Past performance is no guarantee of future results

[flyingpylon]

Everyone should be familiar with the phrase in the subject line.

My question is, for the purposes of financial planning, how do you estimate your future investment returns?

Say you’ve identified an asset allocation that has returned an average of 10% nominal over the last 50 years ( std dev 8.8 ). You’re doing a Monte Carlo simulation and you have to input an expected return and standard deviation. Are you really going to input 10% or does that seem crazy? How can anything be more than a SWAG?

Seems a little crazy to me otherwise I wouldn’t be asking this question. I’m interested in how others approach this issue in their planning given that none of us have a crystal ball. Do you knock an arbitrary % off to be “safe”? Do you consider a shorter and/or more recent timeframe? Something else?

The whole thing just seems like a crapshoot, which I guess it is at some level.

[boglerdude]

I plan for 0. Work as much as I can and spend as little. Ive seen retirement destroy more people than its helped. 2% nominal is Fed target and their legal power to print is only increasing.

[Hal]

My question is, for the purposes of financial planning, how do you estimate your future investment returns?

The whole thing just seems like a crapshoot, which I guess it is at some level.

Personally, I just take the Baseline Return as detailed here => https://portfoliocharts.com/portfolio/l ... m-returns/

You're correct, at the end of the day it comes down to luck, but you can tilt the odds in your favour.

Got to run now, maybe others have deeper insights (and more time )

[vnatale]

My question is, for the purposes of financial planning, how do you estimate your future investment returns?

The whole thing just seems like a crapshoot, which I guess it is at some level.

Personally, I just take the Baseline Return as detailed here => https://portfoliocharts.com/portfolio/l ... m-returns/

You're correct, at the end of the day it comes down to luck, but you can tilt the odds in your favour.

Got to run now, maybe others have deeper insights (and more time )

That is excellent advice if you want to make conservative estimates (as Tyler says he does for his own personal financial planning).

[flyingpylon]

My question is, for the purposes of financial planning, how do you estimate your future investment returns?

The whole thing just seems like a crapshoot, which I guess it is at some level.

Personally, I just take the Baseline Return as detailed here => https://portfoliocharts.com/portfolio/l ... m-returns/

You're correct, at the end of the day it comes down to luck, but you can tilt the odds in your favour.

Got to run now, maybe others have deeper insights (and more time )

Thanks for this reminder! The first couple of related articles on that page are helpful as well. I’m quite sure I’ve used the baseline return before but recently I’ve been second-guessing everything to the point of total confusion. I should probably just find something better to do and re-read the articles on Tyler’s site once in a while.

I would still be interested in hearing other approaches to this issue if people would like to share them.

[barrett]

Back when I used the i-ORP extended planner calculator to run simulations (the earth's surface was mostly just molten lava then), I would assume a real rate of return of 2%. So I used a nominal return of 4% and an inflation rate of 2%.

Alas, that calculator doesn't seem to be working anymore. I read on Bogleheads a while back that its creator James Welch has not been in good health and is unable to continue working on the site. Too bad as it was a great planning tool.

I realize that planning on a 2% real return is super conservative, but I'd prefer leaving money on the table to dying broke.

My wife & I are also invested conservatively so a lower assumed rate of return seems prudent. Not to mention that a bad sequence of returns can knock investors down several percentage points fairly quickly. Or, in the words of mathjak, the only returns that matter to us personally are those that happen during our own timeframes.

[snedgar]

Hi Barrett,

It's possible that this is something different than what you are referencing, but I recently discovered and have been using the planner calculator at this site: https://i-orp.com/Plans/extended.html

I have found it to be very helpful.

[barrett]

Hi Barrett,

It's possible that this is something different than what you are referencing, but I recently discovered and have been using the planner calculator at this site: https://i-orp.com/Plans/extended.html

I have found it to be very helpful.

That's great that you've found it still works, snedgar! I tried running our numbers again this morning and got an error message & just assumed that it was no longer operational. I hadn't run any simulations in a couple of years and, again, read that James has not been able to update the site. Looks like the last update was in 2018. I know he tried to take into account changes in tax law, RMD ages being extended, etc. So it's probably not as current as he would like.

Anyway, thanks for the good news!

[seajay]

Everyone should be familiar with the phrase in the subject line.

My question is, for the purposes of financial planning, how do you estimate your future investment returns?

Assume that each asset, price only value, might broadly offset inflation, 0% real, but endure considerable volatility along the way. You can measure those, and see when a asset is relatively lagging (or leading) that assumption.

1978 start date and LTT were lagging by a considerable amount. By 1999 that had been recouped, back to inflation pacing total return, at which time gold had transitioned to lagging inflation considerably, so rotate into gold, and by the end of 2009 that had been recouped. At which times stocks had dived, so rotate into stocks.

Collectively, 1978 to 2022 inclusive, that rotation in total returns compared to 100% stock held across 1978 to 2022.

You might estimate investment returns as the amount that a inflation lagging asset requires in order to get back to more broadly pacing inflation. But you can't estimate how long that relative gain might take, and it might lag alternatives during that period