Average Rate of Return?

beamyup

Who knows what the future market return will be, or the drivers of the next bull and bear periods. Nobody.

However we do know for certain the difference between the effect of the charges I quoted above.

Thrugelmir

MarkCarnage wrote: »

5% real return may be close to what equities have achieved historically,

This figure comes from from the Credit Suisse Yearbook which extrapolates data from the global markets over the past 100 plus years. Currently stands at 4.2%. Longer term estimates are projecting 3.5%. Reflecting the low level of interest rates globally.

The 5% figure is for the UK alone.

Linton

beamyup wrote: »

Who knows what the future market return will be, or the drivers of the next bull and bear periods. Nobody.

However we do know for certain the difference between the effect of the charges I quoted above.

Maximum return irrespective of likelihood of achieving it should not be the aim of a serious investor. If maximum return really was someone's over-riding objective I doubt they would be looking at cheap global trackers. Constructing their portfolio on the basis of a fraction of a percent /year in charges would be illogical.


A more useful objective is to achieve sufficient return at minimum risk of failure. It is this second but equally important aspect where asset allocation becomes a major factor. If your wealth is so tight that a fraction of a % in return will make the difference between sufficient and insufficient you are cutting things too fine - a typical twitch in the market could be more significant.


Given an achievable return specification a sensible strategy is to set up your asset allocation to create maximum diversification whilst being more than capable of meeting the sufficiency requirement. One then needs to find the funds to provide it. If a choice of funds is between a high cost one that does exactly the right job and a lower cost one that doesnt the higher cost one probably wins. Of course it could be the lower cost fund that is most appropriate. Appropriateness should the the primary criterion with cost as a possible tie-breaker.

[Deleted User]

MarkCarnage wrote: »

5% real return may be close to what equities have achieved historically, but not on a balanced portfolio, whatever that might mean.

I suspect that 5% nominal return for equities forward looking might be challenging enough after costs.

Historic returns from 1980 until now have been inflated by a huge decline in bond yields which is not repeatable.

Balanced portfolio means 60/40 stocks to bonds (see Benjamin Graham). Returns have been alright long term - About 6% after inflation since the records became available. This is for US, and there is no guarantee for the future one way or another

Since 1928 — the first year data were available — a 60/40 portfolio of the S&P 500 and 10-Year Treasurys has delivered an average annual total return of 9 percent, or 78 percent of the total return for just the S&P 500 (11.5 percent). After inflation (using annual CPI) this translates to a 5.9 percent average total return for 60/40, or 70 percent of the average real returns for the S&P 500 (8.4 percent).

https://www.cnbc.com/2018/04/11/6040-stock-bond-weight-rule-needs-to-go-on-a-diet.html

k6chris

The problem is a representative historic bond yield is 4 to 5%, right now it's about a third of that, and by implication the value of the underlying bonds is higher (so room to fall!).



https://www.multpl.com/10-year-treasury-rate


A 40% bond portfolio provided an underlying yield and stability. I would suggest that is no longer the case, so the 'magic' of a 60/40 portfolio might not be quite as potent. Good job the PE ratio of equities is low....no wait!

Thrugelmir

k6chris wrote: »

The problem is a representative historic bond yield is 4 to 5%, right now it's about a third of that, and by implication the value of the underlying bonds is higher (so room to fall!).

Last month the DMO issued an 18 year gilt (2037) . Yield to maturity is 1.274%. In June a 30 year gilt (2049) with a ytm of 1.42%.

Anybody banking on a good return from bonds at the current time is going to be severely disappointed.

In 1991 BOE base was still above 10%. Times have changed over the past 4 decades. With bonds in a bull run. Historic data has no value when looking forward.

jamesd

Twointhebush wrote: »

She's about to inherit some money and I think it's a good idea to put as much of it in her SIPP (etc.) as possible. My argument being that she should plan to spend some of the income from the inheritance, rather than from the inheritance itself.

I've been saying up to 5% = up to £5000 return from £100000 invested, as an easy illustration of what might be expected and also to point out how much we need for a comfortable retirement. I don't know about anyone else but a mere £5k for every £100k, scares me nearly to death!

We both go for balanced risk.

Long term UK equity returns have been a bit over 5% plus inflation with bonds around half that. This mans that a say 50:50 split can't credibly deliver 5% plus inflation with those investments. 4% yes, except bond yields are currently low and likely to stay that way for quite a while - savings accounts are likely too beat them.

However, the Guyton-Klinger drawdown rules do start at 5% for the UK for a 40 year plan with a 65:35 equities:bonds mixture. Those rules usually increase by inflation each year but skip that or add extra increases or cuts depending on how the investments do. If you live through merely average times increases are likely. It is not guaranteed that any money will be left after 40 years and none would be in the extreme worst case which set the limit. It's unlikely that the last of you will live 40 years or live through the worst times so a likely outcome is a substantial amount being left.

It's also worth considering deferring state pensions. For those reaching state pension age from 6 April 2016 each year of deferral gives an increase of 5.8%. Before then it's 10.4% inheritable by a spouse. The payments increase with CPI inflation each year. For those with normal life expectancy around state pension age it's a great deal, particularly for women with their usual longer life expectancy and for core spending.

Naturally you'll both want to take the free £720 a year from paying 3600 gross into a pension before age 75 then taking it out free of tax within the personal allowance. £180 gain if taxed at 20% on the way out. More here.

Chances are that we could provide a more integrated and better overall plan for the household with more information.

[Deleted User]

k6chris wrote: »

The problem is a representative historic bond yield is 4 to 5%, right now it's about a third of that, and by implication the value of the underlying bonds is higher (so room to fall!).
https://www.multpl.com/10-year-treasury-rate


A 40% bond portfolio provided an underlying yield and stability. I would suggest that is no longer the case, so the 'magic' of a 60/40 portfolio might not be quite as potent. Good job the PE ratio of equities is low....no wait!

You should be looking at % return above inflation rather than just “yield”. Bonds provided short term stability in the past and will do so in the future. In the 20th century bonds provided poor returns over long periods of time and this will be the case going forward. 20th century included several bouts of unexpected inflation which were devastating to real returns from bonds. Yet a balanced portfolio performed well

Audaxer

jamesd wrote: »

Long term UK equity returns have been a bit over 5% plus inflation with bonds around half that. This mans that a say 50:50 split can't credibly deliver 5% plus inflation with those investments. 4% yes, except bond yields are currently low and likely to stay that way for quite a while - savings accounts are likely too beat them.

Do you think that over the medium to long term a good actively managed strategic bond fund like Jupiter Strategic bond, would have poorer returns that keeping your defensive portfolio assets in cash savings? If so is 60% equity 40% cash now a better bet than 60% equity 40% bonds?

However, the Guyton-Klinger drawdown rules do start at 5% for the UK for a 40 year plan with a 65:35 equities:bonds mixture. Those rules usually increase by inflation each year but skip that or add extra increases or cuts depending on how the investments do. If you lie through merely average times increases are likely. It is not guaranteed that any money will be left after 40 years and none would be in the extreme worst case which set the limit. It's unlikely that the last of you will live 40 years or live through the worst times so a likely outcome is a substantial amount being left.

I'd be really surprised if a 5% withdrawal rate could be sustained throughout even 30 years if there is a poor first decade of returns.

jamesd

Audaxer wrote: »

Do you think that over the medium to long term a good actively managed strategic bond fund like Jupiter Strategic bond, would have poorer returns that keeping your defensive portfolio assets in cash savings? If so is 60% equity 40% cash now a better bet than 60% equity 40% bonds?

Medium term maybe, depends how rates go. Short term cash outside a pension can get some interesting rates.

Audaxer wrote: »

I'd be really surprised if a 5% withdrawal rate could be sustained throughout even 30 years if there is a poor first decade of returns.

Depends how bad it is. But that's one of the reasons why I tend to like significant amounts of state pension deferral.