Monday, 30 June 2008

Some Views of Expected Future Returns

Ever wonder what to enter for the rate of return in those calculators that tell you what you will have accumulated after 40 years of saving and investing? It doesn't take a genius to understand that you can't just will a certain number to happen. Even extrapolating the past returns can be chancy - who says the future will be like the past and how many years of the past do you take?

Here are some forecasts whose credibility you can judge for yourself.

The US Social Security Administration's Chief Actuary Stephen Goss
Presented at the 2005 National Academy of Social Insurance Conference


Portfolio Solutions LLC (Richard Ferri) 30 Year Market Forecast


Canada Pension Plan Chief Actuary Jean Claude Menard
Presentation on Projecting Diversified Investments at the same Social Security Conference


I find it interesting that the forecasted returns on Canadian equity are lower than both US and other foreign countries. Is that Canadian reticence or a reflection of a country in the wrong economic sectors, like commodities, or just bad economic management? Whatever the reason, if accurate, it reinforces the need for Canadian investors to diversify internationally.

7 comments:

Canadian Capitalist said...

That's very interesting. I find it interesting that my assumptions are more conservative than every forecast in this post. Maybe we can retire many years earlier :)

CanadianInvestor said...

Funny you should say that. Have been reading the bestseller Fooled by Randomness and it has been making me reflect that perhaps we have just been living in an extended period of above-average market returns lasting the last few centuries for a chosen-few countries, namely the USA and Canada and the UK. If that is so, then the wise strategy is to take advantage of the good but prepare for the worst.

Richard said...

Canadianinvestor: usually when people say things like "it's different now, housing prices really can go up 10%/year forever" it's a good joke, but I would say that in the last 300 years a few important things have really changed :) I believe it's William Bernstein who mentions historical rates of return in ancient Rome - that's interesting to know but it's not a direct comparison.

CanadianInvestor said...

Richard, One of the methods to estimate future returns is to base this on GDP growth since GDP derives from the aggregate of all companies' output. In that sense, you may be right if GDP has permanently moved to a higher level. In order to make the case we'd need to explain:
- the mechanism by which GDP can be long term higher;
- why this will be so in future as well;
- why big things won't go wrong to derail the whole scheme.
I cannot recall seeing such evidence but am open to believe it.

Richard said...

The planet is supposed to have run out of food several times by now, but technology keep pushing things further. Similar effects in business productivity are obvious and ongoing. In one sense you could say that we're all just exchanging limited things (natural resources and time), but I don't think overall productivity is finished going up. There are a lot of businesses that have hit a wall, but that doesn't mean the economy has stopped. Stephen Covey has an interesting idea comparing industrial companies with family businesses from before the industry revolution, and drawing parallels with new business models that are starting to show a promise of much higher productivity than the usual rigid factory-type structure (I know that's not saying much, but it's worth thinking about).

It's not all positive however; there are several well-informed people who seem to have reason to believe that a lot of growth in the US lately has been from an unsustainable reduction of savings/increase in debt that has to eventually end and revert to the mean. That doesn't sound like the end of the market though - more like a huge sale :)

Anonymous said...

I have been looking at my 30 year estimates over the past several weeks and do not beleive I will be making any changes, except that real GDP in the US will be slightly lower.

Rick Ferri

CanadianInvestor said...

Rick,
Thanks for the note. As you may have read elsewhere on my blog, liked your Asset Allocation book a lot and keep referring back to it.

Must get on to your other tome on ETFs.

First though, am trying to see whether the history of how and why the West has grown so much richer than any previous society, or others around now, gives any clues as to the sustainability of such growth.

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