Future returns

Saving & investing, frugality & simple living. They're all part of the wealth equation.
Here's the place to discuss getting (and keeping!) your money.

Moderator: lvergon

DoingHomework
Moderator
Posts: 5606
Joined: Wed Sep 23, 2009 9:01 am
Contact:

Future returns

Postby DoingHomework » Wed Aug 01, 2012 10:41 am

Bill Gross's investment outlook this month makes case for the last century being an anomaly and future returns of equities being much less than anyone is expecting. I'm wondering what everyone thinks of this. It is available at

http://www.pimco.com/EN/insights/pages/ ... ures.aspx#

In case you've never heard of him, Bill Gross is a very highly respected bond manager and has done fairly well at predicting the broad direction of the economy over a long period of time.

The basic premises are:
1. Equities have returned 6.6% over the last century, but there is no economic basis for equity returns to exceed GDP growth over long periods.

2. The only way out of the current debt load is by inflating our way out of it over a couple of decades.

I'm not sure I agree with either point and he doesn't fully support those premises in my opinion. But it is an interesting read.

I found myself thinking that one way to support stocks growing faster than GDP is for there to be a shift in money from some investors losing money on companies going bankrupt. Basically, in the early 1900s some people invested in auto companies that failed while others invested in Ford and GM. The money lost in the failed companies is not counted in the returns. It's an example of survivorship bias and partly results from the losses being shifted to the winners.

What do you think lies ahead?

What will stocks return on average between now and 2112?

Will there be an attempt to inflate our way out of the debt situation in a few years?

VinTek
Posts: 2217
Joined: Fri May 04, 2007 8:14 pm
Contact:

Re: Future returns

Postby VinTek » Wed Aug 01, 2012 11:07 am

Business Insider thinks that Bill Gross is mistaken because of one crucial error in the terms that he used: stocks have not "appreciated" 7% (over inflation) over the long term. They've "returned" 7%. They only" appreciated" 2%.

I don't know if the article is right or wrong. I do know that Bill Gross is one sharp cookie. But we've seen in other threads how the use of a single wrong word can change the entire meaning of a sentence and what it portends. But my knee-jerk reaction is to raise a skeptical eyebrow whenever I hear the claim, "This time it will be different."

DoingHomework
Moderator
Posts: 5606
Joined: Wed Sep 23, 2009 9:01 am
Contact:

Re: Future returns

Postby DoingHomework » Wed Aug 01, 2012 12:34 pm

VinTek wrote:But my knee-jerk reaction is to raise a skeptical eyebrow whenever I hear the claim, "This time it will be different."


I agree. But, as a scientist, I like to see both evidence and a plausible, causal theory behind any explanation like this. I've always been bothered by the lack of a causal explanation for the empirical observation that stocks have returned 6% (or 6.6%) over inflation for the long term. (This seems to go back centuries as near as we can tell.) Most people chalk it up to some parameter of human behavior and risk/reward expectations. I think Gross misses out of proposing an explanation for why things have changed but I also think he is right in questioning WHY stocks could have returned so much. Simply projecting past returns forward is not an answer to me.

He also doesn't suggest any alternatives. He says stocks won't return. He doesn't expect bonds to either. He predicts inflation so don't hold cash...and before anyone brings it up, gold and real estate don't have the right characteristics either.

What we need is ACTIONABLE intelligence!

Bichon Frise
Posts: 1108
Joined: Fri May 04, 2012 2:23 pm
Contact:

Re: Future returns

Postby Bichon Frise » Wed Aug 01, 2012 12:38 pm

Since I have absolutely no bearing on the future of the entire market, I don't really care to get into my predictions. Ok, 2.71% real. Any prediction does not change my behavior today (at least I haven't run into one that will).

But, my opinion is inflation will at least be a part of the debt solution. Once this ship is righted and Bernacke can stop pulling the puppet strings, a little more inflation may not hurt. A lot more inflation, probably will. As with almost everything, moderation is the key.
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."

avocado wrote:Good to see you back, I was starting to miss your incisive commentary!

DoingHomework
Moderator
Posts: 5606
Joined: Wed Sep 23, 2009 9:01 am
Contact:

Re: Future returns

Postby DoingHomework » Wed Aug 01, 2012 12:51 pm

Bichon Frise wrote:Since I have absolutely no bearing on the future of the entire market, I don't really care to get into my predictions. Ok, 2.71% real. Any prediction does not change my behavior today (at least I haven't run into one that will).

But, my opinion is inflation will at least be a part of the debt solution. Once this ship is righted and Bernacke can stop pulling the puppet strings, a little more inflation may not hurt. A lot more inflation, probably will. As with almost everything, moderation is the key.


I think it is going to be a few years before Bernanke (or his successor if he gets fed up with being blamed for everything) can start inflating out of the debt situation. Until then I think it is actually quite brilliant how the US is refinancing much of the debt at historically low rates. The deficit hawks ought to be thrilled about this yet they continue to criticize. I can only assume they are just playing politics. They are getting their spending cuts on behalf of the Fed.

tdelamater
Posts: 62
Joined: Thu Dec 30, 2010 4:59 pm
Location: San Diego, CA
Contact:

Re: Future returns

Postby tdelamater » Wed Aug 01, 2012 3:05 pm

*past performance is not indicative of future results
Last edited by tdelamater on Wed Aug 01, 2012 6:18 pm, edited 1 time in total.

babysteps
Posts: 87
Joined: Thu Jun 23, 2011 3:24 pm
Contact:

Re: Future returns

Postby babysteps » Wed Aug 01, 2012 5:17 pm

I've posted before that the historical data show a 2% real return of equities based on asset value, then add in whatever dividends are being paid. The last 50 years (or, 60 yrs ago to 10yrs ago) is indeed above longer term trend-line, closer to 3%. One other glitch is that prior to early 1800s there was hardly any publicly-traded equity, almost all public securities were bonds. The markets may indeed be random ("A Random Walk Down Wallstreet"), as the shorter a period you look at the wider the variation in returns...

Long story short, invest in productive (earning) assets - which may include dividend-paying stocks - and you should be able to keep ahead of inflation. As Ben Franklin advised, spend less than you earn and you'll be secure.

Tightwad
Posts: 1356
Joined: Mon Nov 01, 2010 5:15 pm
Contact:

Re: Future returns

Postby Tightwad » Wed Aug 01, 2012 5:39 pm

What will stocks return on average between now and 2112?

According to Dave Ramsey, stocks return 12% on average.

User avatar
Eagle
Posts: 1186
Joined: Thu May 17, 2012 10:05 am
Contact:

Re: Future returns

Postby Eagle » Thu Aug 02, 2012 8:55 am

flyffdzd wrote:Since I have absolutely no bearing on the future of the entire market, I don't really care to get into my predictions.


What? :^)
~ Eagle
www.eaglesoaringhigher.com

User avatar
Eagle
Posts: 1186
Joined: Thu May 17, 2012 10:05 am
Contact:

Re: Future returns

Postby Eagle » Thu Aug 02, 2012 8:58 am

babysteps wrote:I've posted before that the historical data show a 2% real return of equities based on asset value, then add in whatever dividends are being paid. The last 50 years (or, 60 yrs ago to 10yrs ago) is indeed above longer term trend-line, closer to 3%...

As Ben Franklin advised, spend less than you earn and you'll be secure.


"If you know how to spend less than you get, you have the philosopher's stone."
- Benjamin Franklin

Not sure about the secure part. But it does make sense. I'd like to have the stone he mentioned personally ;)
Last edited by Eagle on Thu Aug 02, 2012 9:03 am, edited 1 time in total.
~ Eagle
www.eaglesoaringhigher.com

User avatar
Eagle
Posts: 1186
Joined: Thu May 17, 2012 10:05 am
Contact:

Re: Future returns

Postby Eagle » Thu Aug 02, 2012 9:02 am

tdelamater wrote:*past performance is not indicative of future results


This is true. Take Enron for example.

Tightwad wrote:
What will stocks return on average between now and 2112?


According to Dave Ramsey, stocks return 12% on average.


Lol. That would be great if it were true. The guy only does getting out of debt well. Dave's investment advice is sorry at best.
~ Eagle
www.eaglesoaringhigher.com

JMC
Posts: 89
Joined: Mon Jan 02, 2012 3:21 pm
Contact:

Re: Future returns

Postby JMC » Thu Aug 02, 2012 10:30 am

Thanks for posting this.

The document seems to be poorly supported, especially for something coming from someone who is so highly respsected. I know much less about the economy than Bill Gross, but I tend to disagree with him on this.

My mind is twisting up in knots thinking about it, but it seems to me that the issue is that Gross is equating the growth of wealth with the growth of GDP. He argues that stockholders would eventually own all wealth if the equity premium stays so high, but if national wealth grows faster than national product, then his premise is untrue. Do you think wealth has to grow at the same rate as national product over the long run? Doesn't this depend on the savings rate?

Also, the "permanent stockholder" that ends up owning all the wealth would actually be taxed on his dividends and capital gains all the time - and the taxes get redistributed throughout the economy.

VinTek
Posts: 2217
Joined: Fri May 04, 2007 8:14 pm
Contact:

Re: Future returns

Postby VinTek » Thu Aug 02, 2012 12:47 pm

Speaking of future returns, the Chief Economist at just weighed in on bonds. His article is called The outlook for bonds: Are the good times about to end?

Tightwad
Posts: 1356
Joined: Mon Nov 01, 2010 5:15 pm
Contact:

Re: Future returns

Postby Tightwad » Thu Aug 02, 2012 2:40 pm

Eagle wrote:
tdelamater wrote:*past performance is not indicative of future results


This is true. Take Enron for example.

Tightwad wrote:
What will stocks return on average between now and 2112?


According to Dave Ramsey, stocks return 12% on average.


Lol. That would be great if it were true. The guy only does getting out of debt well. Dave's investment advice is sorry at best.

Agreed. He program helps people with no financial discipline but his investment advice makes me cringe.

VinTek
Posts: 2217
Joined: Fri May 04, 2007 8:14 pm
Contact:

Re: Future returns

Postby VinTek » Tue Aug 07, 2012 11:20 am

New article on the subject. CBS Marketplace's Larry Swedroe has written a piece called Should You Listen to Bill Gross?

The article gives a little perspective to what Gross had to say.


Return to “Personal Finance”

Who is online

Users browsing this forum: No registered users