As many of you have been following, Mrs. 39 Months and I have been seeing a financial advisor for the last 2 months, reviewing our finances and getting a second opinion on when we’ll have reached FI. There has been some give & take on expenses, investments, inflation rates, etc. Overall, I’ve been pleased, especially as it has helped get Mrs. 39 Months and myself on the same page.

One of the big “bones of contention” between myself and the advisor has been the subject of investment returns. We’re already being somewhat conservative on inflation (setting it at 3.25%, and 6% for medical inflation). Then the advisor is using very low (in my opinion) estimates on investment returns for the next 40 years. Here is what he is using before inflation is taken out (i.e. the real returns will be lower than this):

Asset Class Total
Large Cap Growth Equity 5.03%
Large Cap Value Equity 6.08%
Mid Cap Equity 6.07%
Small Cap Equity 7.24%
US REITS 6.34%
International Equity 7.60%
Emerging Markets Equity 7.27%
Long Term Bonds 3.40%
Intermediate Term Bonds 3.69%
Short Term Bonds 3.48%
High Yield Bonds 6.07%
International Bonds 2.73%
Cash 2.68%

Thus, after inflation of 3.25%, you can only expect to get around 2.5% – 2.75% after investing in the S&P 500. What the…? Based on my current allocation strategy, this would give me a 5.75% return per year. Minus the 3.25% inflation, I’m looking at a 2.5% return. That is going to make it very difficult to make it to 99, even if I don’t retire early!

Historically, since 1930, here are some of the returns, based on market watch report

  • S&P 500: 9.7% (4.7% more than the advisor is using)
  • Large-Cap value: 11.2% (5.1% more than the advisor using)
  • Small Cap: 12.70% (5.5% more than the advisor is using)
  • Small Cap Value: 14.40% (7.2% more than advisor is using)

If you go from 1925, the returns from the CRSP report shows the following

  • US Stocks: 9.8%
  • International stocks: 7.8%
  • Bonds: 5.1%
  • T-Bills: 3.7%
  • Inflation: 2.9%

I actually found a good site, the portfolio visualizer, which shows the returns each year, for a wide variety of asset classes, all the way back to 1972 (almost 50 years of data). While I would like to go back to the mid-1960s (right before the 1968 market, when it started to tank), this is good stuff. It has the inflation rates as well, so you really can dig into the numbers and do some analysis.

Based on this information, my average return for my allocation would be 15.1% vs. a 3.9% inflation, so 11.2% returns. Much better than 2.5%! Much better chance of lasting to 99!

 Still, we have had a tremendous run over the last 40 years of stocks. In the early 80s, the Reagan revolution and the Volker defeat of inflation launched a tremendous stock market surge that we have been living with for our adult lives. Most folks don’t remember how much “in the doldrums” the market was from 1968 – 1981. Now we have several knowleadgeable people saying those heady days of returns may be in for a pause of several decades.

Even Jack Bogle, the Vanguard mastermind, was predicting lower returns back in 2018 before he died. He estimated returns of around 4% annually for growth and 2% for dividend (total of 6%). He based this on expected economic growth and the historic P/E ratio versus current levels. He also estimated bond returns of 3.1% annually.

Since returns play such a vital role in all our plans to achieve FI, its critical that we look at them with an experienced eye, and make good estimates for our lives going forward.

What returns estimates are you using?

Mr. 39 Months

3 thoughts on “Returns”

    1. Not sure what you are saying here – are you saying you think the finance guy is correct? Just want to be clear, as I can see it both ways.

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