Crystal Balling: Expected Future VT Returns & Why

We all believe that Stock Markets in Average yield about a real 7% p.a. But at the same time, real returns in the last 5, 10 years were significantly beyond this. CAPE ratios are fairly high.

At the same time, consensus (which I agree to) is that market timing doesnt work. It would be wrong to refer to past excessive returns and conclude it was time to sell / buy less. Still… we are quite a few percentage points beyond the 7% average line.

So the question is: What Share Price Returns (real in CHF) do you expect from your VT? Lets say over the next 20 years? As most of us here are in a wealth accumulation phase… different around: with what return do you calculate when doing your business cases by when you would reach your target figure? And Why do you take these percentages?

Reason why I ask is that I see things a bit different these days. Given the boom we had at the back of melting interest rates (which are bound to reverse); I would going forward expect maybe 5% of real returns pre Tax / 4.3% Real Returns post Tax only…

How do you see this?

I ignore inflation and yields, so treat it as if it was cash under the mattress.

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At the moment it‘s 2% dividend. I calculate 4% on top of that on value growth, so 6% per annum. What inflation? You can‘t predict inflation (just like returns) currently things seem to get cheaper

Exactly, can’t predict inflation or returns, so I ignore them and also dividends and potential growth. It is a nice surprise/ bonus when returns are 6% p.a. and means I hit my so called FU number ealier.

I calculate everything with 6% nominal returns and 1% inflation. Assuming those numbers I’ll reach my FIRE number at 53.

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If by business case and target figure, we consider reaching my FIRE number, then the actual forward planning doesn’t matter too much to me: I’ll adapt to whatever real returns I get.

The 7% mean returns p.a. is an estimate anyway and the actual returns can vary wildly from one year to the other. What’s computed as taking 10 years in my calculations could actually take 7 or 20, and I have no way to know which would be the good one now.

So I’m using the 7% real returns figure for my calculations. In the short term, it’s probably underestimated, on the mid-long range, it may be over-evaluated. I’ll adapt my planning when we get there, what matters in the mean time is that I’m on the way.

If we’re talking about launching a business venture and building its business plan to test its viability and my prospects, I’d take a conservative 4% p.a. because I’d want to be as sure as I can reasonably be that I can pull it off before launching it.

Interesting, so @Cortana assumes 5% Real Return; vs. Wolverine assumes 7% real return. This Delta will heavily inform the accumulation phase. Time to build up the securities will be longer, and the amount will be higher, if we assume 5% only…

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Real stock return of the world is around 5.2% per year:

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Biggest factor in reaching your FIRE number is time. Let’s assume we want to hit 2 million CHF.

2000 CHF per month with 5% return = 33 years
2000 CHF per month with 6% return = 30 years
2000 CHF per month with 7% return = 27.5 years

3000 CHF per month with 5% return = 27 years
3000 CHF per month with 6% return = 24.5 years
3000 CHF per month with 7% return = 23 years

Here you see that by increasing your savings rate by 50%, you decrease the time by ~20%. Getting 5% instead of 7% also doesn’t have a dramatic impact as you just have to work a couple of years longer.

Nothing beats the compounding effect.


I had the same thought, the more you save the more you can accumulate. If the real return is lower than expected, it might just be a one or two years more work.

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Increasing your savingsrate decreases also your FIRE number.

Assuming a 3% SWR, the time decreases from 31 to 24 years for a 5% return if you decrease your expenses from 5000 chf to 4000 chf per month.

7 Years is quite a long time.

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Not sure your numbers support that…5.5 years is significant. Put another way, I’d rather have an extra 12000Fr to spend every year and get 7% than invest all of this extra money, get 5%, and arrive at the same amount in the end. I could buy a new carbon bike every year and still have money left over for a splitboard, a vacation, and maybe a 3 course meal plus dessert. But of course the future is not ours to see, que será será, etc.

Re: the original question… I don’t think the S&P 500 or whatever the 100+ year annualised rate is based on returned 7% in CHF-terms, so beware. Personally, I think it is a bit over-optimistic to assume anything above 5% in real terms, long term, when making projections.

As always, you should all be running Monte Carlo simulations with long-tail-adjusted Gaussian probability distributions or whatever you see fit. A number without +/- uncertainty means bugger-all.

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…should add the disclaimer that hypothetically I might need to settle for Ultegra to afford the dessert.

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The question is: Which information is not yet priced in?

But I feel you, I’ve been there
I was expecting a crash in 2014 or 15 and moved some of the cash out of the stock market (only to come back six months later at a higher price)

Don‘t get me wrong, I am not talking about market timing. My point is that the last 10 years return on shares was clearly beyond long term averages. So, one could conclude that we will somewhen have below average returns. This could as well be argued with the reduction in interest rate levels, that has reduced implicit capital costand therefore impacts future return Potenzial.

A reduction in assumed returns not onlymajes your savings duration longer; you consequentially as well need alower SWR aka… more money in the pod.

At the Moment, I expect about 5% of real returns on shares; but I fear that my expectations may be too high…

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So you think that we could calculate withabout 5% real returns in CHF, Pre-Tax?

I calculate with a 3.25% SWR

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I would calculate with 4-5% annualised returns, pre-tax, in real (i.e., inflation-adjusted) CHF terms, yes. This number may give you a “ballpark” idea of what to expect.

I was only half taking the piss earlier when I said that this number meant nothing and that everyone should be doing Monte Carlo modelling… But uncertainty quantification is far more meaningful than a single number.

(e.g., 10000 money units added every year, annual return = 5% +/- 10%)

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Same thing presented differently…

Keep in mind though that annual returns are not actually Gaussian distributed…

What about the equity risk premium though? (Since bonds are negative/zero)

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