good interview with michael kitces on low returns (bond, IRA, wage)
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Doesn't matter what it stands for, look at how it is calculated. It does not make use of annual return data, which is what you said.
Years are important though. It is based off of years, hence the term ANNUAL. All I was saying is that this year's returns are important to calculating CAGR. Clearly it could go down 15% next year and the CAGR over 2 years would be negative, but to say where you are now doesn't matter is not accurate as that is where you move from going forward. Is it more likely you have an 8 year real return greater than 2% if you are already up 15% or if you are already down 15% after 1 year? I'd be willing to bet those are drastically different probabilities. If it didn't matter the probabilities should be equal.
Years are important though. It is based off of years, hence the term ANNUAL. All I was saying is that this year's returns are important to calculating CAGR. Clearly it could go down 15% next year and the CAGR over 2 years would be negative, but to say where you are now doesn't matter is not accurate as that is where you move from going forward. Is it more likely you have an 8 year real return greater than 2% if you are already up 15% or if you are already down 15% after 1 year? I'd be willing to bet those are drastically different probabilities. If it didn't matter the probabilities should be equal.
If you are using recent past performance to make decisions on what to do next, that is momentum trading, or timing the market. That is fine for people who like to pursue that strategy. In that case you can only know what the momentum is using recent performance data, like annual returns. But for buy-and-hold investors, i.e., those who do not time the market, annual performance, and even CAGR, does nothing but provide bragging rights. Buy-and-hold is all about asset level and it does not matter if you got to the level you are at today with high CAGR or low CAGR. It is kind of interesting but does not change anything.
...Could the markets have below average returns the next 8 years? maybe, maybe not so you get 6% instead of 9%? maybe, maybe not then you try to "get back in" at the right time....losers game if you ask me...never met anyone who has done it consistently over time...
You're right. But the point of predictions as in the OP is not, I think, to give investment-advice; rather, the point is to advocate for a lowering of expectations, while not necessarily doing anything different with our investments.
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Originally Posted by TwoByFour
Nobody knows what is going to happen. It's all noise. Whatever happens, happens. I will just wait and see.
While I'm quick to agree with you, it should also be taken into account, that demographics and technological slowdown are detriments to economic growth (in GDP, productivity-growth and corporate profits). This is no invocation of doomsday, but it is cause to suppose that stock-market returns may stay lackluster for decades.
Compounded Annual Growth Rate, or what we commonly refer to as "average annual return" for multi-year periods.
You have to be careful when someone reports a return as an "average annual return". The average can be either arithmetic or geometric and there is no universal convention to always use geometric. If the reporting agency (like Schwab or Morningstar) means geometric average they will often call it "compounded average" or "annualized return".
It is more useful to report multiyear return as CAGR but arithmetic average is also interesting since the difference between CAGR and arithmetic average is the so-called volatility drag. CAGR is always less than the arithmetic average and the reason why is volatility.
You're right. But the point of predictions as in the OP is not, I think, to give investment-advice; rather, the point is to advocate for a lowering of expectations, while not necessarily doing anything different with our investments.
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exactly . it has nothing to do with how you invest . the entire interview is that it is better to play it safe and lower expectations . the cape has been pretty accurate around 8 years out . you would be betting against the odds if you think this time is different and you planned to retire within the near term . .
since if you lower your expectations and thinks are better it is just that much better .
If it's one thing I've learned it's that no one can predict what the market will do accurately when. To me that means having an allocation that reflects the level of comfort with taking risk and to be diversified as appropriate and then not panic, because markets are finicky beasts that don't respond to logic.
The rest is a guessing game, even by the experts who do this for a living. One can never expect any exact outcome in investing--unless one is in a fixed rate/fixed term investment like a CD.
10 years is not been the sweet spot , that is his point . shorter term than 8 years and longer than 8 have been iffy . there will always be an exception to everything but betting on the exceptions rarely ends well .
i tend to agree with kitces 100% . if you are retiring within 8 years or so plan around the lower returns at this point . the worst that happen is you will be in better shape then you planned around if it pans out an exception . which is the gist of what he is saying and not trying to predict what returns will be .
I am hoping to retire in 9 years. I just moved 3% of my retirement allocation (not including my IRAs which are both in stock funds) into stable value paying just over 2%, bringing my fixed income percentage to 28%. 25% in global bonds and 3% stable value. I expect to tick that stable value allocation up by a percentage point or two every year until retirement. How does that sound?
i started raising cash to 2 years withdrawals about 5 years or so pre retiring . glad we did . last year we burned principal since our portfolio was up 1% and we spent 3.50% .
this year looks better , up almost 5-6% and drawing 3.50% . so the cash comes in handy . especially for keeping income low if delaying ss .
lots of perks can be available like an aca subsidy and zero capital gains brackets .
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