe that the existence of nuclear weapons has made a general war a practical impossibility and that the present reign of prosperity may well continue for a very long time. Thus giving the opportunity for further developments in science and engineering aimed at expanding the range of useful and desirable products and worker productivity. The world economy is expanding at a terrific rate with literally billions of new people joining its workforce and seeing ways to advance their prosperity. If indeed we are experiencing an unusually long period of peace and prosperity, there is immense potential for profit for those enterprises that can satisfy the hundreds of millions of people aspiring to what we consider lower middle class living standards here in the US and Western Europe. The case for optimism about the world economy seems strong to me. Of course policy errors could derail progress in some countries and financial or technical errors derail individual firms. But some firms will be successful supplying products that people all over the world will want to buy. Those firms should make the indexes and the failures will drop off of them.
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Re: Long term low returns predicted

Post by absolute zero »

jeffyscott wrote: Fri Sep 24, 2021 2:50 pm
absolute zero wrote: Fri Sep 24, 2021 2:07 pm
jeffyscott wrote: Fri Sep 24, 2021 2:05 pm
absolute zero wrote: Fri Sep 24, 2021 1:56 pm
jeffyscott wrote: Fri Sep 24, 2021 11:15 am

No one is saying that the real returns for each year will be 6%, 6%, 6%...6%. (Not sure if that is what you intended to imply there.)
Who knows what he intended to imply. Whatever it was, it didn't seem to have anything to do with my post...

Someone said something along the lines of "no way anyone is pessimistic on a 30 year horizon." And I showed some simple math that suggested "yes, it's quite likely that RA is bearish even over a 30 year time frame. Not as bearish as they are over a shorter time frame....but still bearish."

I certainly wasn't arguing for/against the validity of RA projections. But you can bet that if they expect horrible returns for 7 years, they're going to follow that with "normal" returns, not with a strong bounce-back so that the the whole 30 year time period averages out to 6-7% real. They build their expectations around partial mean reversion. So they wouldn't expect valuations to deflate, then to re-inflate again. That's not how their forecasting works.
Of course, you meant GMO there, but the same would apply to RA. Except they use 10 years and are more average than bearish, I think.

Could extend GMO with their 7 years, by adding 3 normal years to that in order to see how their presumed 10 would compare to RA.
Yeah thanks for clarifying. They are both bearish and they both love emerging markets, so I guess I get them mixed up.
Well, I guess there's Reasonably bearish RA and then there's Grizzly BEARISH GMO :) .

GMO with 7 years at -8.4% followed by 3 at 5.7%, ends up at -36% cumulative (real). While RA would be at about -9% cumulative (real). That's probably something like -11% nominal vs. about +16%, again cumulative over 10 years.
Yeah fair point. While Rob Arnott is a little bit “sales-y,” I tend to be interested in hearing what he has to say about certain topics. On the other hand, I tend to completely ignore Jeremy Grantham. If a massive stock market collapse never occurs, I wonder if he’ll just go all the way to the grave with continuously pessimistic forecasts.
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Re: Long term low returns predicted

Post by Forester »

homebuyer6426 wrote: Fri Sep 24, 2021 12:32 pm More Vanguard prediction analysis.

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Image
This makes the case for owning the global index IMHO :idea:
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Re: Long term low returns predicted

Post by willthrill81 »

skierincolorado wrote: Fri Sep 24, 2021 2:49 pm
HomerJ wrote: Fri Sep 24, 2021 2:12 pm
absolute zero wrote: Fri Sep 24, 2021 1:56 pm I certainly wasn't arguing for/against the validity of RA projections. But you can bet that if they expect horrible returns for 7 years, they're going to follow that with "normal" returns, not with a strong bounce-back so that the the whole 30 year time period averages out to 6-7% real. They build their expectations around partial mean reversion. So they wouldn't expect valuations to deflate, then to re-inflate again.
Which is why their forecasts fail.

Stock market runs in cycles. Human emotions are involved. The pendulum always swings too far in both directions.

There is no historical precedent to assume that things will swing back, and then stop swinging.

Economists exist to make astrologers look good. That includes RA.
Except that's not how it works. If you select historical 10 year periods with the lowest returns, and then look at the subsequent 20 years, the average of the whole 30 years is below the long-term average.
That may be true (I haven't examined it myself), but even if it is, it doesn't have much bearing for most accumulators or retirees because the sequence of the returns they experience have such a big impact on the outcome. This fantastic post below from poster siamond demonstrates this in a SWR rate context, but it applies equally to accumulators.
siamond wrote: Wed Feb 06, 2019 2:35 pm
Note that the relation between CAGR and SWR is surprisingly loose, as Will already hinted at. Let me try to make the point more clear because it is certainly a tad counter-intuitive. I assembled the following graphs by tweaking a tad the Simba backtesting spreadsheet. Every vertical is a retirement cycle of 30 years, starting on the year indicated on the X axis. And you'll find the max WR (aka SWR) for each individual cycle as well as the (real) CAGR. Check those graphs carefully. If you perceive that the blue points (CAGR) give you any solid indication about the lowest pink points (SWR), I don't know, look again...

Image

Image
Accumulators who experience lackluster returns for the first 20 years of accumulation but then experience excellent returns for the last 10 may enter retirement with larger portfolios than had they experienced 'long-term average' returns for the entire period. This is effectively what happened to my father. He started accumulating in the 1990s but didn't have much invested when returns were great, then he had poor returns for the 2000s, followed by fantastic growth since.
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Re: Long term low returns predicted

Post by AlohaJoe »

absolute zero wrote: Fri Sep 24, 2021 1:56 pmSomeone said something along the lines of "no way anyone is pessimistic on a 30 year horizon." And I showed some simple math that suggested "yes, it's quite likely that RA is bearish even over a 30 year time frame.
I'm the one who said that nobody has predicted 30+ years returns.

You still haven't shown than RA has ever predicted 30 year returns will be 1-2% real.

Please link to actual words from them saying it.

Also keep in mind the OP said "a lot" of people were predicting this. So I'm still waiting on those 5-10 other clearcut obvious predictions in black & white.

It's been a few days now and the best anyone can do is point to 2 groups -- RA and GMO -- and then use their 7-10 year predictions to extrapolate and say "it is likely they might agree with returns being 1-2% real for 30 years even though we can't find any evidence of them ever actually making such an explicit prediction."

I stand by my claim that the OP made it up.
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Re: Long term low returns predicted

Post by skierincolorado »

willthrill81 wrote: Sat Sep 25, 2021 9:55 am
skierincolorado wrote: Fri Sep 24, 2021 2:49 pm
HomerJ wrote: Fri Sep 24, 2021 2:12 pm
absolute zero wrote: Fri Sep 24, 2021 1:56 pm I certainly wasn't arguing for/against the validity of RA projections. But you can bet that if they expect horrible returns for 7 years, they're going to follow that with "normal" returns, not with a strong bounce-back so that the the whole 30 year time period averages out to 6-7% real. They build their expectations around partial mean reversion. So they wouldn't expect valuations to deflate, then to re-inflate again.
Which is why their forecasts fail.

Stock market runs in cycles. Human emotions are involved. The pendulum always swings too far in both directions.

There is no historical precedent to assume that things will swing back, and then stop swinging.

Economists exist to make astrologers look good. That includes RA.
Except that's not how it works. If you select historical 10 year periods with the lowest returns, and then look at the subsequent 20 years, the average of the whole 30 years is below the long-term average.
That may be true (I haven't examined it myself), but even if it is, it doesn't have much bearing for most accumulators or retirees because the sequence of the returns they experience have such a big impact on the outcome. This fantastic post below from poster siamond demonstrates this in a SWR rate context, but it applies equally to accumulators.
siamond wrote: Wed Feb 06, 2019 2:35 pm
Note that the relation between CAGR and SWR is surprisingly loose, as Will already hinted at. Let me try to make the point more clear because it is certainly a tad counter-intuitive. I assembled the following graphs by tweaking a tad the Simba backtesting spreadsheet. Every vertical is a retirement cycle of 30 years, starting on the year indicated on the X axis. And you'll find the max WR (aka SWR) for each individual cycle as well as the (real) CAGR. Check those graphs carefully. If you perceive that the blue points (CAGR) give you any solid indication about the lowest pink points (SWR), I don't know, look again...

Image

Image
Accumulators who experience lackluster returns for the first 20 years of accumulation but then experience excellent returns for the last 10 may enter retirement with larger portfolios than had they experienced 'long-term average' returns for the entire period. This is effectively what happened to my father. He started accumulating in the 1990s but didn't have much invested when returns were great, then he had poor returns for the 2000s, followed by fantastic growth since.
Well one thing I would point out is that while there's not much correlation with SWR, the total consumption of those retiring in years with higher future 30 year CAGR would be much higher. The SWR is mostly determined by the final 15 years, and overall volatility (volatility lowers SWR), but if you are withdrawing a lower percent from a much higher amount due to fantastic growth in the first 15 years, the total wealth and consumption will be higher.

Also while past investors who experience early poor returns may have had some cyclical factors working in their favor, that shouldn't be expected in the current situation with sky high valuations.Valuations simply returning to normal, or "high", instead of "sky high", shouldn't be expected to have some cyclical return to "sky high."
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Re: Long term low returns predicted

Post by HomerJ »

skierincolorado wrote: Sun Sep 26, 2021 10:01 pm Valuations simply returning to normal, or "high", instead of "sky high", shouldn't be expected to have some cyclical return to "sky high."
The problem is that the definitions of "sky-high" and "high" and "normal" keep getting changed.

In 1996, a CAPE of 25 was "sky-high".

It hadn't been that high for 70 years. The last time it was that high was in the late 1920s, right before the Great Depression. Every serious proponent of valuations, just like you today, were absolutely sure that 25 was "sky-high" and returns were going to be absolutely terrible going forward.

But instead 1996 was a great time to invest.

Now CAPE of 25 is almost considered "normal"... maybe high end of normal.

So what does that mean?

CAPE hit 45 in 2000... yet returns from 2000 to 2021 are just a touch below the historical average. CAPE went to a NEW "sky-high" in 2000, and yet has almost returned to it, and long-term returns remained good, even investing back in 2000 at "sky-high" CAPE of 45.

Should we expect a return to "sky-high" after the next crash? No idea. Maybe. Maybe not.

But you don't know either.

It's now happened once, so by definition it could happen again. Should we expect a cyclical return to "sky-high" again? Probably not. But maybe. It certainly doesn't seem out of the question.

Or maybe even something crazier could happen. Could CAPE of 35-40 become a new normal someday? Could 50 be the new "sky-high"? Maybe. Maybe not. Shiller never would have believed 25 would become "normal" in 1996. Why not 35?

All the "rules" appear to have been broken. Or maybe the "rules" weren't "rules" after all.

It's certainly reasonable at this point to wonder, if maybe, just maybe, the CAPE model has some serious flaws in it.
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Re: Long term low returns predicted

Post by Forester »

If one measures peak-to-peak or trough to trough (early 1989 to early 2009), unsurprisingly one arrives real returns of around 7%. The argument boils down to, "what if stocks stay at CAPE 40 forever". It's always better to pay less for something, it cannot be disputed that today is the worst time to be an investor, since March '09.

The CAPE data includes the Great Depression, WW2 / Cold War and the Oil Crisis; it's difficult to assume what "normal CAPE" is, given that the data derives mainly from a 20th Century full of strife.
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Re: Long term low returns predicted

Post by Robert T »

.
From this recent M* interview with Arnott. https://www.morningstar.com/articles/10 ... ook-abroad
Arnott: ….U.S. stocks have a yield of 1.5%. Historically, they produce a growth rate that is about 1.0% to 1.5% above the rate of inflation. Well, that gets you to a 2.5% to 3.0% real return--a far cry from what most investors want to expect from stocks. Then there is the valuation component. We're currently at a price relative to 10-year smoothed earnings, a Shiller P/E ratio of 38. Historic norm is 18. Now we don't assume a mean reversion to 18. We know that maybe it's a new normal, maybe this is the new normal for valuations. Or maybe it does mean a revert, as it has in the past. Let's split the difference. Let's instead of going from 38 to 18, let's go from 38 to 28. Well, that's going to cost you about 5% to 6% per year compounded, bringing your real return slightly negative. OK, well, that's where we come out with an expectation that the real return will be negative, and that the nominal return will be modest.

Ptak: Essentially what the yield and cash flow growth giveth, the multiple taketh away, so to speak.

Arnott: Correct.
For my globally diversified small cap value tilted portfolio - (10 yr) expected nominal return of equity portion = just over 6.5% according to Research Affiliates expected returns estimates (just over 4% real).
Planned withdrawal rate = about 2% which is close to the the current yield on my equity allocation. No changes planned to equity portion (50:37:13 US:Non-US developed:EM with 0.2/0.4 target size/value load).

Obviously no guarantees.
.
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Re: Long term low returns predicted

Post by vanbogle59 »

Forester wrote: Mon Sep 27, 2021 3:08 am it cannot be disputed that today is the worst time to be an investor, since March '09.
I'll dispute it.

The money I invested in March '09 has done great.
I kick myself for not investing more at that time. I had the opportunity, and missed it.
That personal failure (failing to stick to my plan) informs my current IPS.
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Re: Long term low returns predicted

Post by Forester »

vanbogle59 wrote: Mon Sep 27, 2021 7:12 am
Forester wrote: Mon Sep 27, 2021 3:08 am it cannot be disputed that today is the worst time to be an investor, since March '09.
I'll dispute it.

The money I invested in March '09 has done great.
I kick myself for not investing more at that time. I had the opportunity, and missed it.
That personal failure (failing to stick to my plan) informs my current IPS.
But the opportunity for US stocks today is mediocre-to-terrible depending on one's POV. In March 2009 renowned US blue chips like Nike & Microsoft were relatively peanuts vs unproven/capital-intensive Emerging stocks.
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Re: Long term low returns predicted

Post by vanbogle59 »

Forester wrote: Mon Sep 27, 2021 7:20 am
vanbogle59 wrote: Mon Sep 27, 2021 7:12 am
Forester wrote: Mon Sep 27, 2021 3:08 am it cannot be disputed that today is the worst time to be an investor, since March '09.
I'll dispute it.

The money I invested in March '09 has done great.
I kick myself for not investing more at that time. I had the opportunity, and missed it.
That personal failure (failing to stick to my plan) informs my current IPS.
But the opportunity for US stocks today is mediocre-to-terrible depending on one's POV. In March 2009 renowned US blue chips like Nike & Microsoft were relatively peanuts vs unproven/capital-intensive Emerging stocks.
So...we agree :confused
March '09 was, in fact, a GREAT time to invest?
And, if you find a pundit claiming otherwise they are either very confused, clinically nuts or a troll?
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Re: Long term low returns predicted

Post by BlueyDivine »

Accepting the difficulty of predictions, especially about the future, my question is: supposing that we believe returns will be lower in the future, how should we change our behaviour?

Many people on here seem to believe that you should save more. I guess if you are targeting a particular level of consumption in retirement, that is the right answer.

But if you are trying to optimize your consumption over your lifetime, the answer should be that you should save less. You read a lot of stuff telling you that $1 saved when you are 25 compounded at 7 percent over 40 years will be worth however many tens of thousands when you retire. If real rates of return are very much lower- as they have been in certain periods, if you go back far enough - then you should instead go out and spend that money socializing or traveling or whatever. $1 saved in your 20s might only end up being worth a similar amount in the future, while your potential to enjoy the money through participating in various activities may deteriorate...
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Re: Long term low returns predicted

Post by skierincolorado »

HomerJ wrote: Sun Sep 26, 2021 11:17 pm
skierincolorado wrote: Sun Sep 26, 2021 10:01 pm Valuations simply returning to normal, or "high", instead of "sky high", shouldn't be expected to have some cyclical return to "sky high."
The problem is that the definitions of "sky-high" and "high" and "normal" keep getting changed.

In 1996, a CAPE of 25 was "sky-high".

It hadn't been that high for 70 years. The last time it was that high was in the late 1920s, right before the Great Depression. Every serious proponent of valuations, just like you today, were absolutely sure that 25 was "sky-high" and returns were going to be absolutely terrible going forward.

But instead 1996 was a great time to invest.

Now CAPE of 25 is almost considered "normal"... maybe high end of normal.

So what does that mean?

CAPE hit 45 in 2000... yet returns from 2000 to 2021 are just a touch below the historical average. CAPE went to a NEW "sky-high" in 2000, and yet has almost returned to it, and long-term returns remained good, even investing back in 2000 at "sky-high" CAPE of 45.

Should we expect a return to "sky-high" after the next crash? No idea. Maybe. Maybe not.

But you don't know either.

It's now happened once, so by definition it could happen again. Should we expect a cyclical return to "sky-high" again? Probably not. But maybe. It certainly doesn't seem out of the question.

Or maybe even something crazier could happen. Could CAPE of 35-40 become a new normal someday? Could 50 be the new "sky-high"? Maybe. Maybe not. Shiller never would have believed 25 would become "normal" in 1996. Why not 35?

All the "rules" appear to have been broken. Or maybe the "rules" weren't "rules" after all.

It's certainly reasonable at this point to wonder, if maybe, just maybe, the CAPE model has some serious flaws in it.
The idea that returns will be low is not premised on CAPE10 reverting to 25, or 30, or even 35. Even if CAPE10 remains at 40, returns will be lower than historical because
1) due to the low earnings yield
2) historical returns have been partially fueled by increaseing CAPE. If/when the increase stops, returns will be lower.
3) poductivity gains have not been any faster than historical recently

The idea that returns will continue at the historical average is premised on a continually increasing CAPE. Unless earnings growth accelerates, the pace of CAPE increase must actually accelerate and increase exponentially to maintain the same 10% historical return. Returns will be lower if/when CAPE stops increasing. If CAPE10 reverts to some lower value (even a value well above the historical mean, such as 30 or 35), returns will be especially low (negative).

Is it possible that CAPE increases forever? Sure. Could we see a CAPE of 80 in my lifetime? Possibly. But that shouldn't be the base assumption.

My base assumption is that CAPE of 40 is the new normal. For that reason, I expect lower long-term returns. Maybe some slight reversion to 35 CAPE. If I expected reversion to 25 (still above the 20th century average) in the next 15 years I would not be investing in stocks, period. Nevermind the leverage I have taken in stocks.

Your expectation seems to be for 7-8% real returns over the next 20-30 years. For that to come true, either earnings growth would have to be much faster than the historical rate, or CAPE would have to be around 60-70 in the next 20-30 years. Either are possible, but shouldn't form the basis of one's expectations.

Productivity growth the last two decades has been just below 1.9%. World population growth rate is 1% and slowing. Earnings yield is 2.5%. Combined, that would provide 5-5.3% real return, unlesss PE ratios continue to increase. If there is some slight reversion of valuations, it would be lower. This is well below the 8.5% real return the last 40 years. The 8.5% real was fueled by

2% productivity + ~1.3% population growth + earnings yield of 3.5% + 3% from valuation increases.

Over the last 40 years, 3% of CAGR is attributable to valuation increases. Unless you expect valuations to increase forever, returns gonig forward should be 3% lower than the last 40 years. Productivity growth and population growth are also slowing, which might subtract a quarter and half percent respectively. Earnings yields are lower which lops off another percent.
Last edited by skierincolorado on Mon Sep 27, 2021 9:48 am, edited 2 times in total.
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Re: Long term low returns predicted

Post by AlohaBill »

Predictions, predictions, predictions!
Here is the only true prediction:
We all will die pretty soon. 80 years is not long.

Stuff happens.
In the meantime, we will all muddle through, wing it, numberize to forever, hem and haw, wish upon a star and so on.
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Re: Long term low returns predicted

Post by asif408 »

BlueyDivine wrote: Mon Sep 27, 2021 7:43 am Accepting the difficulty of predictions, especially about the future, my question is: supposing that we believe returns will be lower in the future, how should we change our behaviour?

Many people on here seem to believe that you should save more. I guess if you are targeting a particular level of consumption in retirement, that is the right answer.

But if you are trying to optimize your consumption over your lifetime, the answer should be that you should save less. You read a lot of stuff telling you that $1 saved when you are 25 compounded at 7 percent over 40 years will be worth however many tens of thousands when you retire. If real rates of return are very much lower- as they have been in certain periods, if you go back far enough - then you should instead go out and spend that money socializing or traveling or whatever. $1 saved in your 20s might only end up being worth a similar amount in the future, while your potential to enjoy the money through participating in various activities may deteriorate...
It's simple, if you invest mostly where valuations are high (US growth stocks) you should spend more and save less. If you are mostly invested where valuations are moderate to low (value stocks in international developed and EM) you should save more and spend less.

I have 85% of my money in foreign value stocks, so I choose the latter approach. Most people here aren't willing to put more than half their money or more overseas and in value stocks, and a large chunk of them have the inverse of my approach, with more than 80-90% in US stocks. So those people should choose the former approach.
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Re: Long term low returns predicted

Post by Beensabu »

vanbogle59 wrote: Mon Sep 27, 2021 7:24 am
Forester wrote: Mon Sep 27, 2021 7:20 am
vanbogle59 wrote: Mon Sep 27, 2021 7:12 am
Forester wrote: Mon Sep 27, 2021 3:08 am it cannot be disputed that today is the worst time to be an investor, since March '09.
I'll dispute it.

The money I invested in March '09 has done great.
I kick myself for not investing more at that time. I had the opportunity, and missed it.
That personal failure (failing to stick to my plan) informs my current IPS.
But the opportunity for US stocks today is mediocre-to-terrible depending on one's POV. In March 2009 renowned US blue chips like Nike & Microsoft were relatively peanuts vs unproven/capital-intensive Emerging stocks.
So...we agree :confused
March '09 was, in fact, a GREAT time to invest?
And, if you find a pundit claiming otherwise they are either very confused, clinically nuts or a troll?
Pretty sure they are saying that if you consider the time period from March 2009 to now, then now is the worst time along that line, because you have to pay more for less now.
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Re: Long term low returns predicted

Post by HomerJ »

skierincolorado wrote: Mon Sep 27, 2021 8:58 am The idea that returns will continue at the historical average is premised on a continually increasing CAPE.

Unless earnings growth accelerates, the pace of CAPE increase must actually accelerate and increase exponentially to maintain the same 10% historical return.
No, this is incorrect. Continually increasing CAPE (like the last decade) gets you above average returns (like we've seen in the last decade)

Normally, we have cycles of terrible returns (CAPE falling), and great returns (CAPE rising), and we end up with a decent average.

If somehow the pendulum stops swinging, and CAPE doesn't continue to increase, we might just see steady average returns after that.

We don't need continually increasing CAPE for the average return.

Not that I think the pendulum will ever stop swinging. Human emotions are a big part of stock market euphoria and despair.
Your expectation seems to be for 7-8% real returns over the next 20-30 years. For that to come true, either earnings growth would have to be much faster than the historical rate, or CAPE would have to be around 60-70 in the next 20-30 years. Either are possible, but shouldn't form the basis of one's expectations.
Again, no. First of all, historical returns are in the 6%-7% real range. I do indeed expect the next 20-30 years to return around that much. Nothing you say has to happen for that to occur. We could have a huge crash, CAPE could drop to 15, and then slow grow back to 30, and we'd still likely see 6%-7% over the long run.

What are you missing is that during the good years, with rising CAPE, we get like 14%-18% a year returns. You don't need rising CAPE for average returns. Rising CAPE gives you spectacular returns. But then that's averaged out when the pendulum swings the other way, and the market crashes.

The long-term 6%-7% real (9%-10% nominal) return of the stock market INCLUDES the crashes. You don't get the average return when CAPE is rising. You get far more, and that's why the average is still good even with the crashes.

Seriously, don't just start thinking of ways to dispute this. Your fundamental understanding of average historical returns is incorrect. We can still get average returns starting from a sky-high CAPE, because CAPE doesn't have to go even higher for average returns.

CAPE in 2000 was 45... It then dropped back into the 20s (even into the teens in 2009), and bounced around the 20s for a while and now is growing back into the high 30s.

And average returns from 2000 is 5.25% real, fairly close to the 6%-7% historical average.

So even starting from sky-high 45, we got close to historical averages over the long run (21 years so far), without CAPE continuing to grow past 45.

I mean, this JUST happened. You can't sit there and write, the only way to get average returns over the next 20 years is for CAPE to grow to 60-70, when we just recently got close to average returns over the past 20 years starting at an even higher CAPE than today.
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Re: Long term low returns predicted

Post by HomerJ »

skierincolorado wrote: Mon Sep 27, 2021 8:58 amthe 8.5% real return the last 40 years. The 8.5% real was fueled by
Ah, I think I see the problem.

You are using numbers from 1981-2021. Starting from a very low CAPE and ending at a very high CAPE.

Yes, to replicate the last 40 years might indeed require a higher CAPE than today. But that's not the historical average. You should really average out all 30 year or 40 year periods, not just pick the one that has best 40-year return in history.

I don't think anyone here is planning around a 8.5% real return.
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Re: Long term low returns predicted

Post by fulliautomatix »

It is interesting in the above chart that while VG got the absolute return number wrong for US Equities, they got the trend quite correctly. If that holds, it indicates that future returns will be lower and will tend to keep getting lower. There is no place to hide for investors now.
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Re: Long term low returns predicted

Post by skierincolorado »

HomerJ wrote: Mon Sep 27, 2021 11:28 am
skierincolorado wrote: Mon Sep 27, 2021 8:58 amthe 8.5% real return the last 40 years. The 8.5% real was fueled by
Ah, I think I see the problem.

You are using numbers from 1981-2021. Starting from a very low CAPE and ending at a very high CAPE.

Yes, to replicate the last 40 years might indeed require a higher CAPE than today. But that's not the historical average. You should really average out all 30 year or 40 year periods, not just pick the one that has best 40-year return in history.

I don't think anyone here is planning around a 8.5% real return.
It doesn't matter what period we pick since we can calculate the portion of returns due to rising CAPE.

But sure, let's do it your way. Let's pick a longer period with what you describe as "normal" returns. The last 50 years have had 6.7% real returns - right in the middle of your 6-7% "normal."

Increasing valuations contributed 1.5% to the return over this period. If valuations were the same today as they were in January 1972, the real rate of return would have been 5.2% instead of 6.7%.

Higher earnings yield (5% in 1972 vs 2.5% today) over the last 50 years than the the next 50 years amounts to a ~1.5% difference.

Thus if CAPE10 remains at 40, returns will be 1.5% lower due to no boost from rising valuations, and 1.5% lower due to lower earnings yield. Thus 3% lower overall. Instead of 6.7% real return, we should expect 3.7% - if CAPE remains at 40. If CAPE falls below 40, they will be lower. If CAPE continues rising, they will be higher.

And this doesn't factor in slowing productivity growth or population growth which shave off another quarter and half percent respectively and bring us to a 3% real return over the next 30 years.

The fact is it is much better to invest over a period of rising valuations than steady or falling valuations. Any period you might define as "normal" has witnessed substantially rising valuations. Valuations cannot increase forever.


Alternatively, instead of picking a long period and factoring out changes in valuations, we could pick a period with no net change in valuation. The longest such period I have easy access to data for is Jan 1972 - Dec 2009. The real rate of return during this period was 4.8% and the average earnings yield during this period was substantially higher than earnings yield today. When one considers that earnings yield is lower today than it was 1972-2009, that would subtract another 1.5%.

Another such period is 2000-present. Real returns were 5%. However, this period has been marked by unsustainably increasing profit margins. 5% is still well below the 6-7% many consider "normal." But even this 5% was largely fueled by an increase in profit margins of the S&P500 from 5% in the 1990s to 10% over the last 5 years, and 13% this year. The U.S. market is becoming increasingly anti-competitive which has fueled record corporate profits. If corporate profitability had not increased, returns would have been substantially less than 5% real. Any reversion of corporate profitability would likely lead to negative real returns for an extended period. Decreased competition also does not bode well for productivity gains and may explain slowing U.S. productivity growth. To be clear, I don't expect a reversion of corporate profitability - I simply expect it to stop increasing at some point which will cause returns to be subsntially lower than the 5% witnessed from 2000-present (which is already subsntially lower than the 6-7% many consider "normal").

Thus unless you expect infinitely increasing valuations and/or ifinitely increasing corporate profit margins, the real rate of return for U.S. stocks is somewhere between 3% and 4%. If you consider slowing population growth and productivity growth, it would suggest closer to 3% than 4%.
Last edited by skierincolorado on Mon Sep 27, 2021 1:03 pm, edited 1 time in total.
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Re: Long term low returns predicted

Post by HomerJ »

skierincolorado wrote: Mon Sep 27, 2021 12:05 pm
HomerJ wrote: Mon Sep 27, 2021 11:28 am
skierincolorado wrote: Mon Sep 27, 2021 8:58 amthe 8.5% real return the last 40 years. The 8.5% real was fueled by
Ah, I think I see the problem.

You are using numbers from 1981-2021. Starting from a very low CAPE and ending at a very high CAPE.

Yes, to replicate the last 40 years might indeed require a higher CAPE than today. But that's not the historical average. You should really average out all 30 year or 40 year periods, not just pick the one that has best 40-year return in history.

I don't think anyone here is planning around a 8.5% real return.
It doesn't matter what period we pick since we can calculate the portion of returns due to rising CAPE.

But sure, let's do it your way. Let's pick a longer period with what you describe as "normal" returns. The last 50 years have had 6.7% real returns - right in the middle of your 6-7% "normal."

Increasing valuations contributed 1.5% to the return over this period. If valuations were the same today as they were in January 1972, the real rate of return would have been 5.2% instead of 6.7%.

Higher earnings yield (5% in 1972 vs 2.5% today) over the last 50 years than the the next 50 years amounts to a ~1.5% difference.

Thus if CAPE10 remains at 40, returns will be 1.5% lower due to no boost from rising valuations, and 1.5% lower due to lower earnings yield. Thus 3% lower overall. Instead of 6.7% real return, we should expect 3.7% - if CAPE remains at 40. If CAPE falls below 40, they will be lower. If CAPE continues rising, they will be higher.
You speak way too confidently while quantifying exactly where returns come from (even using decimal points).

So explain 2000-2021 then. CAPE10 of 45, CAPE is currently below 45, real returns have been 5.25%.

Your model doesn't even match the past. But you think we should believe it can predict the future?
Another such period is 2000-present. Real returns were 5%. However, this period has been marked by unsustainably increasing profit margins. 5% is still well below the 6-7% many consider "normal." But even this 5% was largely fueled by an increase in profit margins of the S&P500 from 5% in the 1990s to 10% over the last 5 years, and 13% this year. The U.S. market is becoming increasingly anti-competitive which has fueled record corporate profits. If corporate profitability had not increased, returns would have been substantially less than 5% real. Any reversion of corporate profitability would likely lead to negative real returns for an extended period. Decreased competition also does not bode well for productivity gains and may explain slowing U.S. productivity growth. To be clear, I don't expect a reversion of corporate profitability - I simply expect it to stop increasing at some point which will cause returns to be subsntially lower than the 5% witnessed from 2000-present (which is already subsntially lower than the 6-7% many consider "normal").
Ah, here you try to explain 2000-2021... All I hear is "another variable showed up". Models based on CAPE ALWAYS seem to fall back to that explanation when they don't work.

There are many variables unaccounted for. That's why predicting future returns looking at just two variables (price and past average earnings) doesn't work.

You seem confident. And you may even be right. But you probably shouldn't be so confident.

In any case, most of here count on conservative returns to begin with... So don't worry, we will all be fine.

We'll get what we get, and we'll adjust.

No one has been able to accurately predict future returns, so just plan for low returns to be conservative, and adjust to ACTUAL returns. Don't make changes based on PREDICTED returns.
Last edited by HomerJ on Mon Sep 27, 2021 1:22 pm, edited 1 time in total.
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skierincolorado
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Re: Long term low returns predicted

Post by skierincolorado »

HomerJ wrote: Mon Sep 27, 2021 1:03 pm
skierincolorado wrote: Mon Sep 27, 2021 12:05 pm
HomerJ wrote: Mon Sep 27, 2021 11:28 am
skierincolorado wrote: Mon Sep 27, 2021 8:58 amthe 8.5% real return the last 40 years. The 8.5% real was fueled by
Ah, I think I see the problem.

You are using numbers from 1981-2021. Starting from a very low CAPE and ending at a very high CAPE.

Yes, to replicate the last 40 years might indeed require a higher CAPE than today. But that's not the historical average. You should really average out all 30 year or 40 year periods, not just pick the one that has best 40-year return in history.

I don't think anyone here is planning around a 8.5% real return.
It doesn't matter what period we pick since we can calculate the portion of returns due to rising CAPE.

But sure, let's do it your way. Let's pick a longer period with what you describe as "normal" returns. The last 50 years have had 6.7% real returns - right in the middle of your 6-7% "normal."

Increasing valuations contributed 1.5% to the return over this period. If valuations were the same today as they were in January 1972, the real rate of return would have been 5.2% instead of 6.7%.

Higher earnings yield (5% in 1972 vs 2.5% today) over the last 50 years than the the next 50 years amounts to a ~1.5% difference.

Thus if CAPE10 remains at 40, returns will be 1.5% lower due to no boost from rising valuations, and 1.5% lower due to lower earnings yield. Thus 3% lower overall. Instead of 6.7% real return, we should expect 3.7% - if CAPE remains at 40. If CAPE falls below 40, they will be lower. If CAPE continues rising, they will be higher.
You speak way too confidently while quantifying exactly where returns come from (even using decimal points).

So explain 2020-2021 then. CAPE10 of 45, CAPE is currently below 45, real returns have been 5.25%.

Your model doesn't even match the past. But you think we should believe it can predict the future?
Another such period is 2000-present. Real returns were 5%. However, this period has been marked by unsustainably increasing profit margins. 5% is still well below the 6-7% many consider "normal." But even this 5% was largely fueled by an increase in profit margins of the S&P500 from 5% in the 1990s to 10% over the last 5 years, and 13% this year. The U.S. market is becoming increasingly anti-competitive which has fueled record corporate profits. If corporate profitability had not increased, returns would have been substantially less than 5% real. Any reversion of corporate profitability would likely lead to negative real returns for an extended period. Decreased competition also does not bode well for productivity gains and may explain slowing U.S. productivity growth. To be clear, I don't expect a reversion of corporate profitability - I simply expect it to stop increasing at some point which will cause returns to be subsntially lower than the 5% witnessed from 2000-present (which is already subsntially lower than the 6-7% many consider "normal").
Ah, here you try to explain 2000-2021... All I hear is "another variable showed up". Models based on CAPE ALWAYS seem to fall back to that explanation when they don't work.

There are many variables unaccounted for. That's why predicting future returns doesn't work.

You seem confident. And you may even be right. But you probably shouldn't be so confident.

In any case, most of here count on conservative returns to begin with... So don't worry, we will all be fine.

We'll get what we get, and we'll adjust.

No one has been able to accurately predict future returns, so just plan for low returns to be conservative, and adjust to ACTUAL returns. Don't make changes based on PREDICTED returns.
Why would we even both to consider a 2 year period for testing a model? Over a 2 year period an infinite number of short term variables dominate. That's like saying global warming isn't happening because it was cold yesterday at my house.

It's not even a "model" it's simply basic math. If valuations were the same today as in January 1972, the 50 year real CAGR would have been 5.2% instead of 6.7%. That's just math. It's not a model and it doesn't need testing.

The "math" explains 2000-2021 perfectly well. The real rate of return was 5% - substnatially less than the 6-7% many claim as the normal - exactly as we would expect. I'm simply pointing out it would have been even lower if it were not for massive increases in corporate profitability.

Neither corporate profitability nor valuations can increase indefinitely. When we look at periods where they did not increase, returns are much lower. Most periods that people "define" as normal featured large increases in valuations and/or corporate profitability.

Finally, I am not confident about 30 year CAGR. 30 year CAGR could be -5% or +15%. I have no idea. A reasonable expectation would be 3-4%. What I am confident about is the math that shows that real returns of 6-7% were due to increasing valuations and increasing corporate profitability. I'm also confident that neither can increase indefinitely.
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Re: Long term low returns predicted

Post by investor.was.here »

alex123711 wrote: Wed Sep 22, 2021 9:20 pm Ture, but real estate has the benefit of leverage and low rates, business is more risky but also higher potential
Over the long term as you stated, I don't think you can claim this. At any time, real estate relies on the same rates that all other industries enjoy. They do have some advantages still, particularly if you're using it as a primary resident.

Housing is probably the biggest benefactor of the wealth effect so if all those others industries are suffering, real estate will too. Leverage won't be your friend in that case. Factors affecting real estate prices include interest rates, consumer confidence, and income. None of those - to me - is predictive of a continued housing bull run.
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Re: Long term low returns predicted

Post by HomerJ »

skierincolorado wrote: Mon Sep 27, 2021 1:09 pm
HomerJ wrote: Mon Sep 27, 2021 1:03 pm
skierincolorado wrote: Mon Sep 27, 2021 12:05 pm
HomerJ wrote: Mon Sep 27, 2021 11:28 am
skierincolorado wrote: Mon Sep 27, 2021 8:58 amthe 8.5% real return the last 40 years. The 8.5% real was fueled by
Ah, I think I see the problem.

You are using numbers from 1981-2021. Starting from a very low CAPE and ending at a very high CAPE.

Yes, to replicate the last 40 years might indeed require a higher CAPE than today. But that's not the historical average. You should really average out all 30 year or 40 year periods, not just pick the one that has best 40-year return in history.

I don't think anyone here is planning around a 8.5% real return.
It doesn't matter what period we pick since we can calculate the portion of returns due to rising CAPE.

But sure, let's do it your way. Let's pick a longer period with what you describe as "normal" returns. The last 50 years have had 6.7% real returns - right in the middle of your 6-7% "normal."

Increasing valuations contributed 1.5% to the return over this period. If valuations were the same today as they were in January 1972, the real rate of return would have been 5.2% instead of 6.7%.

Higher earnings yield (5% in 1972 vs 2.5% today) over the last 50 years than the the next 50 years amounts to a ~1.5% difference.

Thus if CAPE10 remains at 40, returns will be 1.5% lower due to no boost from rising valuations, and 1.5% lower due to lower earnings yield. Thus 3% lower overall. Instead of 6.7% real return, we should expect 3.7% - if CAPE remains at 40. If CAPE falls below 40, they will be lower. If CAPE continues rising, they will be higher.
You speak way too confidently while quantifying exactly where returns come from (even using decimal points).

So explain 2020-2021 then. CAPE10 of 45, CAPE is currently below 45, real returns have been 5.25%.

Your model doesn't even match the past. But you think we should believe it can predict the future?
Another such period is 2000-present. Real returns were 5%. However, this period has been marked by unsustainably increasing profit margins. 5% is still well below the 6-7% many consider "normal." But even this 5% was largely fueled by an increase in profit margins of the S&P500 from 5% in the 1990s to 10% over the last 5 years, and 13% this year. The U.S. market is becoming increasingly anti-competitive which has fueled record corporate profits. If corporate profitability had not increased, returns would have been substantially less than 5% real. Any reversion of corporate profitability would likely lead to negative real returns for an extended period. Decreased competition also does not bode well for productivity gains and may explain slowing U.S. productivity growth. To be clear, I don't expect a reversion of corporate profitability - I simply expect it to stop increasing at some point which will cause returns to be subsntially lower than the 5% witnessed from 2000-present (which is already subsntially lower than the 6-7% many consider "normal").
Ah, here you try to explain 2000-2021... All I hear is "another variable showed up". Models based on CAPE ALWAYS seem to fall back to that explanation when they don't work.

There are many variables unaccounted for. That's why predicting future returns doesn't work.

You seem confident. And you may even be right. But you probably shouldn't be so confident.

In any case, most of here count on conservative returns to begin with... So don't worry, we will all be fine.

We'll get what we get, and we'll adjust.

No one has been able to accurately predict future returns, so just plan for low returns to be conservative, and adjust to ACTUAL returns. Don't make changes based on PREDICTED returns.
Why would we even both to consider a 2 year period for testing a model? Over a 2 year period an infinite number of short term variables dominate. That's like saying global warming isn't happening because it was cold yesterday at my house.
Typo, of course, I meant 2000-2021... I think you might have figured that out from context, and my reference of CAPE 45. But sorry to confuse you.

CAPE went DOWN from 2000-2021. Your model thinks returns should have been much lower than the 5.25% real we actually got. Of course, you can explain that by adding in another variable, corporate profitability. Economists are always good at explaining why their predictions didn't work out.
It's not even a "model" it's simply basic math. If valuations were the same today as in January 1972, the 50 year real CAGR would have been 5.2% instead of 6.7%. That's just math. It's not a model and it doesn't need testing.
We're not going to get anywhere. You think you can completely quantify where each 0.x% of return comes from over 20,30, even 50 years.
Economics is not as simple as you portray. It's not just math. It's a model with multiple independent and dependent variables.

But we won't get past that, so you'll just have to keep asserting that economics is simple, and I'll keep asserting that it's not.

"An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today."
- Laurence J. Peter.


Economics is extremely useful as a form of employment for economists.
- John Kenneth Galbraith
Last edited by HomerJ on Mon Sep 27, 2021 1:38 pm, edited 1 time in total.
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Re: Long term low returns predicted

Post by vanbogle59 »

skierincolorado wrote: Mon Sep 27, 2021 1:09 pm It's not even a "model" it's simply basic math.
Well, not really.
You are calling CAPE valuation, right?
And the C in CAPE is very modelly.
I mean 2 companies, with the exact same earnings last year can have drastically different CAPES based off of their history.
It's not math to say your current "valuation" depends on where you came from, is it?

As for the rest, I generally agree that the market looks "expensive" relative to history. It's been one hell of a bull market with one hell of an accommodating FED. :beer
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Re: Long term low returns predicted

Post by skierincolorado »

HomerJ wrote: Mon Sep 27, 2021 1:34 pm
skierincolorado wrote: Mon Sep 27, 2021 1:09 pm
HomerJ wrote: Mon Sep 27, 2021 1:03 pm
skierincolorado wrote: Mon Sep 27, 2021 12:05 pm
HomerJ wrote: Mon Sep 27, 2021 11:28 am

Ah, I think I see the problem.

You are using numbers from 1981-2021. Starting from a very low CAPE and ending at a very high CAPE.

Yes, to replicate the last 40 years might indeed require a higher CAPE than today. But that's not the historical average. You should really average out all 30 year or 40 year periods, not just pick the one that has best 40-year return in history.

I don't think anyone here is planning around a 8.5% real return.
It doesn't matter what period we pick since we can calculate the portion of returns due to rising CAPE.

But sure, let's do it your way. Let's pick a longer period with what you describe as "normal" returns. The last 50 years have had 6.7% real returns - right in the middle of your 6-7% "normal."

Increasing valuations contributed 1.5% to the return over this period. If valuations were the same today as they were in January 1972, the real rate of return would have been 5.2% instead of 6.7%.

Higher earnings yield (5% in 1972 vs 2.5% today) over the last 50 years than the the next 50 years amounts to a ~1.5% difference.

Thus if CAPE10 remains at 40, returns will be 1.5% lower due to no boost from rising valuations, and 1.5% lower due to lower earnings yield. Thus 3% lower overall. Instead of 6.7% real return, we should expect 3.7% - if CAPE remains at 40. If CAPE falls below 40, they will be lower. If CAPE continues rising, they will be higher.
You speak way too confidently while quantifying exactly where returns come from (even using decimal points).

So explain 2020-2021 then. CAPE10 of 45, CAPE is currently below 45, real returns have been 5.25%.

Your model doesn't even match the past. But you think we should believe it can predict the future?
Another such period is 2000-present. Real returns were 5%. However, this period has been marked by unsustainably increasing profit margins. 5% is still well below the 6-7% many consider "normal." But even this 5% was largely fueled by an increase in profit margins of the S&P500 from 5% in the 1990s to 10% over the last 5 years, and 13% this year. The U.S. market is becoming increasingly anti-competitive which has fueled record corporate profits. If corporate profitability had not increased, returns would have been substantially less than 5% real. Any reversion of corporate profitability would likely lead to negative real returns for an extended period. Decreased competition also does not bode well for productivity gains and may explain slowing U.S. productivity growth. To be clear, I don't expect a reversion of corporate profitability - I simply expect it to stop increasing at some point which will cause returns to be subsntially lower than the 5% witnessed from 2000-present (which is already subsntially lower than the 6-7% many consider "normal").
Ah, here you try to explain 2000-2021... All I hear is "another variable showed up". Models based on CAPE ALWAYS seem to fall back to that explanation when they don't work.

There are many variables unaccounted for. That's why predicting future returns doesn't work.

You seem confident. And you may even be right. But you probably shouldn't be so confident.

In any case, most of here count on conservative returns to begin with... So don't worry, we will all be fine.

We'll get what we get, and we'll adjust.

No one has been able to accurately predict future returns, so just plan for low returns to be conservative, and adjust to ACTUAL returns. Don't make changes based on PREDICTED returns.
Why would we even both to consider a 2 year period for testing a model? Over a 2 year period an infinite number of short term variables dominate. That's like saying global warming isn't happening because it was cold yesterday at my house.
Typo, of course, I meant 2000-2021... I think you might have figured that out from context, and my reference of CAPE 45. But sorry to confuse you.
It's not even a "model" it's simply basic math. If valuations were the same today as in January 1972, the 50 year real CAGR would have been 5.2% instead of 6.7%. That's just math. It's not a model and it doesn't need testing.
We're not going to get anywhere. You think you can completely quantify where each 0.x% of return comes from over 20,30, even 50 years.
Economics is not as simple as you portray. It's not just math. It's a model of multiple dependent variables.

But we won't get past that, so you'll just have to keep asserting that economics is simple, and I'll keep asserting that it's not.

"An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today."
- Laurence J. Peter.
I'm not asserting economics are simple. I'm asserting that if earnings were what they are today, but PE ratios what they were in 1972, the 50 year CAGR would have been 5.2% instead of 6.7%. That is a mathematical fact that cannot be disputed. It has nothing to do with economics, or models, or anything except math.

You can hypothesize that somehow if PE ratios had stayed low, earnings growth would have been faster - but that's a half baked economic hypothesis. And it hasn't held true over actual historical periods of flat valuations - such as 1972-2009 or 2000-2021.

You're also cherry picking periods of increasing valuations. When we look at periods without increasing valuations, returns are lower. There is no hypothesized dependent variable to the rescue.
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Re: Long term low returns predicted

Post by skierincolorado »

vanbogle59 wrote: Mon Sep 27, 2021 1:37 pm
skierincolorado wrote: Mon Sep 27, 2021 1:09 pm It's not even a "model" it's simply basic math.
Well, not really.
You are calling CAPE valuation, right?
And the C in CAPE is very modelly.
I mean 2 companies, with the exact same earnings last year can have drastically different CAPES based off of their history.
It's not math to say your current "valuation" depends on where you came from, is it?

As for the rest, I generally agree that the market looks "expensive" relative to history. It's been one hell of a bull market with one hell of an accommodating FED. :beer
I agree it is "modelly" to say CAPE=valuation.

There's nothing modelly about CAPE itself though. CAPE is a simple math calculation with a precise definition and means of calculation. What is modelly is the idea that CAPE means anything or can predict market returns. But that's not what I'm trying to do. I'm simply pointing out that in periods where CAPE has stayed constant, CAGR has been lower.

The only modeling I'm suggesting is that CAPE cannot increase indefinitely, so when deciding on a historical "norm" we should look at periods of flat CAPE.
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Re: Long term low returns predicted

Post by HomerJ »

skierincolorado wrote: Mon Sep 27, 2021 1:39 pmI'm not asserting economics are simple. I'm asserting that if earnings were what they are today, but PE ratios what they were in 1972, the 50 year CAGR would have been 5.2% instead of 6.7%. That is a mathematical fact that cannot be disputed. It has nothing to do with economics, or models, or anything except math.
The math works out if everything else in the world stays exactly the same, but only an academic would ever make such a foolish argument when talking about the real world.

And then use that 1.5% number going forward in a predictive model like it means anything.
Last edited by HomerJ on Mon Sep 27, 2021 1:49 pm, edited 1 time in total.
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Re: Long term low returns predicted

Post by HomerJ »

skierincolorado wrote: Mon Sep 27, 2021 1:47 pmCAPE is a simple math calculation with a precise definition and means of calculation.
You realize that how "earnings" is calculated has changed over time right?
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Re: Long term low returns predicted

Post by skierincolorado »

HomerJ wrote: Mon Sep 27, 2021 1:47 pm
skierincolorado wrote: Mon Sep 27, 2021 1:39 pmI'm not asserting economics are simple. I'm asserting that if earnings were what they are today, but PE ratios what they were in 1972, the 50 year CAGR would have been 5.2% instead of 6.7%. That is a mathematical fact that cannot be disputed. It has nothing to do with economics, or models, or anything except math.
The math works out if everything else in the world stays exactly the same, but only an academic would every make such a foolish argument when talking about the real world.

And then use that 1.5% number going forward in a predictive model like it means anything.
I agree on this point. It does assume everything else stays the same. An assumption that has worked well over mutliple independent historical periods. Periods of flat CAPE have seen lower returns. There has not been a compensatory dependent variable.

You on the other hand are assuming a dependent compensating variable to the rescue that simply has not existed in any historical period tested, and does not make sense in theory. Periods where CAPE has been flat have seen returns substantially below 6-7%. There could be a compensatory dependent variable, but it does not make sense to assume one without any empirical or theoretical evidence.
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Re: Long term low returns predicted

Post by HomerJ »

skierincolorado wrote: Mon Sep 27, 2021 1:51 pm Periods of flat CAPE have seen lower returns.

Periods where CAPE has been flat have seen returns substantially below 6-7%.
Edit: My numbers were off by one year. I changed the numbers below but not the comments. skier pointed out my errors later on, and we discussed them.

Show some numbers. Find some long-term periods (around 20 years) where CAPE was flat.

1973-1992, CAPE of 18 in 1973 to 19 in 1992 - 4.5% 4.47% real.
1989-2009, CAPE of 15 in 1989 to 15 in 2009 - 6.04% 5.15% real
1993-2010, CAPE of 20 in 1993, to 20 in 2010 - 5.62% 5.07% real
1996-2016 CAPE of 24 in 1996 to 24 in 2016 - 6.12% 5.92%real
1999-2021 CAPE of 40 in 1999 to 38 today - 8.35% 5.90% real

I'm using portfolio visualizer, do you have access to data farther back?

Anyway, you're right it's usually on the low end of the historical average when CAPE is flat.

But still not as far off the average as you claim. Not sure how you can confidently forecast 3.7% real going forward for the next 20-30 years with no change in valuations.

You knock off 1.5% from the historic average assuming no more rise in valuations, but it doesn't appear the historical data matches that number. We got pretty close to the historical average even when CAPE was flat over the long term. We don't appear to need a continued rise in valuations to get close to the average long-term returns.
Last edited by HomerJ on Mon Sep 27, 2021 4:01 pm, edited 1 time in total.
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Re: Long term low returns predicted

Post by vanbogle59 »

skierincolorado wrote: Mon Sep 27, 2021 1:47 pm
vanbogle59 wrote: Mon Sep 27, 2021 1:37 pm
skierincolorado wrote: Mon Sep 27, 2021 1:09 pm It's not even a "model" it's simply basic math.
Well, not really.
You are calling CAPE valuation, right?
And the C in CAPE is very modelly.
I mean 2 companies, with the exact same earnings last year can have drastically different CAPES based off of their history.
It's not math to say your current "valuation" depends on where you came from, is it?

As for the rest, I generally agree that the market looks "expensive" relative to history. It's been one hell of a bull market with one hell of an accommodating FED. :beer
I agree it is "modelly" to say CAPE=valuation.

There's nothing modelly about CAPE itself though. CAPE is a simple math calculation with a precise definition and means of calculation. What is modelly is the idea that CAPE means anything or can predict market returns. But that's not what I'm trying to do. I'm simply pointing out that in periods where CAPE has stayed constant, CAGR has been lower.

The only modeling I'm suggesting is that CAPE cannot increase indefinitely, so when deciding on a historical "norm" we should look at periods of flat CAPE.
hmmmm.....
Well, that takes out one moving part from the model, at least :D

1) "What is modelly is the idea that CAPE means anything..." (agreed)
2) "when deciding on a historical "norm" we should look at periods of flat CAPE."

If you really thought CAPE didn't mean anything, you wouldn't care about the second sentence at all.
That's why you don't advocate for "The market goes up with the hemlines in Paris" :D

So, still modelly for me :beer
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