This has come up a few times here recently, and I think it deserves its own thread...

What is the net, after-inflation return that you truly expect to get on your investment portfolio over the next decade or two? This is after all fees, commissions, loads, etc. And I'm not just talking about the US stock market - feel free to include any CD's, bonds, real estate, or other commodities (gold?) that you own too.

As an example, let's say that all your money (except for an emergency fund) is in the Dodge and Cox Stock fund. You think that with dividends reinvested it will return 10% minus 0.5% in fees over the long term. You also think inflation will run about 3%. So you would be expecting a real return of 6.5%.

The WSJ had an article in which they posed a similar question to a bunch of finance professionals and the answers varied tremendously. If you've never thought about this then it may be a worthwhile exercise.

Tim

I apologize... it seems that the poll isn't working. Maybe a moderator can help?

Tim

Very strange... I'll discuss it with Jericho and see if we can come up with a solution to this problem.

weird

and umm, 4-6%

forwarded to the gnomes

With what kind of asset allocation?

Tim

My answer is 5 percent, Tim. The asset allocation would very with changes in stock valuations (Surprise! Surprise!).

Rob

Somewhere between -40% and 40%. It changes daily depending on things like if unemployment figures are 0.001% higher than expected or lower than expected.

Haha, good point. Using how much leverage? 10x or 20x?

Tim

I like to leverage my leverage and then bundle the result, which I sell in parts to people with my AAA rating.

My current AA:

60% stock with value + emerging markets tilt
5% broad commodity futures
5% gold
20% Treasuries
10% TIPS

I expect 3.3809% real return.

What I get ... to be honest ... is irrelevant because I'm quasi 1st generation immigrant (came to the U.S. at age 5) and inherited my parents' m@d s@v1ng sk1llz. They came to the U.S. in their late 30's, early 40's and now are retired very comfortably with a 0% inflation-adjusted return as they only have CDs and rental income. (It's probably less than 0% if you factor in their losses from dabbling in stocks during the dotcom era.) But they pulled it off because they kept the 40%-50% savings rate from China.

This topic deserves a more detailed response actually. I'll have to pull some numbers together, make some fancy graphs, make up some math formulas in a full blog entry.

This is a good point. An important aspect of our plan is to adhere to a savings rate which is high enough to secure a modest lifestyle in retirement even if we get only a 0% real return. [Although I admit that this relies somewhat on Social Security, among other things, continuing to exist in its current form.]

I tend to think that 0% is a floor on the long-term return of a balanced portfolio. Any less than that and the economic/political problems would probably be so bad that this sort of thing doesn't matter anymore.

If we do better than 0% it means that we get to retire early or enjoy a much more lavish lifestyle.

Tim

Not that I am pro-consumerism per se, but if everyone in America had the savings ethics of his Chinese parents wouldn't it crush our economy?

That is controversial (and I hope it doesn't derail this thread), but I believe the answer is "yes." Witness the problems that China has now due to low domestic consumption. Their level of unemployment depends directly on the whims of consumers and governments of other nations.

It's probably best to strike a balance between demand/consumption and savings/investment. Those of us who save and invest a good portion of our income (to be spent later) compensate for our neighbors (such as retirees) who simply spend.

Tim

Depends on how Americans theoretically arrived at this point. If Americans *always* had such savings rates -- no, the economy wouldn't be crushed. It simply would be the way it always was. Life would be different as we know it in this alternate universe but who's to say we wouldn't be happier?

But if the scenario was America goes from 0% to 40% savings, yes there would be huge upheaval in the economy.

The problem is that growth, i. e., investment return, does not come out of nowhere. Stock prices or dividends increase only when corporate earnings increase. Earnings increases can only be maintained if they are achieved through growth in revenue. That means there have to be more consumers or higher spending levels. A single company can increase revenue by increasing market share but the economy as a whole can only increase if there are more consumers.

Reducing costs, either by cutting expenses as some companies have done lately, or by improving productivity, as has happened to the entire global economy for the last 50 years, can lead to growth as long as the cuts/productivity increases can be maintained. But productivity gains have come mainly from improvements in computer technology and more efficient transportation that makes it cost effective to exploit cheap foreign labor. That might continue of course but it is silly to expect the same gaisn we've seen for half a century.

Savings is important because it provides the fuel to increase the capital base needed to expand production. But that capital is not needed if production is not expanding. If you take a place like China where development is rapid, the high savings rate is needed to enable the growth. Here, a high savings rate would likely just reduce consumer spending and lower growth.

So, sticking with the thread, I expect investment returns of 2-4% for MY asset allocation. That is based on expecting about 8% for equities and 4% for bonds over the next 10 years or so. The 8% for equities is based on a 1.5% population growth rate globally of middle aged consumers, plus 0.5% productivity increase, plus the historical equity risk premium of 6%. My bond retunr assumes lower retunrs than we have seen due to an increase in people who want to invest in bonds as baby boomers approach retiirement. If there is more money to fund bonds then the rates that companies must pay will go down. I expect 2% inflation so I am subtracting that off.

Spending levels correlate with age. People spend most when they are middle-aged. So when that population group is growing as it has been, spending is robust to support strong earnings growth. Well, that group is beginning to shrink.

Are there flaws in my logic? Probably. But I fundamentally think the days of rapid growth are gone and population demographics just are not there to support some of teh wild predictions people make based on history.