In the broad picture, I agree with the expectation that both stock and bond returns will be lower going forward. But not as explained. Stocks may violate mean reversion (i.e. overshoot the mean on the low side, rather than simply dropping closer to the mean). Parallel increases in prices and rates would keep bond real returns closer to zero.

I agree with this. The reversion to the mean is better applied to probabilities (e.g. coin toss, roulette ) and requires large numbers. None of those things apply with the stock market.
We've had lower than normal GDP growth recently and that will likely continue as was discussed in the thread on productivity recently.

Hi Bob, thanks for the comments. I completely agree with you that after several fat cows one should expect several lean ones. But mean regression is something entirely different.
What you (and I, and most everyone else) are assuming is that there's some relationship between past and future (lean follows fat). Mean regression assumes the complete opposite - that each year is completely independent and random.
Now you don't believe that next year is disconnected from this year or the past few. Neither do I. So mean regression is not applicable. Even if it were, it never predicts bad years, just that if this year was good, next year will, more likely than not, be less good.
With respect to bonds ... If one buys a bond now, even a premium bond, whether the real rate of return turns out to be positive or not depends on rate of inflation until maturity. It doesn't matter whether nominal rates go up 1% next year, that's not going to affect the coupons, the return of principal, or the real return. (Except arguably by inference that inflation may rise in tandem with the rise in nominal rates - see Fisher hypothesis.)
Inflation is still hovering below 1%. (0.8% Y/Y as of July - see graph here). Target rate is 2%. If we approach that without overshooting (admittedly a significant assumption), then 10 year bonds, yielding 1.60% nominal as of 9/2/16 should generate a small but positive real return. It doesn't matter what happens to market rates; what matters once the investment is made is the rate of inflation.
Still, there's a difference between this barely positive real return and the historical real return of 1.6%. So I agree that one needs to plan for lower returns than the historical average for both bonds and stocks. Though it remains important to be clear on the reasons for that qualitative projection, in order to make good quantitative guesses.
I think your 4-5% (nominal) is a good, conservative figure for planning purposes. IMHO that puts real return somewhere around 2%.

FYI: This has been a big year for U.S. fixed-income ETFs, which have led asset-class net creations with inflows of more than $60 billion year-to-date. In this segment, no fund has been more popular this year, or is bigger than the iShares Core U.S. Aggregate Bond ETF (AGG).
Regards,
Ted
http://www.etf.com/sections/features-and-news/comparing-total-return-bond-etfs?nopaging=1

Hi, msf. Given the fact that we have had out-sized returns for the S&P 500 the last 5 years (average of about 15.5%), with some sectors much, much higher, it is natural to expect that we could well have some lean years if longer-term average numbers are to be trusted. The 10-year S&P 500 average return is only 7.4%, a long way from the outrageously long historical number, which some retirement web sites still allow using. So if we are to have future average returns of around 7%, there will need to be some very poor years to bring the market average down to that level. Or we could have one or two awful years. Perhaps the need to keep words to a minimum meant a deeper or clearer explanation was left out. I hope this clears the water.
As for bond yields, I think the fact that we are in totally uncharted waters with interest rates might result in strongly negative returns for bonds. I am not aware that so many countries have ever suckered poor souls to buy bonds with negative yields. And while U.S. yields are higher than 0%, many bond prices are so high as to suggest owners could have negative returns if rates move up by just 1%.
I am not suggesting returns for stocks or bonds is about to be hideous, but I do believe that using an assumed average return of more than 4-5% for retirement projections is unwise.

I blinked at that comment; presumed it was a misquote or misunderstanding, or a way of telling them they would never achieve his level of performance. I took a speed-reading course in high school, which might have made me a bit faster; but I'm presuming we are expecting the 16 hr day after your commute (during which you may read), so it's possible in that context, if not reasonable.

I am still holding ARTMX in a taxable account and it too has not performed well in the past 3-5 years. To add insult to injury, from 2013 to 2015 it has distributed LTCG's of 8% to 16% of NAV and with an ER of 1.19%.
I will cut the cord this year before its November distribution and put the proceeds in VIMAX and call it a day. I never had any business of tilting to Mid-Cap Growth in the first place.
Mona

M* Ultrashort Bond Fund Returns:
http://news.morningstar.com/fund-category-returns/ultrashort-bond/$FOCA$UB.aspx
IMHO they're getting closer, but still not worth the risk as a cash substitute. The heuristic I'm using is to take the SEC yield, subtract 1/2 * duration (assuming a 1/2% rate increase over the period of a year), and compare it with a 1% bank account.
If the fund has other risk factors, I ding it qualitatively (i.e. seat of the pants):
- junk bonds (credit risk),
- adjustable rate/mortgage bonds (these somewhat artificially lower the duration, or if you prefer have higher interest risk than is represented in their duration)
- other "esoterics" (notably PSHDX, though if you want to assume risk on your cash, this has definitely done well so far)
FWIW, the lead fund mentioned in the story, MAFRX, is available NTF at TDAmeritrade.

In Jan 2015 Richard Wiggins wrote a fascinating article at the Journal of Indexes called "Cloning DFA".
This "must read" article is available here: http://tinyurl.com/cloning-dfa
As noted by Mr Wiggins in his article:

However, low-cost funds, especially ETFs, now occupy every asset category offered by DFA. As new indexes have come to market, investors can get the unloved and unwanted part of the market for a lot less. Today DFA offerings are very close to what other major market benchmark providers deliver; the DFA U.S. Small Cap Value [DFSVX], for example, is not dissimilar from the iShares SmallCap 600 Value Index Fund (IJS|A-87). Where there’s not a perfect substitute, it’s rather easy to combine two less expensive funds and create an effective clone.

The article then proceeds to show how DFSVX can be cloned with a combination of two ETFs: VBR and IWC, the Vanguard Small Cap Value and the iShares Micro Cap, respectively. While DFA funds may only be available through financial advisors that have been approved by DFA, and can charge additional fees, the ETFs are open to anyone with a brokerage account.
Below are the current (Sep 2016) expense ratios of DFSVX, and the two ETFs used in the article. At the time that the article was published (Jan 2015) the ER of DFSVX was 52 bps, and the blended ER of the Vanguard and iShares ETFs was 17 bps.

DFSVX: 52 bps
VBR:    8 bps
IWC:   60 bps

A footnote to the conclusion of the article noted that:

The authors [of the JoI article] are working with Silicon Cloud Technologies, LLC which will offer software at PortfolioVisualizer.com that computes these factors automatically.

As originally noted by MJG in Feb 2014, that site - [https://www.portfoliovisualizer.com] - is available to all. Today, it contains (among other things) the following tools:
Fama French Factor Regression Analysis (For individual funds or ETFs)
Match Factor Analysis
Once you have identified a set of potential similar funds or ETFs - based on fundamental or factor analysis - to a target fund, you can use the latter tool to derive a two-investment "clone", based on either the results of factor regressions or historical performance. The site then provides various metrics that can be used to assess the quality (i.e. accuracy) and performance of the clone versus the target fund or investment.
Here, for example, is a clone as inspired by the article: http://tinyurl.com/dfsvx-vbr-iwc
Thought that others might find the website and Jan 2015 JofI article interesting.

FYI: (Click On Article Title At Top Of Google Search)
Investors tired of earning next to nothing on their savings are finally getting some relief.
Even as short-term Treasury rates stay excruciatingly low, interest earned on many kinds of short-term securities has been rising in recent months. Yields on ultrashort bond funds, which buy debt maturing in less than a year, have increased about 30% in the past 12 months. The average yield in the category is 0.5%, according to Morningstar, but many of them are yielding more than 1%.
Regards,
Ted
https://www.google.com/#q=Ultrashort+Bond+Funds:+Better+Yields,+Lower+Risk+Barron's
M*: Short-Term Bond Fund Returns:
http://news.morningstar.com/fund-category-returns/short-term-bond/$FOCA$CS.aspx

What a change from 2015 when MSCI index was down 15.4%. So taking the long term view and staying the course would help to invest in this volatile asset class.

FYI: The MSCI Emerging Markets Index is up 14.8% this year through August, including dividends, while the S&P 500 is up 7.8%
Regards,
Ted
http://www.investmentnews.com/article/20160902/BLOG09/160909987?template=printart

FYI: ETFs are shutting down at a record clip, but the shakeout is seen by some financial advisers as the natural evolution of a market saturated with too many funds.
Last month, 41 ETFs shut down, and 11 more are already slated to close in September. That compares to 40 closings through the first seven months of the year
Regards,
Ted
http://www.investmentnews.com/article/20160902/FREE/160909986?template=printart
Ron Rowland's August 2016 ETF Deathwatch:
http://investwithanedge.com/etf-deathwatch/august-2016

MFO profiled QUSIX here: http://www.mutualfundobserver.com/2015/02/pear-tree-polaris-foreign-value-small-cap-qusoxqusix-february-2015/
That said, if you like the thinking behind QUSIX, you might be more interested in their global strategy PGVFX: http://www.mutualfundobserver.com/2014/12/polaris-global-value-pgvfx-december-2014/
WAIOX has been a successful fund for a long time, defying its very high expenses.

I use VTMSX as my small-cap holding in a taxable account. IMO, it is very difficult to find consistent performers in actively managed small cap funds. It is easy to see who has hit home runs in the past... but not so easy to figure out who will hit the next home run going forward.
As gmarceau stated, this is not Bogleheads and index funds are not particularly interesting to write about. But I'm sure every reader here knows that index funds are always a valid option, especially when you lack the conviction or risk tolerance for the actively managed alternatives.
A few other small cap funds that I've looked at:
- Brown Company Management Small Company BCSIX: One of the few consistent performers and a frequent MFO Great Owl. Currently closed but has reopened from time to time.
- Pear Tree/Polaris Small Cap USBNX run by the Polaris team (disregard its prior performance, since Polaris only took over at the beginning of this year). Looks promising but I prefer their all-in-one strategy PGVFX, which was profiled on MFO.
- Artisan Global Small Cap ARTWX, run by the team behind ARTJX. Also profiled on MFO. Last year, I thought it looked volatile but potentially rewarding. Since then, it's been relatively disastrous. It might yet redeem itself eventually... or it might not.
- Driehaus Micro Cap Growth DMCRX: If February, this fund was -20% for the year (i.e. past two months). Now, it's almost +13% for the year. If you like volatility, check it out.

Robert Cochran's column, in its use of mean reversion and inflation/real return, has left me befuddled.
"Reversion to the mean" simply expresses the tendency of next year's returns to be closer to the long term mean than the current year's returns are.
Underlying mean reversion is the assumption that each year's performance is independent of the previous one's. That is, mean reversion applies to random variables.
Assuming a long term mean of 9-10% for stocks (as stated in the opening sentence), and assuming 2016's return comes out about 12% (extrapolating from 8% YTD), mean reversion suggests that it is more likely next year's returns will be lower (closer to the mean of 10%) than higher (further from the mean). That's all.
Many prognosticators suggest that stock returns going forward will average around 4-5% (with an assortment of solid reasons backing this up). Mean reversion would seem to cut against this, as it implies, quite literally, reversion (coming closer) to the mean of 10%. IMHO this just shows that mean reversion doesn't apply here - yearly returns are not random variables.
Regarding real returns and inflation - if inflation is assumed to run at 2-3% (it isn't now, but it is expected to increase), then SS should also increase in nominal terms 2-3%, not the 1% projected. In real terms (as measured by CPI-W), SS payments do not decrease.
The 5% average figure for bonds over the past 15 years suggests that "bonds" means 10 year bonds. See here (geometric average over past ten years was 4.71% for 10 year bonds). That same source also shows an average near 5% (4.96%) for the past 85 years. Arithmetic averages are similar, though slightly higher (a small fraction above 5%).
So it seems fair to use last century's (100 year) average real returns for 10 year bonds as "normal" returns. That average real return was around 1.6% in the US:

If you prefer, 1.7% real return for 1900-2002 (based on Shiller data)
So I don't understand what the big deal is about a 0-2% real return going forward. That sounds about normal.
If anything, achieving typical real returns with lower nominal returns and lower inflation is beneficial to fixed income investors. That's because taxes are based on nominal returns, not real returns. So achieving the same real returns and paying less in taxes (lower nominal returns) seems like a plus.
In the broad picture, I agree with the expectation that both stock and bond returns will be lower going forward. But not as explained. Stocks may violate mean reversion (i.e. overshoot the mean on the low side, rather than simply dropping closer to the mean). Parallel increases in prices and rates would keep bond real returns closer to zero.

Since Aug 2011, SCMFX could have been substituted with a fixed portfolio of ETFs: ~47% IJJ, 20% XLB, 8% XRT, 7% IGN, 7% PJP, 7% UUP, 5% FXL. Through Jul 2016, the ETF portfolio produced a ~23% higher cumulative return with a slightly lower volatility.
Similarly, SPMIX could have been substituted with an ETF portfolio of ~46% IJK, 44% IJJ, 5% FTC, 3% FNX, 3% IVOO, which by Jul 2016 produced a ~2% higher cumulative return with a slightly lower volatility. See goo.gl/2Z3V5Q

From Aug 2013 onwards, you could have substituted MSCFX with a fixed portfolio of ETFs: ~34% IJR, 15% PSCT, 13% KRE, 7% SLY, 7% FXR, 7% VPU, and a few smaller positions, of comparable return and smaller volatility. See goo.gl/2Z3V5Q

Cash is a sizeable amount within my portfolio's asset allocation with a range of 15% to 25%. According to a recent Xray analysis it is at its upper limit at 25% without being overweight cash. In the nearterm, it might just become overweight.

Take a look at the detailed analysis at goo.gl/pB1mTk

Hi steppinrazor,
I agree that reading 500 pages per day is a challenge beyond the reach of most folks. Especially elusive if some comprehension is a target goal. Doubly elusive if, like me, your education and experience are in the scientific or engineering fields.
For most folks a reading speed between 300' and 600 words per minute is the standard. Let's use 500 WPM as a good yardstick. An average page contains 500 words so that makes the calculation easy. It takes 1 minute to read a page. A 500 page reading assignment will absorb 500 minutes or 8.3 hours. That's a heavy load each day. I would fail that assignment.
My job demanded responding to government's Request for Proposal (RFP). Often there was a page limit specified. To say more, we used small type, almost zero margins, and multiple foldout pages. Those tricks increased our word count. I doubt it ever increased the odds of our team winning a contract.
Best Regards.