Tadas Viskanta put together a great compilation of thinking about future real returns. I was included in this “financial blogger wisdom” series which makes a lot of sense because my mom always told me that I am very smart and she’s never wrong.¹ So here’s what I said:
“It’s difficult to put together a high real return scenario given the many positives we’ve seen for the last 10+ years. The historical earnings and dividend yield has been about 7% on a rolling 10 year historical basis. But we’ve had pretty steady multiple expansion over the last 30+ years. If we assume that companies return their 7% earnings and dividend yield (perhaps optimistic) and we also assume that multiples don’t expand further (because they’re so historically high) then 7% is a safe starting point. Inflation has been 3% or so historically, but the good news for investors is that this has been trending down and given secular inflation headwinds, is likely to run closer to 2% than 3% in the future. So a 5% real return is a reasonable 10-year assumption.”
This is probably an excessively simple extrapolation of Bayes’ Theory. I am actually about to publish a longer paper detailing my thoughts there so stay tuned, but 5% real strikes me as a pretty reasonable assumption. If you combine bonds into this portfolio then the current 10 year yield of 2.8% gives you about 5.3% nominal and 3.3% on a real return basis for a 60/40 stock/bond portfolio. Not great, not terrible.
There were a ton of good answers there so go give it a read.
¹ – This is a total lie. I love you mom!
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.