Latest GMO 7-Year Asset Class Total Real Return Forecasts: Cash >> Stocks

[CM]

GMO publishes periodic real return forecasts for a variety of asset classes. Here is the latest: https://www.gmo.com/docs/default-source/research-and-commentary/strategies/asset-class-forecasts/gmo-7-year-asset-class-forecast-(3q2017).pdf?sfvrsn=3. (Free registration may be required.)

 

Selected highlights:

Stocks:

US Large -4.1% (per year)

US Small -2.9%

Int'l Large -0.7%

Int'l Small -1.4%

US Cash 0.1%

 

In the past, GMO has reported that it assumes that valuation will be equal to the long-term mean at the 7-year horizon. GMO assumes that the future mean is higher than the historical mean, but still lower than today; that accounts for the negative return forecasts.

I assume the future return will be current dividend plus 1.8% real eps growth (Shiller's 1881-present historical figure) minus some valuation haircut. The current PE10 is about 31.5 (https://www.gurufocus.com/shiller-PE.php) versus the long-term mean of 16.8. I think it's likely that the PE10 will dip below 16.8 at some point over the next 12 years, causing negative returns between here and there. Not sure if that's at 3 years, 7 years, 10 years, etc.

[Zaphod]

Saw this on twitter and thought of you, just funny, no ill intent.

 

[CM]

Zaphod wrote:

Saw this on twitter and thought of you, just funny, no ill intent.

 

Click to expand...

That's funny.  

[The White Coat Investor]

I guess if that's what you really expect out of your equities the next 7 years, why are you holding equities? Go buy something you expect a positive return from.

Do GMO clients not own any stocks at all right now?

[CM]

The White Coat Investor wrote:

I guess if that’s what you really expect out of your equities the next 7 years, why are you holding equities? Go buy something you expect a positive return from.

Do GMO clients not own any stocks at all right now?

Click to expand...

I own foreign equities in ETFs. They may have similar returns at the nadir of the next bear market, but should do better over the long-term (though I don't expect much).

None of the major asset classes offer attractive returns today. I'm more concerned with return of capital than return on capital right now. It's very likely that conditions will change at some point, and the opportunity cost of sitting in low-yielding, high-quality fixed income looks low to me. Touch base in 12 years and we'll compare notes.

I'm not sure what GMO is doing except that they "overweight" EM stocks currently.

[The White Coat Investor]

CM wrote:

The White Coat Investor wrote:

I guess if that’s what you really expect out of your equities the next 7 years, why are you holding equities? Go buy something you expect a positive return from.

Do GMO clients not own any stocks at all right now?

Click to expand…

I own foreign equities in ETFs. They may have similar returns at the nadir of the next bear market, but should do better over the long-term (though I don’t expect much).

None of the major asset classes offer attractive returns today. I’m more concerned with return of capital than return on capital right now. It’s very likely that conditions will change at some point, and the opportunity cost of sitting in low-yielding, high-quality fixed income looks low to me. Touch base in 12 years and we’ll compare notes.

I’m not sure what GMO is doing except that they “overweight” EM stocks currently.

Click to expand...

Exactly. By the time we know the future, it's too late to act on the present. But if you really expect crummy future returns, there are other options out there besides the stock market...

Go buy a rental property for instance. It's pretty easy to find one that will give you 4% real in any market without any leverage at all.

[CM]

The White Coat Investor wrote:

CM wrote:

The White Coat Investor wrote:

I guess if that’s what you really expect out of your equities the next 7 years, why are you holding equities? Go buy something you expect a positive return from.

Do GMO clients not own any stocks at all right now?

Click to expand…

I own foreign equities in ETFs. They may have similar returns at the nadir of the next bear market, but should do better over the long-term (though I don’t expect much).

None of the major asset classes offer attractive returns today. I’m more concerned with return of capital than return on capital right now. It’s very likely that conditions will change at some point, and the opportunity cost of sitting in low-yielding, high-quality fixed income looks low to me. Touch base in 12 years and we’ll compare notes.

I’m not sure what GMO is doing except that they “overweight” EM stocks currently.

Click to expand…

Exactly. By the time we know the future, it’s too late to act on the present. But if you really expect crummy future returns, there are other options out there besides the stock market…

Go buy a rental property for instance. It’s pretty easy to find one that will give you 4% real in any market without any leverage at all.

Click to expand...

Yes, I think an investor can earn better returns in rental properties than the broad stock or bond markets, but I don't have enough time or energy for satisfactory workouts, much less a new business. I'm exhausted most of the time.

Beyond that, I wouldn't like being a landlord. I would work at it if it was my only option to earn a living, but I hope that is never the case. Don't want to deal with tenants, maintenance, and that particular brand of liability.

[The White Coat Investor]

CM wrote:

The White Coat Investor wrote:

CM wrote:

The White Coat Investor wrote:

I guess if that’s what you really expect out of your equities the next 7 years, why are you holding equities? Go buy something you expect a positive return from.

Do GMO clients not own any stocks at all right now?

Click to expand…

I own foreign equities in ETFs. They may have similar returns at the nadir of the next bear market, but should do better over the long-term (though I don’t expect much).

None of the major asset classes offer attractive returns today. I’m more concerned with return of capital than return on capital right now. It’s very likely that conditions will change at some point, and the opportunity cost of sitting in low-yielding, high-quality fixed income looks low to me. Touch base in 12 years and we’ll compare notes.

I’m not sure what GMO is doing except that they “overweight” EM stocks currently.

Click to expand…

Exactly. By the time we know the future, it’s too late to act on the present. But if you really expect crummy future returns, there are other options out there besides the stock market…

Go buy a rental property for instance. It’s pretty easy to find one that will give you 4% real in any market without any leverage at all.

Click to expand…

Yes, I think an investor can earn better returns in rental properties than the broad stock or bond markets, but I don’t have enough time or energy for satisfactory workouts, much less a new business. I’m exhausted most of the time.

Beyond that, I wouldn’t like being a landlord. I would work at it if it was my only option to earn a living, but I hope that is never the case. Don’t want to deal with tenants, maintenance, and that particular brand of liability.

Click to expand...

# 1 You can hire that out.

# 2 If you really get -4% returns on your investments, your alternative may be working a decade longer at your real job. Still too exhausted?

[CM]

The White Coat Investor wrote:

CM wrote:

The White Coat Investor wrote:

CM wrote:

The White Coat Investor wrote:

I guess if that’s what you really expect out of your equities the next 7 years, why are you holding equities? Go buy something you expect a positive return from.

Do GMO clients not own any stocks at all right now?

Click to expand…

I own foreign equities in ETFs. They may have similar returns at the nadir of the next bear market, but should do better over the long-term (though I don’t expect much).

None of the major asset classes offer attractive returns today. I’m more concerned with return of capital than return on capital right now. It’s very likely that conditions will change at some point, and the opportunity cost of sitting in low-yielding, high-quality fixed income looks low to me. Touch base in 12 years and we’ll compare notes.

I’m not sure what GMO is doing except that they “overweight” EM stocks currently.

Click to expand…

Exactly. By the time we know the future, it’s too late to act on the present. But if you really expect crummy future returns, there are other options out there besides the stock market…

Go buy a rental property for instance. It’s pretty easy to find one that will give you 4% real in any market without any leverage at all.

Click to expand…

Yes, I think an investor can earn better returns in rental properties than the broad stock or bond markets, but I don’t have enough time or energy for satisfactory workouts, much less a new business. I’m exhausted most of the time.

Beyond that, I wouldn’t like being a landlord. I would work at it if it was my only option to earn a living, but I hope that is never the case. Don’t want to deal with tenants, maintenance, and that particular brand of liability.

Click to expand…

# 1 You can hire that out.

# 2 If you really get -4% returns on your investments, your alternative may be working a decade longer at your real job. Still too exhausted?

Click to expand...

1. I would have to find suitable properties, buy the properties, find a suitable property manager, and supervise the property manager. I would want to screen the tenants myself. I'd have to set up an LLC. These are just the first things that pop into my head.

I had a tough time finding the time to close on my own house. It's a non-starter.

2. That won't keep me an extra decade.  

 

[The White Coat Investor]

Why don't you work less if you already have "enough" and sound like you're busier than you'd like to be?

[CM]

The White Coat Investor wrote:

Why don’t you work less if you already have “enough” and sound like you’re busier than you’d like to be?

Click to expand...

I don't have enough, I'm not an ER doc, and I don't control my schedule (except for arranging vacation days).

When I have enough I'll offer to work a sufficiently lifestyle-friendly schedule and just walk away if the hospital isn't interested.

[The White Coat Investor]

Oh, sorry, I read your previous statement wrong. I thought you were saying that 4% was 43% less than what you spent this year, not 43% more.

[CM]

0.