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Comment by klodolph | Hacker News Reader

The assumptions of 4-5% market returns and 7% inflation seem a bit suspect to me.

Its an example of a possible scenario so not really possible to be suspect. All you need understand is that if inflation is greater than expected return potential you are in the described scenario. It can come about from either lever: confidence in returns is lost causing no one to invest, or inflation outstripping expected returns for a significant period of time (like in Venezuela).

> Its an example of a possible scenario so not really possible to be suspect.

This doesn't follow. I would expect any financial planner worth their salt to consider many different scenarios and make decisions based on which scenarios they think are likely... not based on which scenarios they think are possible.

The fact that it's possible for a decision to put you in a disadvantageous position does not mean that you made the wrong decision. It may just mean that you made a reasonable decision but failed to predict future market behavior.

The idea of using a 40-year high for inflation to do your long-term planning sounds like some pretty outrageous incompetence to me.

That's pretty accurate. Vanguard estimates US equities 10 year returns in the range of 2.3%-4.3%. And inflation is at 7% right now.

https://advisors.vanguard.com/insights/article/marketperspec...

It seems pretty unreasonable to take Vanguard’s equities return projections over the next 10 years and simultaneously ignore their inflation projection from that same source.

Equity returns and inflation are not independent and the assumptions that led to their equities prediction are embodied in their inflation prediction.

It’s only accurate if 7% inflation also persists for 10 years, which seems unlikely.

High inflation persisted in America in the 1970s. Why wouldn’t it happen again?

Because we have different Federal Reserve policy than we did in the 1970s, for one thing.

The fed in the 70s slowed inflation by raising interest rates to 20%. The current fed will never do that.

Correct. And there is a reason, at 10% interest rate, the federal government is bankrupt.

It could happen again, but equity returns wouldn't be sub-inflation for 10 years, because the real economy isn't shrinking by 4% a year.

Vanguard's estimate of returns is not independent of their estimate of inflation.

Vanguard estimates returns will be higher than inflation.

That estimate seems wildly low given that the S&P 500 has returned about 10% a year since its inception 65 years ago.

Also from your link, Vanguard estimates about 2% annualized inflation over the next 10 years.

Annualized returns for the S&P from 2013-2021 was ~15% per year. For 2019-2021 the average was 24% per year.

The idea is that future returns will be lower because those some of those expected future "real" gains (i.e. gains from growth and dividends) are already reflected in the current price (i.e. speculative gains). That these recent years of high returns are due to speculation is clear from the abnormally high PE ratio.

Of course, Bogle has been saying stuff like this for awhile, so who knows. He was saying that future gains would be lower back in '17, and look where we are now.

If I cast the slide ruler over these numbers it suggests the period of time is decreasing, while the returns for said period are increasing. Thus the next values in the series are as follows;

Full year 2022 +33%, H1 2023 +42%, Q3 2023 +51%, August 2023 +60%, first 10 days of Sep 2023 +69%

> 10 year returns in the range of 2.3%-4.3%. And inflation is at 7% right now.

Usually those sorts of estimates are on real returns, so factor in inflation (i.e. 2.3%-4.3% above inflation). That is about right in historical data over most 10 year periods.

That said there have been periods of negative real return, but are you sure this is what Vanguard is predicting?

Isn't it the exact scenario we are in today?

The trailing 12 month return for the S&P500 is a little over 16%. Other broad-based equity indices are also substantially higher than 5%.

The S&P500 is currently at ~4250. 12 months ago, it was at ~3898. That's a 9% return, is it not?

You have to add dividends to that. TTM is commonly calculated on full months:

https://ycharts.com/indicators/sp_500_12_month_total_return

Whole month returns, excluding dividends: https://ycharts.com/indicators/sp_500_1_year_return

What were they in the 1970s?

During the 1970s real returns were negative. Inflation-adjusted S&P 500 was 632 in 1970; it was 395 in 1980. After the 1970s it shot up; it was 788 in 1990, and then 2322 in 2000.

https://www.macrotrends.net/2324/sp-500-historical-chart-dat...

I've seen some academic papers remark that investors tend to undervalue the earnings side of inflation. They will discount future earnings by the high interest rates that go along with inflation, but they will fail to account for earnings growth that goes along with having a profitable business in a high-inflation environment, and for the changes in competitive dynamics that follows inflation. (When rates and expenses rise, it tends to flush out the more marginal and unprofitable firms, which means dominant firms have less competition.) Warren Buffett made a large portion of his fortune by investing in businesses with little competition during times of high inflation.

Basically, it's good to be a stock buyer in times of inflation, and bad to be a stock seller*.

That makes intuitive sense because stock valuations depend on interest rates. Long periods of low interest rates -> high P/E. Long periods of high interest rates -> low P/E.

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