When GMO refers to 7-year forecasts, they are definitely not suggesting that this change will happen for seven years in a row. On the contrary, they are very clear that they never make short-term forecasts.
So what they are saying is that seven years from now, after accounting for 2.2% inflation, the value of each of these asset classes will be as if it had risen/fallen by this percent each of the seven years. They don't claim to know if it will do this in a straight line or on a roller-coaster.

Certainly.
It's an annualized real return forecast over 7 years.
So if they are correct, then 7 years from now we would find the average annualized 7 year return figures to be close to what they stated. No need to even look at it for 7 years, because nothing is implied for this year or next year or the next.

Hi Junkster,
I suspect you are either being too generous or too naïve in our assessment of individual investor performance.. Given your past postings I gage the odds of you being too naïve as nearly zero, so I guess you are being overly liberal in your appraisal.
Overall, investors are not that talented, and often do not take the time to measure their successes against a proper benchmark. Even professionals share this very common failure.
Your post reminded me of several stories that appear in Peter Bernstein’s classic “Capital Ideas” book. As recently as the 1960s, Bill Sharpe reported to Bernstein that professional advisors and institutional agents did not keep proper score. They assumed they were dong well, but did not document their records. In general, those records were uniformly miserable. Alfred Crowles 3rd documented how badly these pros did in their inept forecasting as early as the mid-1930s.
The performance statistics are at least reasonably accurate although they are not perfect. They need not be perfect since the percentages are in continuous change. There are periods when both the amateur ranks and the professionals do extremely well. But a conservation of profits law dictates that the average investor (both institutional and amateurs) must on average earn less than the overall market because of fee and cost leakage that subtracts from the total market rewards.
Also note that the investor population itself is in constant flux. Poor performers drop out. Today’s investors are not the same group that was underperforming 20 years ago. The survival rate of mutual funds is a staggeringly low percentage. Losers do disappear from the investment scene.
Like you, I do believe that long-term MFO participants are likely near the top in terms of returns. But many exceptions exist, and the membership of MFO is dynamic. That’s one reason why I try to introduce members (especially new ones) to the organizing magic of statistical analyses.
On a personal note, I have been investing for almost 60 years. I did not do well in my earlier years and was victimized by the industry touts. I did finally learn. It does take learning, patience, and persistence. And some painful losing, and a ton of reading.
Thank you for your comments.
Best Wishes.

I dollar cost averaged my whole investment lifespan. It began with $25 a month through Twentieth Century and at least once a year I would revisit that number and increase or stay put. As time went on I was putting in several hundred dollars a month. This meant of course that I was frugal in my social life. I didn't forgo a social life per se, but I didn't throw money away either. It was this discipline that got me to where I am now.
If I had been making only 2% all those years I would have been discouraged for sure. I had my losing investments as well as my home runs. I certainly made more than 2% so this article like so much of the Marketwatch stuff is just drivel to me.
What I find fascinating now is investing this money on my own after years of 403b. I rolled it over to my own account and am testing what I have learned over years. I think I have done well so far but knock on wood. At least I know who to blame if things don't go right.

Keep in mind, that's real-return, so they are assuming something like 2.5% inflation. Which means something around -1.5 to -2% a year going forward.

Still need substantially sized cajones to make the call ANY mainstream asset class is going to on average yield negative returns for 7 years. I don't think even Hussman is saying that, and he is already in the dog house for the rest of this century!
My point, we need to applaud the true visionaries and/or need to verify if Grantham is also a BS artist. 7 years. I hope to be alive. I hope to remember to check.

Hello,
I think you really meant "cojones" :)
Anyway, I don't think they mean uniformly but on average or compounded. We will see. I am not going to make any changes based on these predictions. I take these predictions with a grain of salt.
What is more interesting to me is the timber. It has the highest expected return. Now, if timber is in such a demand and everybody gets into timber business we can get another real estate like bubble or timber mania (like tulip bubble). For timber to be so much in demand we should either have a construction boom again.

The inhabitants of this board who have been around the investment game for the past 20 years must be *above* average investors. That's because I can't imagine any of them
earning a mere 2% to 3% per annum over that time frame. In fact, I can't imagine any investor sticking it out over 20 years with those type of returns. It would appear the *average* investor referred to in these types of studies are a composite of hypothetical creatures.
Edit: As an aside, the nice thing about accumulating wealth in the investment/trading game is it doesn't require a high intelligence or any knowledge whatsoever of math and statistics.

Hi Guys,
This exchange really revolves around Dalbar’s consistent findings that the “Average Investor” almost universally underperforms the mutual funds that he buys by a huge number. Often this mythical “Average Investor” captures only between 20% and 40% of his mutual fund’s quoted returns. That’s devastating from a retirement perspective.
Our buddy, Vintage Freak, paints a dismally dark and uncompromisingly bleak portrait of the “Average Investor’s” investment acumen. Initially, his representative caricature has a moderately conservative investment approach. Unfortunately, he abandons his good intentions and does not stay the course. He fails the persistence and the patience tests.
His intemperate market actions quickly unmask him both as an inept and an unlucky market timer. The marketplace is a challenging task master, and our “Average Investor” pays the price for his imprudent and whimsical activity, a least according to Vintage Freak’s profile. It’s a sad tale of a dysfunctional investor, but plausible.
Rather than assembling some ad hoc stories, I thought it would be a worthwhile exercise to explore the wisdom or foolishness of our “Average Investor’s” game plan using Monte Carlo-based analyses. Thousands of reasonable cases can be generated and examined in just a few minutes.
Towards that end, I ran 4 cases on the Portfolio Visualizer’s website. If you wish to put their Monte Carlo simulator to use on your portfolio possibilities, here is a Link to it:
http://www.portfoliovisualizer.com/monte-carlo-simulation
The 4 cases that I input were designed to examine the benefits (or not) of a Dollar Cost Averaging (DCA) strategy compared to a full immediate commitment of monies, and the benefits (or not) of a broadly diversified portfolio contrasted against a single Large Cap Blend position.
I completed this brief study using the parameters that Vintage Freak invented. The time period was 20 years. I used the site’s statistical market category historical returns option without inflation for simplicity. The Monte Carlo code runs 10,000 random cases for each scenario.
For comparative purposes I postulated a diversified portfolio with 30% Large Cap Blend, 10% Small Cap Value, 10% REIT, 10% International Stock, 20% Short Term Corporate Bond, and 20% Total Bond holdings. According to the Portfolio Visualizer’s output, this diversified portfolio only compromised expected returns by a small amount (10.43% vs. 11.79%), but substantially attenuated the portfolio’s volatility (10.66% vs. 17.96%). Diversification is close to a free lunch.
The simulations demonstrated the wisdom of Dollar Cost Averaging over an immediate full commitment of money by a small margin. It is a small victory, but it is above a noise level.
The benefits from portfolio diversification were magnificent. The median returns for the diversified portfolio outdistanced those from the concentrated Large Cap Blend pace-horse by more than a factor of two for both the DCA and the Immediate full investment scenarios.
These analyses took only a few minutes to complete on the Monte Carlo simulator. And it was fun to do. I encourage all you guys to play what-if games with this excellent and practical investment tool. Monte Carlo was specifically designed during World War II to explore uncertain, complex events. It’s fully within Monte Carlo’s competency wheelhouse for the non-predictability of the marketplace. Learn and prosper.
I hope this little drill is helpful for a puzzled and perplexed someone out there in MFO space.
Best Wishes.

TIAA-CREF would be my recommendation. Their programs come in many flavors, not all of which offer the same combination of retirement class funds and annuities. As a general matter, they have a nice series of target-date funds that are built purely around index funds. And their Real Estate account is, literally, in a class by itself. It invests directly in real estate rather than just in real estate securities. It utterly crashed in the 2008 market crisis; that was one disastrous 24 months period sandwiched by 18 years of remarkably steady returns.
David

When GMO refers to 7-year forecasts, they are definitely not suggesting that this change will happen for seven years in a row. On the contrary, they are very clear that they never make short-term forecasts.
So what they are saying is that seven years from now, after accounting for 2.2% inflation, the value of each of these asset classes will be as if it had risen/fallen by this percent each of the seven years. They don't claim to know if it will do this in a straight line or on a roller-coaster.

For those unfamiliar with FundAlarm and for folks looking for a nostalgic rush, here's a snapshot of the FA discussion board from January 2011 and April 2005.
Roy Weitz launched FundAlarm 18 years ago as an antidote to the mindless hype that fund companies were getting away with. He combined a tart monthly commentary with a list of funds to avoid, then added a discussion board. About six years ago he felt himself running out of steam and asked if I'd write a new feature on small and new funds; after a year, Roy granted himself a sabbatical and I took up the monthly commentary. About four years ago he admitted that he'd written himself out; he felt he was stretching for content and made my role permanent.
About three and a half years ago, Roy's parents encountered simultaneous health crises and he let the community know that he was retiring FundAlarm to care for family. At Roy's prodding a number of folks encouraged me to launch "a site in the tradition of FundAlarm." Lacking any technical skills, I paid Brad Isbell, an IT colleague at Augustana, to design the site and prevailed upon my friend Cheryl Welsch (a/k/a Chip) to maintain it. We did a "soft launch" on April 1 2011 and had a sort of grand opening on May 1 2011. Our early look was ... uhhh, rudimentary. Anna Zolotusky, web designer whose mom was (is?) a fan, volunteered to bring us into the 21st century (and did).
We run two major software packages side-by-side: WordPress underlies the entire site and Vanilla underlies the discussion board. Chip frets rather more about WordPress, Accipiter - who taught himself programming for the purpose - frets rather more about Vanilla. Accipiter also wrote the Navigator program, which allows you to find a wealth of targeted information about any fund. As our discussion board software grew in complexity (Accipiter has written a bunch of custom programs for it), OJ generously wrote a really first-rate users guide.
Charles, like me, started as a member of the discussion community with a special knack. I'm not sure what my knack was. Charles's is making data sing. After reading one particularly fine post, I asked Charles if we might include it in the monthly commentary and had the pleasure, thereafter, to have him contribute pieces with a sophisticated statistical bent on a regular basis. As he thought about what the site needed, he also designed both our fund screener and the metrics behind it which led to the Great Owl designation.
Ed Studzinski, whose career included stints in the Navy JAG office and banking as well as co-managing OAKBX, had been sharing behind the scenes commentary on the industry and its players by phone. Eventually I persuaded him to address a larger audience about the dynamics of the industry and the way they affect our fates.
All on less than $700 a month.
Hope that helps,
David

I was thinking back a few years when "tactical" seemed to be the buzz word in investor circles. I actually didn't know there was a difference in meaning between tactical and strategic, or tactic and strategy.
Thanks for the references.

I will tell you why average investor has lagged. It is because average investor does not invest lumpsum and hold on for dear life for 20 years. This is what happens to average investor.
Average investor is told to DCA. So he starts DCAing at Y-20. He had $100,000 but he does not invest $100,000 at Y-20. He invests $5K, then another $5K at Y-19. Market is going up. He DCA'ing is effing him up. At Y-15 he realizes is $25 investment is only worth $40K. Everyone is celebrating 5-year returns. M* is rolling out red carpet for fund companies.
Average Jo now takes remaining $75K and invests it Y-15. Y-14 his $115K investment is now worth $120K. He is still up, and he is complacent because so is everyone else. Market starts tanking. Y - 12 his investment is worth $120K. 5 Years numbers are still positive from funds. He thinks, oh yeah market will come back. Y - 11 He is at $55K. 5 year numbers suck!. Things are not okay any more. He sells.
$100K is now worth $55K. Y - 10. Market returned 50% in the past 2 years. Time to get back in again. Rinse. Repeat.
Moral Of the Story: Stop watching CNBC, Stop reading M*. Come to MFO. Learn.

Also, arn't there student loan forgiveness program out there for those that choose education as a profession?

Without debating whether it is the "education" field, not generally for people who become professors. Though the restructuring of federal student loans now essentially means forgiveness after 20 years.
I'm guessing, but at 27 her chances are her student debt may be minimally limited to undergrad. Let me second the 9% is amazing comment, though. Especially given how tight money can be at universities and colleges. Great deal.

Back in my youth, I was in a similar position and ended up with 403b's at both TIAA-CREF and Valic. Looking back years later, IMO you have only one choice and that is TIAA-CREF.

Keep in mind, that's real-return, so they are assuming something like 2.5% inflation. Which means something around -1.5 to -2% a year going forward.

Still need substantially sized cajones to make the call ANY mainstream asset class is going to on average yield negative returns for 7 years. I don't think even Hussman is saying that, and he is already in the dog house for the rest of this century!
My point, we need to applaud the true visionaries and/or need to verify if Grantham is also a BS artist. 7 years. I hope to be alive. I hope to remember to check.

thanks mrdarcey. I'll have to take a look at those. I believe there have been some articles this year, possibly one by Larry Swedroe, saying that dividends were getting quite popular and therefore expensive.....so that the P/E ratios on some of the dividend exchange traded funds was too high. Swedroe in particular was advising total return investing and not dividend investing for that as well as other reasons. I'd have to look for those articles.

I've seen Swedroe make the point that it shouldn't matter towards cap gains if you take dividends out or not and sort of poo poo DRIPing. Basically telling investors to create their own dividends by selling a %age of gains. But the thought is supposed to be that dividends and low payout ratios (and to some extent buybacks) impose some restraint on corporate misbehavior, and that only high quality firms can afford to continually restrain themselves by returning profits. You've probably seen the same things I have there. Some valuations seem stretched, but these are maybe companies people are willing to pay up a little for.
Forgot to add M*'s wide-moat index, MOAT.

Negative 4.4 returns for small caps for 7 years in a row. Takes some cajones to make that call. Setting a reminder for 2021.

Keep in mind, that's real-return, so they are assuming something like 2.5% inflation. Which means something around -1.5 to -2% a year going forward.

Domestic Energy/Heath-Bio
https://www.google.com/finance?q=NYSEARCA:IEO&ei=xj3sU6CECYbPrQGu_4HwCA
https://www.google.com/finance?q=MUTF:FRAK&ei=xj3sU6CECYbPrQGu_4HwCA
http://news.morningstar.com/fund-category-returns/energy-limited-partnership/$FOCA$LP.aspx
http://news.morningstar.com/fund-category-returns/equity-energy/$FOCA$EE.aspx
http://news.morningstar.com/fund-category-returns/health/$FOCA$SH.aspx
http://etfdb.com/index/health-care-select-sector-index/
An Economist's Perspective From Mesirow Financial's Diane C Swonk
"I debate with my colleagues on economics,
politics and psychology about the nature
of the changes that we are seeing: if they
are “cyclical,” then the effects of the
changes will be short-lived, and over within
a few months or quarters; or, if they
“structural,”then the effects of what we are
seeing will take much longer to play out;
it will take years to see the full impact and
could affect the lives of our children as well
as ourselves. This report takes a closer look at some of
the structural changes that we see emerging,
and how they are likely to affect the pace
and composition of growth going forward.
Technically we have shifted from a recovery
into an expansion. Waiting for a more
pronounced recovery, however, has been a
bit like waiting for Godot. Much of that
is because of the structural shifts we are
seeing in everything from a slowdown
across emerging markets, most notably in
China, to the ongoing challenges that the
Eurozone faces, and what those shifts mean
for monetary policy."
CHICAGO, August 13, 2014 – In the August issue of Themes on the Economy®, Mesirow Financial' s Chief Economist Diane Swonk muses on economic challenges and burdens that baby boomers are leaving for the millennial generation. "This will no doubt trigger some backlash, particularly among younger workers who will have to pay more into the system to keep the promises made, but they will not get much (if anything) in government-sponsored retirement benefits for themselves."
And, don't look to make it up in stock market, technology or housing bubbles; the Federal Reserve is keeping a much closer eye on the banks it regulates. Chair Janet "Yellen has talked about higher capital requirements and more conservative underwriting standards as ways that the Fed could deflate emerging bubbles. She has also praised the use of regulations targeted at tempering the rise in home prices..." The Fed plans to exit its QE3 program gradually, but the "fear is that the economy is more sensitive to rate hikes now than it was in the past. If the Fed acts too aggressively, it risks leveling the whole forest."
The picture looks different in other parts of the world, too. China will still represent opportunity but competition as well, and not just on the economic front, as it increases military spending. Swonk also cautions that, "stability in the Eurozone is illusory," with "the ongoing risk of deflation" and the effects on sovereign debt.
http://www.mesirowfinancial.com/economics/swonk/themes/themes_0814.pdf
Everything is Good!
Tonight's Headline
Shares, bonds rally as investors bank on ENDLESS stimulus.
Reuters By By Wayne Cole
2 hours ago
http://news.yahoo.com/asia-shares-investors-bank-more-stimulus-013020693--finance.html

Negative 4.4 returns for small caps for 7 years in a row. Takes some cajones to make that call. Setting a reminder for 2021.

Yeah, that's quite a forecast. It would be much easier to gloss over that forecast if it was made by Harry Dent, Dr. Doom (Marc Faber) or Peter Schiff.
But Jeremy Grantham and GMO should not be glossed over so easily.
I can only imagine a portfolio constructed on the basis of that forecast.
Let's see now.......how should that portfolio be constructed? Let's keep it very simple.
35% Emerging market stocks
30% US High quality stocks
15% Emerging market bonds
10% Developed small international stocks
10% Developed large international stocks
In you're in that portfolio, better hope the US dollar does not strengthen!

@Ted I'd be interested to know how Sam and Art's prognostications have played out over the years. Do you know of any reference material?

Negative 4.4 returns for small caps for 7 years in a row. Takes some cajones to make that call. Setting a reminder for 2021.