Estimating Future Stock Returns

Thrugelmir

MarkCarnage wrote: »

Keeping a lid on investment costs will be vital in a low nominal return environment.

Selection of investments will be key. Market returns are driven by a small % of companies. Just over 3% of listed US companies have beaten the rate of return on cash in the past 4 decades. Indices hide a multitude of sins.

itwasntme001

I got my father to take out an annuity at 10% a couple of years back (when he was in his early 60s). Looking like a good decision based on the returns forecasted for stocks.

MarkCarnage

itwasntme001 wrote: »

Or conversely it may be worth paying up for someone to pick stocks for you (or spend time doing it yourself).

Needn't be conversely.....I think you assumed that I meant go passive only. I didn't. You can still keep a lid on costs though.....I run my portfolio which is almost all active with a TER of under 75bps including platform fee. Mainly investment trusts.

MarkCarnage

Thrugelmir wrote: »

Selection of investments will be key. Market returns are driven by a small % of companies. Just over 3% of listed US companies have beaten the rate of return on cash in the past 4 decades. Indices hide a multitude of sins.

Agreed. Asset allocation and stock selection will be key in a low return environment. Still important to keep a very watchful eye on costs though.

bd10

Have a look at the US yield curve. It has been inverted for the past few months (10y-3m). As of late, looks like we are coming back into positive territory. But this is not necessarily a good thing: If we look at the past few decades, a US recession followed around 1 year after yield curve inversion. Yet, thanks to QE, equities are up, but fundamentals look weak. So, I do see the clear risk of a sell-off at some point. If we overlay the yield curve chart with S&P 500, we see that 1-2 years past the inversion we have had equities tumbling. The party might continue for a while but I see a downside risk. Timing it, that's impossible.

Thrugelmir

MarkCarnage wrote: »

Agreed. Asset allocation and stock selection will be key in a low return environment. Still important to keep a very watchful eye on costs though.

Horses for courses. There's a balance to be struck. The more esoteric the sector being invested in. The higher the level of due diligence that's required.

Malthusian

What was the author's estimation of future stockmarket returns in 2009?

itwasntme001 wrote: »

I got my father to take out an annuity at 10% a couple of years back (when he was in his early 60s). Looking like a good decision based on the returns forecasted for stocks.

A 10% a year annuity in 2017 in his early 60s?

Either it was GAR, in which case it wasn't a good decision, it was an absolute no-brainer. Or, congratulations on your father's improved health since he bought the impaired life annuity.

itwasntme001

Malthusian wrote: »

What was the author's estimation of future stockmarket returns in 2009?



A 10% a year annuity in 2017 in his early 60s?

Either it was GAR, in which case it wasn't a good decision, it was an absolute no-brainer. Or, congratulations on your father's improved health since he bought the impaired life annuity.

Yes it was a GAR. He is in perfect health for his age. Keep in mind it is not inflation linked so there is inflation risk. But he has other assets (investment property, stocks, some cash, state pension coming soon).

itwasntme001

The annual total return for the s&p over the past 10 years is 12.9%. Not sure what the author of the study had projected for the returns back in 2009 as i can not see any raw data but from looking at the chart it seems around 14% roughly (end of the red line). Difficult to tell the exact number but it appears the forecast worked pretty well. I guess if you want to see what the return would be like in the next year (if say you need to plan what to do with a large sum of cash), you would take the Oct 2010 forecasted return and then see what the 1 year return from today would need to be to match the forecast.


Again difficult to tell from just looking at the chart but assuming the 10 year forecast from 2010 is around 12% (start of the green line) and since we have made an annual total return from 2010 to present for around 13%, the return for the next year is forecasted to be pretty much zero.


Given the sharp drop in the green line, it appears we are going to have some pretty serious sell-offs in the near future (next couple of years).

seacaitch

itwasntme001 wrote: »

The annual total return for the s&p over the past 10 years is 12.9%. Not sure what the author of the study had projected for the returns back in 2009 as i can not see any raw data but from looking at the chart it seems around 14% roughly (end of the red line). Difficult to tell the exact number but it appears the forecast worked pretty well.

At the March 2009 lows the average investor equity allocation suggested a ~16% 10yr annual total return; the actual outturn was ~16.3%. Not bad.

itwasntme001 wrote: »

I guess if you want to see what the return would be like in the next year (if say you need to plan what to do with a large sum of cash), you would take the Oct 2010 forecasted return and then see what the 1 year return from today would need to be to match the forecast.

Not recommended.