Stupid question about estimating future ROI

[Gilgongo]

I've been playing about with some retirement calculators, and have, er.. a question.

If in my little spreadsheet I do a simple XIIR formula on my portfolio (80% of which is invested in the stock market), it's getting 5.65%. I've been investing for about 15 years.

Yet the retirement calculators that let you choose your expected future rate of return seem to assume that stock market investments (AKA "aggressive" or some such) get between 8% to 12%.

Am I missing something?

[Alaric]

Yet the retirement calculators that let you choose your expected future rate of return seem to assume that stock market investments (AKA "aggressive" or some such) get between 8% to 12%.

Am I missing something?

The current low interest rate environment is reducing the expected rate of return. Calculators and methods devised years ago may not have caught up with this yet.

Fifteen years ago, you could get 4.5% on Gilts, this year it's 1.5% and even then only on the longest issues most at capital risk to increases in yield.

[xeny]

Am I missing something?

What fees are you paying on your portfolio? Is it a primarily UK based portfolio, or worldwide?

If it's a portfolio with a long time horizon, as retirement implies, what has the other 20% been in if not equities?

vwrl, which I tend to use as a rule of thumb benchmark has averaged 12.7% over the past 5 years, so that might be a useful metric to compare against for the last 5 years.

[Gilgongo]

What fees are you paying on your portfolio? Is it a primarily UK based portfolio, or worldwide?

If it's a portfolio with a long time horizon, as retirement implies, what has the other 20% been in if not equities?

vwrl, which I tend to use as a rule of thumb benchmark has averaged 12.7% over the past 5 years, so that might be a useful metric to compare against for the last 5 years.

Thanks for your reply. Weighted average fees on the investments are running at 0.45% (incl. platform fees) as it's mostly in direct holdings (a HYP of mostly FTSE 100s), ITs (giving some international exposure) and some index-trackers (FTSE, DOW and India as ETFs). The other 20% is in an international corporate bonds ETF, a gold ETF and cash.

So if I use VWRL and assume conservatively a return of, say 10%, will that be realistic? Some of the calculators have Monte Carlo analysis which I guess will show me at least worse case too I suppose.

G

[JohnB]

How are you treating inflation? Are the other sites doing the same?

[Alaric]

So if I use VWRL and assume conservatively a return of, say 10%, will that be realistic?

I would have thought that on the high side. The dividend yield on the FTSE 100 is around 4.5%, so to get a return of 10%, you have to get dividend or price growth of 5.5% or 6% allowing for charges.

[TheRIT]

To compare I've been accurately tracking my annualised return on a diversified by country and asset class portfolio since 2007. After expenses and withholding taxes I've currently achieved 6.6% which is a real 3.8%.

[tjh290633]

The increase in capital value of my HYP since January 1st has been over 13%, with all dividends reinvested. Some years it is negative. Over the last 32 years it has given an XIIR of between 10 and 11%. I can't give the exact figure, as I am not at home.

TJH

[dealtn]

So if I use VWRL and assume conservatively a return of, say 10%, will that be realistic?

I would have thought that on the high side. The dividend yield on the FTSE 100 is around 4.5%, so to get a return of 10%, you have to get dividend or price growth of 5.5% or 6% allowing for charges.

Why do you think that is unrealistic? It would be fairly common I would think for FTSE 100 companies to have dividend cover of 2x, although I haven't checked. That suggests earnings returns of around 10%, with half paid out and half reinvested in the business to fund future growth.

The average return on capital on the companies in my portfolio is around 11% currently, with ROE higher still. I would expect, and history over the last decade or so backs this up, to have returns in excess of 10% per annum, albeit as an average, not every year in a smooth pattern.

[TUK020]

I would have thought that on the high side. The dividend yield on the FTSE 100 is around 4.5%, so to get a return of 10%, you have to get dividend or price growth of 5.5% or 6% allowing for charges.

Why do you think that is unrealistic? It would be fairly common I would think for FTSE 100 companies to have dividend cover of 2x, although I haven't checked. That suggests earnings returns of around 10%, with half paid out and half reinvested in the business to fund future growth.

The average return on capital on the companies in my portfolio is around 11% currently, with ROE higher still. I would expect, and history over the last decade or so backs this up, to have returns in excess of 10% per annum, albeit as an average, not every year in a smooth pattern.

I am afraid that I find this discussion a bit meaningless unless you spell out whether you are talking about real, inflation adjusted figures, or nominal ones.
From the figures quoted, I am guessing that we are talking nominal rates. What are the future inflation assumptions in this case?

[Hariseldon58]

Retirement calculators are not as useful as they appear...

We know that stock markets returns are very variable year by year. I have had a nominal return of around 11% since 1990 and that equates to around 8% real return.

When I started, I targeted a real return of around 4 or 5% a year and thus I have done better than expected, the present investment conditions have been very favourable for the last 10 years.

We tend to set our expectations based on recent experience and for those of us investing over say two or three decades, you might well have experienced two near 50% declines. It’s foolish to assume that over the next 10 years that your return will follow the last 10 years. We simply don’t know...

So a retirement calculator is pretty useless over a short period of time, returns are hugely variable on a yearly basis and in a longer period, say 25 years, returns may become less volatile, but a small change in the return assumed, significantly changes the calculated outcome.

I’d suggest that the OP invests as much as possible, with a sensible allocation and sticks to the policy through thick and thin and see what happens.

VWRL has done well for the last few years because the US is a dominant part of the index and has done well, the decline of the pound has given it a massive boost in the last 3 + years.

The pound may recover, the US market may stall, the return for the first decade of this century from US stocks was very poor and underperformed other international markets...

[tjh290633]

The increase in capital value of my HYP since January 1st has been over 13%, with all dividends reinvested. Some years it is negative. Over the last 32 years it has given an XIIR of between 10 and 11%. I can't give the exact figure, as I am not at home.

TJH

I've now had a chance to look at my figures. This table gives the values of my accumulation units on the date listed and the IRR from the year end listed to the present day.

Since        Acc Unit   IRR   
31-Dec-98        5.89    7.66%
30-Dec-99        6.85    7.25%
31-Dec-00        6.68    7.79%
31-Dec-01        6.43    8.48%
31-Dec-02        5.23   10.35%
31-Dec-03        6.38    9.65%
31-Dec-04        7.59    9.05%
30-Dec-05        9.69    7.82%
31-Dec-06       12.25    6.49%
31-Dec-07       12.41    6.94%
31-Dec-08        7.41   12.85%
31-Dec-09       10.24   10.56%
31-Dec-10       12.32    9.50%
31-Dec-11       13.45    9.54%
31-Dec-12       15.80    8.43%
31-Dec-13       19.56    5.98%
31-Dec-14       20.34    6.40%
31-Dec-15       21.42    6.69%
31-Dec-16       24.37    4.27%
29-Dec-17       26.70    1.46%
31-Dec-18       24.06   17.51%

I've used the figures for my accumulation units, since this eliminates the effects of withdrawals of cash from the portfolio, which happen at irregular times. The effects of bear markets are obvious. The last figure is for a part year only.

The current IRR for the 32 years since April 1987 is 9.80%. The current unit value is £27.41.

TJH

[EthicsGradient]

Odd IRR figures in the loss years, tjh29063 - are there minus signs missing?

[tjh290633]

Odd IRR figures in the loss years, tjh29063 - are there minus signs missing?

No. The IRRs are from the ends of those years to the present day. They are all positive.

TJH

[TheRIT]

...

Since        Acc Unit   IRR   
...
31-Dec-07       12.41    6.94%
...

...

I found the 6.94% very interesting. Thanks for sharing.

Our investing strategies are very different with my portfolio only containing a HYP worth about 6% of my portfolio. Overall my portfolio is a diversified by country and asset class (equities, corporate bonds, index linked gilts, NS&I ILSC's, cash, gold, UK/Europe REIT's) and I've managed 6.6% as mentioned above over the same period. What I found interesting is that I've under performed you by 0.4%. I thought under performance would have been worse as I know my 36% allocated to bonds/cash is definitely affecting performance in the hope of also reducing volatility. Possibly a nice example of Modern Portfolio Theory at work.

[tjh290633]

...

Since        Acc Unit   IRR   
...
31-Dec-07       12.41    6.94%
...

...

I found the 6.94% very interesting. Thanks for sharing.

Our investing strategies are very different with my portfolio only containing a HYP worth about 6% of my portfolio. Overall my portfolio is a diversified by country and asset class (equities, corporate bonds, index linked gilts, NS&I ILSC's, cash, gold, UK/Europe REIT's) and I've managed 6.6% as mentioned above over the same period. What I found interesting is that I've under performed you by 0.4%. I thought under performance would have been worse as I know my 36% allocated to bonds/cash is definitely affecting performance in the hope of also reducing volatility. Possibly a nice example of Modern Portfolio Theory at work.

The fact that my portfolio fell by about 50% in the following year, and had to be rebuilt considerably to get the income back to its previous level, no doubt reduced the rate of return over that period.

TJH