Do you try to budget stock market returns?

Investing / Others
1

In my finance forecast, I have input for stock market gains. I put a placeholder 3.5% in there which proved to be hopelessly pessimistic for this year.

So I put in 8% for next year and 3.5% for years after that.

I guess the stock market return is not so important, I mainly need the income portion for my tax return and that part is much easier to estimate and less volatile.

However, the capital gain is also useful to estimate when I will reach my target FI date for retirement planning.

Does anyone else do these estimates and if so, how accurate was your 2024 figure and what do you have for future years?

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The video at link here explains a bit how to forecast returns in simple way. Skip to 42 mins

I think forecasting one year return would be very difficult. But I use gross 5% per annum (in CHF terms) for a 10 year horizon from Equity portfolio.

And if you are looking for some info, search for capital market assumptions from Blackrock, JPM, Vanguard etc. you can get a bit of idea.

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I do this but in a very basic way: assume 7%/year growth, plan out what I contribute per month, and what dividends are going to be thrown up, the last two numbers are easy to forecast.

Why were you so pessimistic though? And what makes you think 8% for next year and 3.5% after that? My own impression is a lot of volatility next year and more steady after that.

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Well if valuations are higher, then expected returns should be lower.

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Sure, but it’s been overvalued for ages and can remain so. A correction to fair value would require a 30-50% drop or flat prices for several years, but as we both know this could either not happen for many years…or what’s fair value will just be adjusted. Finance and economics are no more scientific than tea leaves reading, astrology or phrenology.

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I wouldn’t try to do yearly estimates of stock returns: the volatility can be wild and you can end up with -20% or +30% where you had budgeted for +5%. It’s not actionable in my mind, money that would have a use during the year should not be in the stock market so I don’t need to know how much I’ll gain or loose any individual year.

I do an estimation of the dividends and interests I expect to receive during the year, both for tax and charity donations purposes (I aim to give propotionally to my total income). For these, I simply use the value of my stocks at the beginning of the year, times 2%. It’s very rough, but that’s enough for me as my main salary still outpaces other incomes by a significant measure.

Edit: I do my longer term planing using 5% yearly returns over the years.

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Same here, I track and predict the payout (aka dividend) portion of my stock picked portfolio.

Since the portfolio is explicitly constructed to mainly contain reliable dividend payers and dividend growth companies, I feel the predictions work out rather well and in the past four years I’ve clocked in on about 4-5% CAGR for the portfolio’s dividends.*

Backtesting the current portfolio composition suggests an average dividend growth of 5.1% for the past 5 years and 6.4% for the past 10 years.
Being a risk-averse chicken, though, I only use 2% average dividend growth going forward in my planning spreadsheet sketching out the next couple of decades.

Share price predictions seem impossible to me, at least in the short term.
Long term (couple of decades) I’d expect my total return to average similar to the S&P 500 total return over the same time frame as my beta is close to 1.

* This works despite the occasional company slashing their dividend (like Intel, Walgreens Boots Alliance) and some keeping theirs steady (like Avangrid, LTC Properties).
There’s enough other companies who raise their dividend significantly (like the Bank of New York Mellon or Cummings).

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I dont budget stock price returns at all.

I have a fire goal in X years, but that is basically up to the market gods ± how many years I will reach that.

I only estimate taxable income for tax calculation purposes. Anything else will not tell me much and will be wildly off anyway.

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I use 3.5% to forecast my total wealth. A friend is applying expected returns per asset class, but I like things to remain simple.

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Here is Bogle’s model which only have info until 2014
Bogle sources of return

I think Vanguard folks must be using similar stuff for their long term capital market assumptions

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I do something very similar. Not relying on return predictions for anything, but for some stuff it’s nice to have a rough idea what a median outcome could be.

So I use 3.4 % real geometric returns[1] for the full portfolio, which has an ~80–85 % equity component.

  1. i.e., inflation- and volatility drag-adjusted, long-term, not by year ↩︎

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