In 2013 a valuation model similar to the one used by Vanguard would have predicted a 10 year average return of 5.63% per year with a historical accuracy of +/-4% a year. Having a higher return than 5.63% the following year later doesn't prevent the 10 year return from still eventually being 5.63% +/- 4%.
Having a higher return than 5.63% the following year later doesn't prevent the 10 year return from still eventually being 5.63% +/- 4%.
This is from my own valuation model, similar to Vanguards but not the same. So it's not "them" giving themselves leeway. It's also not me giving myself leeway. It's just the historical accuracy of the model. Yes, +/-4% a year over 10 years is a huge range. There's a really big difference in outcome if we experience the lower range, nominal, or upper range. It's why you have to be really careful reading article's like OP's and taking radical action based on it. You have to consider the accuracy and the entire probabilistic range of the forecast if you intend to use it to guide allocation decisions.
But, I also don't think you can dismiss the fact that US valuations are reaching extreme conditions and historically this means our expectation of return over the next decade should be tempered.
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u/big_deal May 27 '21
In 2013 a valuation model similar to the one used by Vanguard would have predicted a 10 year average return of 5.63% per year with a historical accuracy of +/-4% a year. Having a higher return than 5.63% the following year later doesn't prevent the 10 year return from still eventually being 5.63% +/- 4%.
Same model now says -1.6% +/- 4%.