(Very) rough estimates for expected rate of return?

pledgeX

Is there such a thing as an expected rate of return for a tracker fund over the course of say 30 years? Say a fairly 'standard' tracker fund such as the FTSE all share?

I'm sure I've seen something on a pensions statement which used estimates of 1%, 4% and 7% for low, average and high performing funds.

I know no one can answer this accurately, but I could do with at least a ballpark estimate to try and work out how much I need to save or how much it could be worth.

HappyMJ

pledgeX wrote: »

Is there such a thing as an expected rate of return for a tracker fund over the course of say 30 years? Say a fairly 'standard' tracker fund such as the FTSE all share?

I'm sure I've seen something on a pensions statement which used estimates of 1%, 4% and 7% for low, average and high performing funds.

I know no one can answer this accurately, but I could do with at least a ballpark estimate to try and work out how much I need to save or how much it could be worth.

If 4% is the average then that's a reasonable figure to use.

Hopefully the performance of the fund outstrips inflation over time which is also another unknown figure.

coastline

The link shows the MSCI World Index and the FTSE All Share..
If you reset the timescale it goes back to 1985.

http://www.trustnet.com/Tools/Charting.aspx?typeCode=NM990100,NASX

BananaRepublic

There is no such thing as an expected rate of return. If you look back over a century, you will see long periods where the market drops, such as during wars. In other periods it grows, albeit not monotonically.

You can look at tracker fund histories, compare them to the market, then make a guess based on various assumptions such as sustained peace and prosperity, or a nuclear holocaust. The reason many people spread investments is because you cannot be sure which will do well, if any.

TheTracker

For long term planning (restoflife.xls) I use 5% above inflation for a 60:40 portfolio. Will let you know in 50 years how it went.

Thrugelmir

Save as much as you can as early as you can. Then you'll be in a position to determine your own fate.

Aretnap

Average annual return on equities over the last century was about 5% over inflation.

However there's a view that the 20th centuary was a golden age for equities (USA was an emerging market, people underinvested in shares as they were seen as the preserve of the rich, progressive economic liberalisation etc) and those returns are unlikely to persist in the 21st. Maybe 3% is more realistic. Basically we don't know.

I suggest being pessimistic. That way if you're wrong you get to retire early. Beats being optimistic, wrong and not retiring at all.

BTW FTSE all share is a lousy index to base your pension on. Poorly diversified with a history of underperformance. Where is the FTSE's equivalent of Apple, Google, VW or Toyota? You want global investments, not just British ones.

Thrugelmir

Aretnap wrote: »

Average annual return on equities over the last century was about 5% over inflation.

Most people don't have that time frame though to invest over. Nor are we likely to see the same rate of technological change in the coming decades.

kidmugsy

I'd be tempted to make the assumption, conservative I hope, that over the long run equities keep up with the earnings inflation index.

The trouble is that the argument that equities will surely do well in the long term is that the long term might exceed your investment lifespan.

BananaRepublic

Thrugelmir wrote: »

Nor are we likely to see the same rate of technological change in the coming decades.

That's quite some crystal ball you've got. The truth is we don't know, but I would expect huge advances in medicine and AI, self driving cars, electric cars, maybe even nuclear fusion in 40 years time (1). And then there are advances we cannot even conceive of because the discoveries have not been made.

(1) 40 years ago nuclear fusion was 40 years away. Ever since, it has been "40 years away".

Linton

kidmugsy wrote: »

I'd be tempted to make the assumption, conservative I hope, that over the long run equities keep up with the earnings inflation index.

The trouble is that the argument that equities will surely do well in the long term is that the long term might exceed your investment lifespan.

You would expect the value of companies broadly and globally to keep up with inflation as their income and expenditure will (almost by definition) generally follow inflation. In addition companies aim to make a positive return which eventually is passed to the shareholders in the form of dividends or capital growth. So it is reasonable to assume for longer term planning purposes a return of inflation plus a bit. So the issue is what is the bit. I planned on 1% above inflation which since my retuirement 10 years ago has proved to have been very pessimistic despite 2 major and several minor falls in prices. However in planning pessimism is generally better than optimism.

If these general expectations fail to materialise we must surely be talking about a global economic collapse in which circumstances all bets are off no matter what you do with your money.