The Next 10 Years using Simple Forecasting Rules Hi Guys,
The saying that “Everything should be made as simple as possible, but not simpler” is often but not universally attributed to Albert Einstein.
Regardless of who actually made that pithy proclamation, it is especially applicable when making investment forecasts. Uncertainty dominates any forecasting, and complexity only increases the odds of introducing extraneous and erroneous factors.
I particularly favor a short and simple set of rules when forecasting longer-term market returns. I am not in any way motivated to travel to Chicago to attend a Morningstar convention where invited experts offer no more illuminating projections than I can painlessly glean from these simple rules.
What is my simple rule set? For the equity portion of my portfolio, I use a 10-year equity returns correlation that deploys the Bob Shiller Cyclically Adjusted Price to Earnings ratio (CAPE) as the entry parameter. Its current value is about 26; its historical mean value is roughly 17. So, today, the equity marketplace has a cautionary higher than normal risk level.
Future equity returns are negatively correlated with CAPE. A correlation that I like projects the following 10-year annual real returns (inflation subtracted) of 11%, 8%, 5%, 3%, and 1% as CAPE groupings increase from below10, 10 to 15, 15 to 20, 20 to 25, and greater than 25, respectively. These 5 groupings project a sad story for the current CAPE level. Please take note: This table is the primary insight and tool.
Above a CAPE of 30, equity returns have been historically negative for the upcoming 10 year period. One reason I like the above correlation is the timeframe balance of its components. Both CAPE and the equity market returns forecast are for a 10-year time horizon.
Projecting the next 10-year bond return likelihood is an even easier task. Simply use the current yield of the 10-year treasury bond. If you are a more aggressive corporate bond holder, you might consider adding 0.8% to the government value.
Given today’s market conditions and the S&P 500 CAPE valuation, I anticipate an equity annual real return of 1.0%, and a bond return of 2.5% (mix of treasury and corporate holdings) over the next 10-year time horizon.
Add another 2.5% for inflation. I presently expect a 60/40 equity/bond mixed portfolio to generate an actual return of 0.6 X 1.0 + 0.4 X 2.5 + 2..5 (inflation) = 4.1% annual average actual return for the next 10 years. Given the crudeness of the analyses, the projection is 4% annually. Quoting anything more accurate is misleading.
If you are a neophyte investor and expecting a portfolio return that is north of 8% annually over the upcoming 10 years, forget-about-it. It is not now in the cards given the present high value of CAPE. Naturally, these forecasts change as the input parameters get revised.
Well, this forecast is not rocket science and it did not need a visit to the Morningstar clambake. It has taken a complex forecasting problem and has simplified to allow a rapid and respectable estimate that does not depart too radically from those made by the professionals with their complex computer models. That complexity adds little.
Returning to the Einstein quote, I hope my approach has not crossed the overly simplified boundary. I also hope that a few MFO members find this simple forecasting tool useful. I realize that many MFO members use similar simplified methods in making their own projections. I thank these members for their patience with this submittal.
Best Regards.
Internet explorer or firefox @Derf- with Firefox here's the easiest way to clear your MFO browser cache:
1) Make sure that your browser is looking at the MFO site.
2) Use "
Command I " which will bring up the "page info" window for the MFO site.
3) Select "
Security " at the top of the info page.
4) Select "
View Cookies ", which will then show you a list of all of the stored MFO cookies
5) Click on "
Remove all Cookies "
Of course you will then have to go back to the MFO site and re-register so that a new set of cookies can be stored.
3 Sectors To Watch In The Second Half Of 2015 - XLF (Finance), XLU (Utilities), XLV (Health care)
June Jobs Report
Tekla World Healthcare CEF A few thoughts:
1. I had no idea this fund was coming out. I got an alert because I own two of the other funds and was surprised to see it. There was nothing about the fund on the website yesterday.
2. Are there really enough major foreign healthcare names for this to be worthwhile? I mean, I know there's the European names (Novartis, Sanofi, etc etc) and others, but HQH (for example) is 12% foreign. This new fund can be up to 40% foreign - but "up to" is the focus (and 5% in EM.)
3. It can have 10% in private names, which is less than HQH/HQL.
I guess I'm just not seeing why I need this in addition to two of the other funds.
Edited to add: in terms of HQL, I see in the propsectus: "The Trust may invest up to 25% of its net assets in securities of foreign
issuers, expected to be located primarily in Western Europe, Canada and
Japan, and securities of U.S. issuers traded in foreign markets (‘‘Foreign
Securities’’). The Trust may buy and sell currencies for the purpose of
settlement of transactions in Foreign Securities"
and "The Trust emphasizes investment in securities of emerging growth Life
Investments Sciences Companies. These investments are often venture capital
investments. The Trust may invest up to 40% of its net assets in securities
subject to legal or contractual restrictions as to resale (‘‘Restricted
Securities’’), including venture capital investments. The Trust’s investments
in Restricted Securities may include ‘‘start-up,’’ early and later stage
financings of privately-held companies and private placements in public
companies. See ‘‘Investment Objective and Policies.’’"
So HQL has up to 25% in foreign and up to 40% in private. The new worldwide fund can do up to 10% in private and up to 45% in foreign.
Honestly, I'd rather HQL's 25% in foreign and 40% in private.
The World's Richest People Lost $70 Billion Yesterday @MJGTwas not that I don't know how to do the ballpark math; as I do this all of the time for our portfolio. I was curious as to Old_Skeets number and what brought him to this conclusion.
Easy case for what Ted mentioned would be to pick
5 balanced/moderate allocation funds and discover the average down for the day in question. Magico-Presto, eh?
I've always been very good with head math........
Each week at our house for the true numbers, I use a handy-dandy and most reliable, HP-12C.
I'm sure your example may have been of benefit to someone here; but I am surprised that you would choose to explain your method to me.......my being in the game of life for so many years.
