Worst average return on 60% equity portfolio over the next 20 years?

Audaxer

If £100k was invested now in a 60% equity passive portfolio or a multi asset fund like VLS60, for the next 20 years, what do you think the average total return percentage would be in a worst case scenario, say, if we were to start with a big equity crash, and a have a few more during the 20 years?

The average total return on a VLS60 fund over the last 5 years of the bull run was 8.8%. I'm thinking worst case scenario over the next 20 years if we start with an equity crash, average total return could be as low as 4% per annum. Is that too pessimistic?

Alexland

20 years is a long time and it's kinda pointless quoting percentages because it really depends on what happens to the value of money and if we see high or low inflation. I would expect VLS60 to return inflation after the various fees. Maybe a bit less if there was a crash right at the end of the period. Not based on science but gut feeling.

Alex

MSul

No one has that crystal ball for you. The thing with the stock market is that the past means absolutely nothing. The crashes of 1929 and the dotcom bubble may never repeat, or may come in less than 5 years as we are seeing stocks being sold for extremely high multiples of their business underlying value.

What I would suggest you do simply for self assurance, since you want the VLS funfd and that holds mainly US, UK securities and bonds is for you to check the average returns of these markets. For example historical returns of the dow jones are here:
tradingninvestment com / stock - market - historical - returns

Just £100k on that would have returned you an average of 8% a year for the last 20 years, but the history would be a lot different for bullish eras. Ultimately re investing your profits year on year would give you way more than 8% as you know.
100k reinvesting profits of 8% year on year would give you over £430k at the end of the 20 years, not including fund fees, etc.

Ultimately, if this is all you have to invest I would certainly not put it all into VSL, I would spread on other funds. If you are a wise investor and read value investing books you'd normally get way more than 8% average a year so you'd composite your gains a lot quicker than a safe fund like VSL which owns safety stocks and has a low beta.

MK62

Over such a long period, you can't ignore inflation, and if investing in overseas assets, you
can't ignore exchange rates either.......which, added to unknown market performance, makes long range predictions little more than a guess.
We may be able to use history to make a more educated guess......but there's no guarantee history will repeat....so it's still a guess.
Add in the fact that we are in an unprecedented era of ultra low interest rates, and QE inflated asset prices, so history can't actually repeat anyway as we've never been here before...........

Audaxer

Alexland wrote: »

20 years is a long time and it's kinda pointless quoting percentages because it really depends on what happens to the value of money and if we see high or low inflation. I would expect VLS60 to return inflation after the various fees. Maybe a bit less if there was a crash right at the end of the period. Not based on science but gut feeling.

That definitely seems like a worst case scenario if it only covered inflation averaging say 2.5% total return a year. If that was the case for most medium risk 60/40 equity bond portfolios, that surely would be a big problem for a lot of retirees hoping a drawdown of 3.5% would be a safe withdrawal rate?

Alexland

Well it's what Vanguard themselves were forecasting for the next 10 (or 9 and a bit now) years. The problem is both equities and bonds are not cheap and that is likely to harm medium term returns.

https://www.vanguardinvestor.co.uk/articles/latest-thoughts/markets-economy/why-investors-prepare-for-lower-returns

In terms of safe drawdown levels the assumption is the capital is gradually erroded so it really depends when you start. I want to retire early so am planning on 1/35th of the pensions.

We will also be recycling some of our LISA money into my younger wife's pension for about 20 years (from when I am 60 until she is 75) so really the total pension plus LISA drawdown rate will be even more conservative. I will probably die first and would like to know she has enough to outlive me comfortably.

Alex

Audaxer

Alexland wrote: »

Well it's what Vanguard themselves were forecasting for the next 10 (or 9 and a bit now) years. The problem is both equities and bonds are not cheap and that is likely to harm medium term returns.

https://www.vanguardinvestor.co.uk/articles/latest-thoughts/markets-economy/why-investors-prepare-for-lower-returns

In terms of safe drawdown levels the assumption is the capital is gradually erroded so it really depends when you start. I want to retire early so am planning on 1/35th of the pensions.

We will also be recycling some of our LISA money into my younger wife's pension for about 20 years (from when I am 60 until she is 75) so really the total pension plus LISA drawdown rate will be even more conservative. I will probably die first and would like to know she has enough to outlive me comfortably.

Thanks Alex, possible future returns do look quite bleak in that article for a 60/40 portfolio.

If I understand the chart correctly, UK equity for example, looks as if it is forecast to return between about 2.5% and 6% over the next 10 years. I'd be surprised if it was at the lower end, because a UK Equity Income IT like City of London returns a yield of about 4% with a growing dividend. Although it may be volatile, I'd be very surprised if the total return wasn't over 4% as surely the capital value in 10 years would have grown a bit even without dividends being reinvested?

ColdIron

Don't forget that CTY grows its dividend in terms of pounds and pence per share. The yield is linked to the share price so it could quite conceivably decrease whilst continuing to grow its dividend

Alexland

And it's using leverage so not strictly just equities.

seacaitch

Audaxer wrote: »

Thanks Alex, possible future returns do look quite bleak in that article for a 60/40 portfolio.

If I understand the chart correctly, UK equity for example, looks as if it is forecast to return between about 2.5% and 6% over the next 10 years. I'd be surprised if it was at the lower end, because a UK Equity Income IT like City of London returns a yield of about 4% with a growing dividend. Although it may be volatile, I'd be very surprised if the total return wasn't over 4% as surely the capital value in 10 years would have grown a bit even without dividends being reinvested?

You've asked for feedback for "worst case" returns but seem to then be balking at numbers that aren't showing optimistic outcomes.

Present conditions are: low inflation, low interest rates, high valuations, low forecast economic growth. That's not a great combination for attractive future returns.

Per the Vanguard document above, their model for a 60/40 portfolio shows a minimum forecast of 10yr annualised nominal returns slightly below zero. Factoring in moderate annual inflation of say 2.5, that slight negative nominal annual forecast of Vanguard's would translate to an overall 10yr real return of roughly -22.5%. That is, your investment pot would have purchasing power of nearly one quarter less in 10 years time that it has today. Not ideal!

The good news about periods of low returns is that they lead to periods of higher returns, because they allow overvaluations to unwind, interest rates to normalise etc.

So, although Vanguard's minimum 10 yr returns forecast is pretty grim, it would quite likely lead to conditions that would usher in very attractive returns. That's the benefit of having a suitable lengthy investment time horizon: you very likely get to enjoy the good times, sooner or later.

NB the worst case is far worse than any of these conservative minimum forecasts; barring extreme "end of the world" scenarios, there's still scope for severe economic/political disruption to occur that destroys asset prices/currencies and/or leads to severely confiscatory govt policies that ruins people financially - as has happened to many people in various countries throughout history. Fortunately, we live in a super stable part of the world and as a nation are born to be lucky, so no chance of that ever happening here

Audaxer

seacaitch wrote: »

You've asked for feedback for "worst case" returns but seem to then be balking at numbers that aren't showing optimistic outcomes.

No, I'm happy to hear possible worse case scenarios. I was just trying to compare that with an IT with a growing dividend. Maybe the share price of CTY could possibly be lower in 10 years time than it is now, but I was just questioning whether that was likely in a worst case scenario.

Per the Vanguard document above, their model for a 60/40 portfolio shows a minimum forecast of 10yr annualised nominal returns slightly below zero. Factoring in moderate annual inflation of say 2.5, that slight negative nominal annual forecast of Vanguard's would translate to an overall 10yr real return of roughly -22.5%. That is, your investment pot would have purchasing power of nearly one quarter less in 10 years time that it has today. Not ideal!

Agree, so in that scenario a lot of people in retirement are going to suffer if relying on total return. It makes me think that it may be better to rely on dividends for income if you can afford to, as they seem to be more stable even in equity crashes.

The good news about periods of low returns is that they lead to periods of higher returns, because they allow overvaluations to unwind, interest rates to normalise etc.

So, although Vanguard's minimum 10 yr returns forecast is pretty grim, it would quite likely lead to conditions that would usher in very attractive returns. That's the benefit of having a suitable lengthy investment time horizon: you very likely get to enjoy the good times, sooner or later.

Good point.