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Expected future returns. Worried?

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  • Expected future returns. Worried?

    Amidst all the talk of FI/RE that we all enjoy doing to some extent around here and elsewhere, this assessment of future expected returns by asset class has gotten me thinking a lot about planning my finances for the future.  In part because its far from the first article I've read to say that the economic returns the baby-boomers have enjoyed during their investing years should not in any way be planned on in the future.  I know William Bernstein has recently been saying the same thing about expected returns going forward.  And last year I read this book that basically laid out the case that the future of lower returns in some sense inevitable because its really the long-term historic norm.

    And if you think that diversifying asset classes might help, I can't help but think that one of the asset classes hardest hit recently (and therefore expected by many to have higher than average returns in the future) is emerging markets.  But then I read this article on the coming debt crisis in China.  Just a mild bump downwards in China's stock market last year was enough to trash global market returns.  What if this is accurate or even worse than expected?

    I've also been thinking about this in relation to recent news reports about declining revenue in the financial and retail sectors in our economy.  One of the hidden problems of the continued influence of technology and data utilization is that many businesses are becoming more efficient and differentiating themselves to consumers based on low costs and high efficiency (e.g. Amazon, Betterment).  How many people whose jobs depend on systemic inefficiency do you think would be laid off if we really went to a flat tax or single-payer universal Medicare for all?  But isn't this in part what the tech generation is wanting? As we trend towards efficiency and automation, how will this economy continue to grow enough to provide the returns we are all hoping for?

    On top of that, within our own profession, declining reimbursements, increasing overhead expenditures, and a trend towards employment has resulted in lower salaries without even considering keeping pace with inflation, sort of resulting in 'negative returns' on our annual earnings.

    The sky will be falling  But seriously, I do think some of the FIRE talk needs to be tempered by some cautious pessimism.

  • #2
    meh.  7 years isn't long term, and my FIRE will survive even with lower than historical returns.

    Also, I just don't believe the dire forecasts because there are too many people all over this world working too hard to build new businesses, more customers are born everyday, and technology is advancing too fast to keep the human market place down.  The market's historical performance already includes World Wars (even nuclear bombs being dropped!), famine, coups, revolts, embargoes, Depressions, epidemics, etc.  All that stuff will keep happening, and the market will probably keep doing what it has been doing, because people will keep doing what they have always done: produce and buy stuff.


    • #3
      Not worried at all, but that is mostly due to the fact that all our models are plan-based. Talk like this is not new. Pessimism about the market is very popular in the media - it sells. You can find the same talk during in any period in history or, in fact, any year you choose to dig up. Take a look at The Idiot-Maker Rally and think what all the people who listened to these "experts" have given up. Much better to have a plan for both the short- and long-term and invest accordingly.

      "I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful." - Warren Buffett
      Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


      • #4
        You've obviously done your homework and have done a good job summarizing some genuine reasons for concern. Experts have been wrong before, but if people who know a lot more about economics than me are tempering their expectations, I am too. I don't worry about it, but I don't expect to see the S&P 500 return an average of 18% for 20 years like my parents did when they were in their prime earning years.

        I use reasonably conservative estimates in my FIRE calculations. In my 4 Physicians series, I use real (inflation adjusted) returns of 2%, 4%, and 6% to guesstimate their financial futures. Even the most optimistic expectation is below historical norms. If market returns meet 4% real, I've planned accordingly. If they exceed it, we should be in great shape.




        • #5
          Agree, I don't pay too much attention to it.  Not really related, but I've survived so many predicted apocalypses/raptures in my life that I can probably survive some predicted low returns from the markets.  There will always be doom-and-gloom type people.  I ignore them.


          • #6
            I dont worry about it mainly because its hard to see the major changes that can negate those forecasts, growth, innovation, interconnectedness, etc....

            Further, this is all a discussion on nominal returns, which frankly dont mean squat. Not a single person received the nominal 10-12% oft quoted return. Inflation ran much higher in the past, taxes have been better/worse, and mainly transaction costs were immense. Once you strip these away to real, real return, that is after inflation, taxes, and transaction costs they are probably going to be similar, if not better. If the other things in the world arent eating away at your returns it makes sense for them to be lower and it will be fine as well. No one "feels" good about it, but its basically the same.

            Just the same in the way people feel great when they get a raise even if inflation is higher than the raise, while bemoaning stagnant wages while their purchasing power increases.


            • #7
              One good saying to remember.  "The market climbs a wall of worry."  Returns will jump around but over time they go slowly up.  If everyone started predicted returns of 10-15% then we might really need to worry.


              • #8

                One good saying to remember.  “The market climbs a wall of worry.”  Returns will jump around but over time they go slowly up.  If everyone started predicted returns of 10-15% then we might really need to worry.
                Click to expand...

                Yes indeed, the amount of years the market has returned the "average" return is something like 2% or less.


                • #9
                  So returns don't go up. That means that in one decade stocks on "average" returned 6% in the next 7% and then 8%?


                  Infact if anything they are declining.

                  You probably meant to say it averages out from fluctuations.