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How Will You Invest with Low Stock Market Return?


How will you invest with low stock market return?Nobody knows how the stock market is going to perform in the short term so we shouldn’t worry about it. On the other hand, long term profit is more predictable. Historically, stocks return about 7% per year after adjusting for inflation. Passive investors (index funds) who are in it for the long haul can count on 7% and they don’t have worry about the day to day fluctuation. I’m a long term investor and plan to invest in the market for the next 40 years. However, I’ve been hearing more and more about the expected low return over the next 10 years. I’m in it for the long haul, but 10 years is a long time to live with low return. Would it be smart to adjust our investing strategy until things look better? I’m not sure and I would love to hear your opinions.

Low return

Experts are predicting low single digit return for stock over the next decade. John Bogel, the founder of Vanguard, in particular is a trusted voice and I’m inclined to believe him. Most of our stock investments are in low cost index funds and that is Mr. Bogel’s area of specialty. Here is the formula for calculating return from his book – Common Sense on Mutual Funds.


Here is what John Bogel has to say.

  • Dividend yield is 2%.
  • Earnings growth has been about 5%, but probably will slow down to 4% in the next 10 years.
  • The current P/E ratio is higher than average so it will probably come down to average at some point.

Total Return = 2% + 4% – (1 or 2%) = 4% to 5%

Once we adjust for inflation, the stock market index could return just 1-3% over the next 10 years. I think this prediction is probably accurate for passive index funds, the kind we’re invested in. John Bogel’s prediction may not work for active investors who invest in individual stocks and derivative. Those people depends more on skill (luck?) and not the average market return. Many other experts also expect low return over the next decade and I’ve been hearing it more often.


We can see that the Shiller PE ratio is creeping into the dot com territory. Nobody knows what’s going to happen in the next few years, though. The stock market might keep going up and reach the dot com bubble height or it could taper off.


Some scenarios

Let’s say the experts are right and stock will return about 3% over the next 10 years. Let’s look at some scenarios and see what we can expect.


Scenario 1 would be a slow 3% rise over the next 10 years. This would be easy for investors to handle because there will be no volatility. Of course, this is unrealistic. The stock market is volatile and we will see some ups and downs.


Scenario 2 looks like the last 10 years on the stock market. We’d see a bit more growth, a big crash, and then a long recovery. This would be great for young people who has good income and can invest more. However, it would be horrible for people who retire in 2017 and 2018.

Or we could see a lot of ups and downs with a general upward trend. This would be good for working people as long as they can handle the volatility and keep investing.

What can investors do?

The graphs all look different, but the outcome is the same for long term investors. We’d see low profit from the stock market for the next 10 years. 3% is very low especially if you have to sit through a few years of stomach churning drops. Are there some ways to increase our return on investment?

  1. Save more

One sure way to increase your total profit is to invest more. Investing $1,000 per month with 3% return will give you about $140,000 after 10 years. However, if we increase the monthly saving from $1,000 to $1,100, then we’d have $154,000 at the end. Saving more is the only guarantee way to boost your total profit.

*This is especially important when you’re early in the investing game. Your saving rate matters a lot more than return. If you save as much as you can, you’ll do well in the long haul.

  1. Take on more risk

Investors who are willing to take on more risk might be able to increase their return. The US equity market had done very well over the last 9 years. During that period, the rest of the world has underperformed the US significantly. Experts think this will change in the next decade so now might be a good time to invest in emerging markets and Europe. To US investors, this will sound risky. The US stock market has been doing very well and who’d want to sell and move their money to emerging market? Investors might need to do this to increase their return over the next decade, though.

  1. Diversify with real estate

The real estate sector is doing very well again. Home price has been rising all over the country and the interest rate is still low. It is still a good time to invest in real estate in many part of the US. Real estate has a low correlation to stocks and bonds so this is a good diversification. Real estate has a good chance of beating the expected low return from the stock market. Here are some ways to invest in real estate.

  • Invest in a rental property. This one can pay off big, but a lot of people don’t want to be a landlord. We own a duplex and a one bedroom apartment. The cash flow has been improving and the appreciation is great too. They aren’t a lot of trouble unless something breaks. Turning over a unit is a lot of work, though.
  • Invest in real estate investment trusts, REITs. This is the easy way to invest in real estate. Regular investors can invest in various sectors such as apartment buildings, hotels or hospitals. However, REITs fell along with the S&P 500 index in 2008. They are public companies and can be influence by the stock market.
  • Invest in real estate crowdfunding. This is a relatively new way to invest. Investors pool their money and invest in a project they like. I started investing with RealtyShares earlier this year and it has been good so far. There are different types of projects to invest in and they are spread all over the US. I’ve seen strip malls, apartments, single family home, data center, and more. I like RealtyShares because it gives me a way to diversify away from the local real estate market.

*Disclosure: We may receive a referral fee if you sign up for a service through the links on this page.

Our portfolio

Let’s take a quick look at our portfolio. Actually, this is our net worth. It includes our primary residence and other personal properties. They add up to about 5% of this chart so it shouldn’t screw up the percentage too much.

RB40 Asset Class

  • US stocks – 33%. This is probably a little low compare to most investors. I think it’s about right for this low return environment.
  • Bonds – 13%. The bonds yield is right around inflation so the return is even worse than stock. I have bonds in case we have a big stock market crash. We will sell some bonds and buy stock when the time is right.
  • International stocks – 14%. International stocks haven’t done well compare to US stocks over the last few years, but that could change in the next decade. If the experts are right, then we’ll get a boost to our profit from this sector.
  • Alternatives – 4%. REITs
  • Rentals – 24%. Our rentals are worth quite a bit due to appreciation. However, all our properties are in Portland and I need to diversify away from the local area. Portland is booming now, but I seriously doubt it will last. There just aren’t enough good jobs here. That’s why I plan to increase our investment with RealtyShares over the next few years.
  • Primary residence – 5%. Also in Portland… At least our primary residence is just 5% of our net worth. That’s a point on my pop quiz – How serious are you about early retirement.
  • IP – 4%. Retire by 40 is valued conservatively at 3x our 2016 income.
  • Cash – 1%. We’re building up our cash position. It’s tough because I’d rather invest the cash than having it in the bank.
  • Others – 1%. Personal property.

I feel okay about our current asset allocation. US stocks is the biggest part of our portfolio, but it’s not huge. It looks like we’re diversified and should do okay over the next decade. The only big problem I see is the big 29% chunk in Portland real estate. We’ll have to work on that.

What about you? Do you have any plan to deal with the expected low return environment? Will you stay the course or make some adjustments?

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Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, he couldn't stomach the corporate BS.

Joe left his engineering career behind to become a stay-at-home dad/blogger at 38. Today, he blogs about financial independence, early retirement, investing, and living a frugal lifestyle. See how he generates Passive Income here.

Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help DIY investors analyze their portfolio and plan for retirement.
{ 72 comments… add one }
  • Michael @ Financially Alert May 25, 2017, 2:16 am

    Hi Joe, if we enter into a slow growth period, I’d probably look into some additional deals with RealtyShares. But, rather than equity deals, I’ll look for the debt deals that pay a consistent 8-9%.

    If we had a significant drop (>20%) in equities, I’d consider putting our cash to work.

    Other than that, I’d also consider some side hustles that I’d have more control over than a slow growth stock market.

    • retirebyforty May 25, 2017, 7:04 am

      I think investing in a business is a great idea. It might be tough if the economy isn’t doing well, though.

    • Oliver @ Appreneurinvestor.com May 25, 2017, 3:42 pm

      Just signed up for RealtyShare not too long ago and I’ve been doing exactly that. Debt deals! It’s nice for a little side income where there isn’t much to do. It does take a little bit for everything to go through tho. Been flirting with the idea of turnkey properties in easier areas outside of California too.

  • Pennypincher May 25, 2017, 2:34 am

    Low returns on both stocks and bonds now? Where to run? Saving more, living within or below ones means is the new reality, I guess. I know it all doesn’t sit well when you have a college education to fund.
    On the # 1 rated money show, Wealth Track (PBS), a well noted economist kept mentioning a possible recession in about 2 years. Great! This show always gives the best advice on a well invested, widely diversified portfolio for the long term.
    The thing about REITs is when they drop, they drop for a long time-long recovery.
    Once again, saving more, living w/in one’s means is the new reality.

    • retirebyforty May 25, 2017, 8:57 am

      I think saving more is the key too. I haven’t watch Wealth Track. Thanks for sharing. I can watch in online.

  • Financial Coach Brad May 25, 2017, 3:19 am

    I’m in it for the long-haul and not making any adjustments – even though I’m already in retirement mode (yes, in my 40s).

    We’re 90% in stocks and 10% cash (includes emergency fund and cash reserves). Of the stocks we’re about 50/50 on US and International.

    Different experts have been predicting lower returns for years now. Yet the S&P500 has averaged just over 10% the past three years. And 75% of companies reporting are beating their estimates lately. P/E ratios will go lower, but likely due to increased earnings – which is a good thing.

    I’m still very bullish about the market.

    • retirebyforty May 25, 2017, 8:59 am

      50% international is a lot! I think you’re well positioned for the next decade.
      I’m not bullish about the market at all. We’ll see how it goes over the next few years.

  • Mustard Seed Money May 25, 2017, 3:20 am

    Since I don’t need the money anytime soon, I won’t chase returns. I tried to do that in the 2000s when things were a bit dicey and I didn’t do so well. So I’ll stick with what I know which is slowly building my positions in passive index funds. I’ll try to continue to be disciplined and if I can I’ll continue throwing money in the market and letting it work. Easier said than done though 🙂

    • retirebyforty May 25, 2017, 9:09 am

      Sticking to the plan is a great idea. What’s your asset allocation?

  • The Tepid Tamale May 25, 2017, 3:41 am

    “You’re killing me smalls!”

    As someone still in the trenches, early on in building my portfolio, this is somewhat sobering. Most of the people that have succeeded have done so in a very favorable market. What do I do in light of these predictions? A couple of things come to mind ….
    1. As the comments above reflect: Stay the course. I am not an index, can predict just about nothing. I will continue to form a lifestyle of saving. (It does make me feel my decision to pay down my mortgage and invest is a good decision, for me.)
    2. Predict a Bull Market, as Brad does above. I think there is a lot to ‘self-fulfilling prophecies’. So, if we want a Bull Market, let’s make on happen!

    • retirebyforty May 25, 2017, 9:11 am

      If you’re still early in the process, then the saving rate matters a lot more than return. Just keep saving as much as you can and you’ll do fine. Good luck!

  • [email protected] May 25, 2017, 3:50 am

    We just put our 8-unit apartment complex on the market yesterday. It’s a win-win because the realtor would manage it for us this fall (when we want to start traveling a lot more) if it doesn’t sell. We’re excited about that too – since we couldn’t find a good property manager! He has it listed for almost $200K more than we bought it for – so we’ll see what happens. We’d be happy if it sold for even $100K more! We’ll see though. We want to get into the real estate crowdfunding too. I’ll be following along here to see what others plan to do (or not do!)

    • retirebyforty May 25, 2017, 9:13 am

      Good luck with the apartment. I haven’t been able to find a great property manager either. They just don’t take care of your property like you do. They are always too busy.

  • Budget on a Stick May 25, 2017, 4:20 am

    Our hope is to get into real estate in the next 5-7 years. For the time being we will probably just stay the course since our early retirement date is still quite a ways out.

    Luckily for use that may be moved up since will be able to start pumping a lot more into retirement in 3 years and if that is during a dip even better!

    • retirebyforty May 25, 2017, 9:28 am

      I updated the post. Saving rate matters a lot more than return when you’re early in the game. Keep investing and you’ll do very well. Good luck!

  • Apathy Ends May 25, 2017, 4:35 am

    I won’t change our strategy up too much, we do want to get into real estate – but that will be when our student loans are paid off.

    Maybe I will get impatient – I am ok with taking more risk and might pump up our small cap or international exposure if it gets to slow

  • Ms. Frugal Asian Finance May 25, 2017, 4:38 am

    Great analysis! I’ve also head and read that the market return is going to be slow over the next few years due to the market cycle.

    I’m still holding my breath. If the market is not doing well and if we don’t lose our jobs, Mr. FAF and I will look into buying another house. We are not too worried unless one of us loses our job.

    • retirebyforty May 25, 2017, 9:31 am

      You’re still young so keep investing. At this point, saving rate is a lot more important than return. Keep at it.

  • Jay May 25, 2017, 5:10 am

    Great post! It’s scary how many people are dependent on historical market returns – and might be in tough times if faced with the inflation-adjusted stock market returns you’ve proposed. That said, better to prepare than hide our heads in the sand! For me I think a balance of taking a bit more risk and saving more of my incoming cash flow should be enough, but I guess only time will tell!

  • Mark May 25, 2017, 5:19 am

    Good topic.
    Two problems in your text. Saving more will not return more…this is an illusion. The relative return is the same.
    In 2008, the real estate sector (along w/ banks of course) was actually the trigger of the S&P500 crash not the opposite like you said.
    I would and I am shifting some of my portfolio towards some very selected sector in the emerging markets according to the macro economy aspects of the modern world.

    • retirebyforty May 25, 2017, 9:43 am

      I meant total return. Is that the right word? You just get more profit when you invest more.
      You’re right about 2008.

  • Grant @ Life Prep Couple May 25, 2017, 5:46 am

    I am interested in trying to diversify a bit into real estate but I will still be staying heavy in stocks.

    I have been hearing we were due for a market correction for several years and it hasn’t happened yet.

    • retirebyforty May 25, 2017, 9:45 am

      We’ll get a market correction at some point. Or maybe we’ll just get slow growth. The low return is solid reasoning to me.

  • The Grounded Engineer May 25, 2017, 5:51 am

    I don’t plan to change my investment strategy for retirement accounts: 401(k), Roth’s and HSA. I’ll stay with an aggressive investment strategy in these accounts. I’m young, and I plan to ride a few market ups and downs over the next 50+ years.

    I want to diversify by amping up my investment into my taxable account and into real estate.

    • retirebyforty May 25, 2017, 9:45 am

      Keep at it. I think real estate will beat stock in the next decade especially if you can leverage.

  • vivivanne May 25, 2017, 6:43 am

    I’ll leave my 401K the same. My company doesn’t allow individual stock pick, so I just pick the S&P 500 and let it ride. I’ve reach FI in 2015 and continue working, I’ve been strengthening my Real estate business, and now using the extra income to re-build my dividend portfolio. I still enjoy hand picking a small number of share on selected companies.

    However, I might left out some impressive growth companies that don’t pay dividend, I guess, I’d let my 401K capture those companies. LOL 🙂

    • retirebyforty May 25, 2017, 9:46 am

      I’m letting my index fund capture Apple, Facebook, and those companies too. They are such a big part of the index fund now.

  • [email protected] May 25, 2017, 6:52 am

    I was pondering this exact topic recently after hearing what Mr. Bogle predicted. I think I will look more into real estate (I have only 1 rental property right now). However, the real estate market seems a little tighter too and the good deals are tougher to find. I’ve also gotten into crowdfunding real estate and will be interested in going that route too.

    • retirebyforty May 25, 2017, 9:47 am

      Real estate is very location dependent. Portland is doing very well, but I don’t think we can keep it up for long. Not sure about CA. It is very expensive there too.

  • Mr Crazy Kicks May 25, 2017, 7:14 am

    We’re staying the course. Trying to get too fancy never did me any good. We do have some REIT, International stock, and physical real estate. So I feel diversified well enough.

    At least if the next ten years are slow, we can look forward to a good ten after that 🙂

    • retirebyforty May 25, 2017, 9:47 am

      Stay the course is a good move. Less stress. 🙂

  • Dads Dollars Debts May 25, 2017, 7:23 am

    I am on a set it and forget it path right now. I figure once my net worth hits a certain number, or I begin to get near retirement (10 years at least in reality), then I can revisit my allocations.

  • Brian - Rental Mindset May 25, 2017, 7:27 am

    You are right – it matters for people who want to retire in the next few years. If you don’t? Think about how you can invest best for your timeline.

    My conclusion is that rental properties are best when someone has 10+ years. Owning them yourself let’s you use cheap leverage, which is where the returns are killer (and safe with a long outlook). Plus you don’t have to be a landlord if you don’t want to – many investors and I hire property managers to take care of almost everything.

    • retirebyforty May 25, 2017, 9:56 am

      I like rental properties in the next 10+ years too. With low return on the stock market, real estate is the way to go.

  • freebird May 25, 2017, 7:32 am

    Actually this slow and steady grind hasn’t worked all that well for me because I go for recovery plays. So shifting to low returns and higher volatility would be something I look forward to. My cash balance is really high now thanks to a few years and counting of deferred ER, so happy to shop a wider candidate pool. Lower returns also means less FOMO when holding cash instead of index funds.

    FWIW most of my tax-deferred holdings are ‘international stock funds’, been this way for a long time. Not cut out to be a landlord but I’ve been buying real estate related shares.

    • retirebyforty May 25, 2017, 9:58 am

      The thing with higher volatility is that it’s tough to time the market. I guess DCA would work better with higher volatility. International stock hadn’t done that great over the last few years. Hopefully, they’ll make a come back soon.

  • Dividend Growth Investor May 25, 2017, 8:15 am

    It is time in the market that counts, not timing the market, right? For everyone in the accumulation phase, they should just keep investing, through thick or thin. It is quite possible that real returns are low to non-existent for the next decade. However, the decade after that could produce amazing returns. For example, we had no returns 2000 – 2012, but 1982 – 1999 had awesome returns. 1965 – 1982 produced terrible returns, but the 20 years prior to that produced awesome returns. You just have to keep investing, and realize that 7%/year is just an average over a 30 – 40 year investing career.

    For retirees, they should just live off that passive income (dividends, interests, rents,pensions, social security etc).

    Now is the time to remind yourself to stay the course. The stock market is a giant distraction from the business of investing. I found that by focusing on the dividend income stream, I am less likely to panic when stock prices crash and also I am less likely to call the top and sell out during a bull market. In investing, being lazy and doing nothing is usually the correct thing to do 99% of the time.

    • retirebyforty May 25, 2017, 10:00 am

      Dividend investing is a great way to change focus. As long as the income is good, then you don’t have to worry about the stock price. In fact, dividend gets better when stock is down. You’re doing it right. Thanks for your input.

  • Dividend Diplomats May 25, 2017, 8:35 am

    Number 2 made me cringe when I read it. Something about changing your investment strategy to take on additional risk would have me nervous. Be prepared for the downside that would come along with the potential upside. It is hard as heck to predict what the future has in store and therefore, I would not change how I invest in the market because of potential low returns. I’m in the camp that I will continue to invest in high quality dividend growth stocks here that have been through many different economic cycles, some high growth periods and some low growth cycles. If you are in it for the long term, then you have to look past the short term period and stick to your equity investment strategy (in my opinion).

    Real estate though is a different story. If you find value and have that as a part of your final strategy, then take advantage of a potential great deal. It may not be a bad use of extra capital if this is the best option available.

    Hopefully my answer makes sense and helps. Not an easy decision and all of this would be much better if we had a crystal ball to predict the future.


    • retirebyforty May 25, 2017, 9:46 pm

      That’s good advice. If you’re going to take on more risk, then be prepare for bigger swings…

  • David Michael May 25, 2017, 9:26 am

    Amazing how age makes such a difference in investment goals. Now that we are in our eighties, we have sold everything to simplyify our lives except dividend paying stocks and Treasury Bonds (I Bonds). What I have learned over the years, is how important it is to have a rock solid investment as a base that will survive whether we have a crash or some other economic disaster. For my wife and I, that was I Bonds that we purchased over 18 years ago. We have enjoyed over a 5% return every year. Because we need immediate income on our stocks, we have the other 50% in BDC (Business Development Companies), REITs, and Utilities. They pay about 7% return on average. Together with Social Security that provides enough for us to live a simple but an enjoyable lifestyle which includes travel abroad. Whenever we need more money, I take a seasonable job for three months. There are tons of jobs out there for seniors. Next week we leave for two months of travel in a our converted cargo van as a camper to Vermont, Maine, and the Boundary Waters in Minnesota to be with family, friends, and kayak the beautiful lakes. Thanks Joe for illustrating how important dividend paying stocks are for one’s retirement.

    • retirebyforty May 25, 2017, 9:48 pm

      Your I Bonds return is great great. My I Bonds rate just 1%. I’ll have to keep this lesson in mind if we ever see high interest rate again. Enjoy your travel!

  • Friendly Russian May 25, 2017, 10:55 am

    I think our goal and strategy wouldn’t change at all. Our principles are really easy and they work in every economy.
    – Stay debt free
    – Spend less, significantly less than you make
    – Invest as much as you can.
    – Repeat.

    Of course, being in a low economy environment it’s always nice to have more cash, but at the same time, it’s nice to invest more, because you’re buying with huge discount.

  • Jason In Vancouver May 25, 2017, 12:33 pm

    Based on our current spend over the past few years and my target for retirement in 5 years, I’ve been using 6% nominal returns for my investment calculations. My portfolio is split between a concentration of Canadian dividend growth stocks and also Canadian, US, International, and Emerging Market index funds (and a bit of bonds and cash). I’m hoping to grow my Canadian dividends to a point which supports our core spending. The thing with the Canadian blue chip dividend growers is that a number of them (currently) yield around 3.5%-4.5%. We’re talking about banks/financials, telecoms, utilities, and pipelines which have wide moats due to regulation and somewhat restricted competition; though they are not invincible and are vulnerable to specific threats. For foreign investors, there’s obviously currency fluctuation risk. WRT my index funds, I am skewing towards a bit larger mix of international and EM funds. That’s kind of where the growth is expected, hoping they will catch up to how well the US markets have been. But I’m don’t feel I need that large of a boost to get to my 6% target.

  • Mr. All Things Money May 25, 2017, 1:21 pm

    If I’m not mistaken, Boggle was talking about broader market returns such as from a low cost Index Fund. I guess slow growth is expected, the stock market can’t continue to give out double digit returns when the cumulative earnings are declining.
    This is the downside of investing in index funds, you are stuck with what broader market returns. I guess you get what you pay for in terms of cost of investing and effort.
    For people who want to put more effort in investing, the slowing broader market should not be an issue as there are always individual stocks that are selling cheap and have double digit return potential.
    For example, REITs have been down recently and provide a good opportunity to lock into a great dividend yield with a high total return potential. I’ve been buying VNQ (Vanguard REIT ETF) in my IRA account for the past month or so as it has been close to its 52week low while giving out a yield of around 4.5%.
    There are also beaten down stocks in technology, pharma, and telcomm that are cheaper than broader market e.g. QCOM, T, VZ, PFE, etc.
    Point I’m trying to make is if you are willing to be an active investor, there are plenty of stocks that can get you a double digit return regardless of the market.

    • retirebyforty May 25, 2017, 9:50 pm

      Yes, this is about the broader market.
      If you can beat the market, then I’m sure you’ll do well in any condition. Unfortunately, most people can’t do that. Good idea about REIT, though. Might be a good time to add a little more to my VNQ.

  • Kevin @39months.com May 25, 2017, 2:29 pm

    Great post. I’m thinking that the market is going to “correct” in the next 24 months, and then continue going up. I intend to continue to invest monthly and dollar cost average.

    Since we paid off our mortgage last year, I take that money and buy income items into a portfolio (REITs, Dividend stocks & Intermediate bonds).

    For our Roth IRAs and 401K, I am at 30% bonds, and then split the remaining 70% evenly betweeon index funds in S&P 500, Small Cap, REITs and International.

    I think its about as balanced as I want to be at 53 years old, and I’ll continue to go with it for the 38 months remaining till FIRE

  • Fred May 25, 2017, 6:53 pm

    CAPE is definitely on the higher-end right now. I’ve been trying to read the tea leaves myself but honestly it’s pretty tough. I’ve been trying to figure out where the bubble is and the only thing I can really come up with is US Debt. We’ve got a lot of debt but it’s not at historically unprecedented levels. And debt-based drag on the economy can be somewhat mitigated by the central bank lowering rates in the future. (Assuming they keep a steady run up.)

    So here’s my prediction:

    If tax changes that cuts corporate rates ends up passing, we’re going to get one more “bump” out of the total US market – somewhere in the range of 7-10% from DOW 21,000. That will price in earnings growth for the next 5-7 years. The market will be pretty flat after that, maybe with some downturn.

    I also think we’re about to hit another tech boom not quite as significant as the internet boom but pretty significant. That tech boom is coming from two areas: IOT and self-driving cars. Especially when self-driving cars hits, productivity goes through the roof. We’ll have to mitigate unemployment issues, but shipping costs dive big-time – huge economic boom.

    So I think there’s another 7-10% to be had in the short run (with tax legislation) before we’re in for the long slog of slower returns, some pullbacks, etc. I could easily see a 10% correction, but I don’t see a 40% correction coming.

    • retirebyforty May 25, 2017, 9:53 pm

      Thank you for your input. It’d be great if your prediction comes true. We’d all be a lot richer! 🙂
      I don’t believe in IOT, but I’m 90% wrong about these kind of things. Self driving car is definitely a game changer. Good call.

    • Joe May 26, 2017, 2:01 pm

      I think the coming tech boom will be bigger than anyone thinks. It’s not just about self-driving cars. The AI and deep learning techniques being applied to self-driving cars will be applied to every other data-intensive industry, including medical, manufacturing, social media, advertising, oil exploration, biotech, entertainment, finance, etc etc. The productivity gains are going to be huge.

      • Fred May 26, 2017, 2:07 pm

        That’s a very good point, Joe. We’re already seeing some impressive results with Google Assistant and Alexa, and I heard that IBM’s Watson is better at diagnosing patients based on symptoms than Doctors are. That’s not surprising, but it is pretty amazing nonetheless. A huge boom is coming – I agree.

  • FIREin' London May 25, 2017, 11:35 pm

    Hi Jo,

    A very good question! For the bulk, I am sticking with just throwing cash into the regular investments (a mix of active and passive) and letting the market do what it wants to do. The only exception is the part that I actively manage. Once I am back to my target allocation then I will be going for stock selection which will hopefully give me better performance, but who knows.
    As you rightly say at the top – just invest more 🙂

  • Jo May 26, 2017, 2:50 am

    Back in 2008 my portfolio lost 50% and I had to delay my ER. I hope it will never happen again but I know it may come one day.
    Now I hold cash that covers 5 years of expenses. In case of a crash I hope to hold my breath and stay the course while living out of that cash.

    • Joe May 26, 2017, 2:03 pm

      The last crash in 2008 hit one year after my early retirement… interesting days! Hope everyone is prepared for the next one.

    • retirebyforty May 28, 2017, 10:58 am

      Good luck! I hope your portfolio has recovered since then. Holding cash is a good idea when you’re retiring.

  • SMM May 26, 2017, 12:19 pm

    “early in the investing game. Your saving rate matters a lot more than return”

    Your post is reassuring because I feel like I’m doing a lot of these things. I’d continue to invest because at least I’d be buying in at a low price. I have a looonnnnngggg way to go until retirement and wouldn’t want to miss the next wave by not investing and deciding when is the best time to get back in. ONE thing I admit I need to work on is not look at the market so often.

  • Mr. Tako May 27, 2017, 4:33 am

    Hi Joe. I’ve always believed in the 3% rule instead of the 4% rule because I’ve always believe lower returns were much more likely in the future.

    If I’m wrong, that’s still a happy outcome. 🙂

    For now, I’ll keep my spending to under 3% of my portfolio. With any luck, things should work out just fine.

    • retirebyforty May 28, 2017, 11:00 am

      I think 3% is better for early retirement as well. It gives us a margin of safety and we can always adjust it to 4 when we’re 60 or so.

  • cannew May 27, 2017, 7:24 am

    The Economist seems to agree with Bogle:
    “The return from shares can be broken down into three components: the initial income yield; growth in the income stream; and any change in valuation. ”
    They also state:
    “Over the long run, reinvested dividends rather than capital gains have comprised the vast bulk of returns.”
    So why change ones strategy because one expects Market returns to be low? Instead invest in a strategy that will over the long term provide the most gains with the least risk. Invest in quality DG stocks, reinvest the dividends and as DGI stated continue to invest in those holdings even when the market is low, so ones long term returns will benefit from buying low and holding for the growing income.

  • Laura May 27, 2017, 8:14 am

    Staying the course (as usual). We’ve had emerging market exposure for some time, with a current allocation of about 6% (may be more thanks to international funds as well as straight-up emerging market fund – should probably figure that out)

  • Jason May 30, 2017, 4:09 am

    My current allocation is basically 100% stocks. Yes, I know that sounds a bit risky but I am in the accumulation phase (unfortunately didn’t get serious about FI until I was in my late 30s). However, I do think that we are in a secular bull market where actual returns will be higher for the next decade or so. Now you can debate if we started in 2009 or 2013, but I do think that over the next decade it will be much better than people think. However, we will then have a prolonged period of little to no returns and then back again. So I am a bit more optimistic looking out 10 years or so.

    That said I would like to diversify my portfolio to think about differing income streams. I like the idea of real estate, but am not sure I want to be a landlord and I don’t have a big enough net worth to invest in RealtyShares (like the idea) and Fundrise’s fees are WAY too high. So what is an investor supposed to do? P2P?

    • retirebyforty May 30, 2017, 8:56 am

      You could invest in REIT for now. Once you have more cash, RealtyShares is another option.

  • saveinvestbecomefree May 30, 2017, 4:45 am

    My approach is to shift aggressively to international (particularly emerging markets). I detailed the macroeconomic reasons why in a post called Extreme Rebalancing. Financial assets go in cycles. Profit margins in emerging markets are below long-term averages (while in the US they are almost 50% above average) and improving and valuations are low. The last 5 years have been bad for emerging market investors. The next 10 should be good. Of course no one can predict this fully, especially the timing, but in terms of risk I see bonds/cash as the riskiest (against the real risk of a poor long term return vs inflation), US stocks the next riskiest, and foreign stocks as the least risky. This is just the opposite of what many people think but they are thinking of short term volatility and the real risk is low long-term investment returns, not short term volatility.

  • Mike H. May 30, 2017, 2:02 pm

    The math doesn’t necessarily support a 3% return on stocks over a 10-year period. At that point, there’s no reason to invest in stocks beyond growth/speculative bets; just go all in on a bond portfolio for the same yield and almost no risk (other than default risk, I guess…)

    Honestly, I don’t expect average returns to drop too much. My own projections went super conservative at 6%/year. But if it does happen, alternative income streams – like real estate – seems like the best choice.

  • Lazy Man and Money May 31, 2017, 7:11 pm

    The CAPE numbers for some international countries are significantly less than the United States. For this reason, I view investing in broad international stocks LESS risky than investing in a high-priced US market.

    I’m shifting more towards international and emerging markets. My stock market mix is close to 50% US and 50% non-US.

    I’m usually very aggressive as I figure I have 40 years to ride out any short-term hiccups. However, I’ve shifted to put about 10% in bonds and 5% in REITs. I’m hoping this diversification helps me in the event that the US has a correction.

    • retirebyforty June 1, 2017, 9:20 am

      I like your 50/50 split. We’ll probably move some US to international too.
      Thanks for your input. I put 20% in bonds just in case we have a big correction.

  • Sam @ Financial Samurai June 1, 2017, 3:25 am

    I’m taking on LESS risk and want to sell one SF property and diversify into heartland real estate.

    I’ve also been buying bonds, although bonds have rebounded well post election.

    Perhaps cash is the best for now as we wait for opportunity!


    • retirebyforty June 1, 2017, 9:22 am

      I’m planning to do that in the long term too. We’ll sell our condo and move into our rental. Then use some of the proceed to invest in non-local real estate.

  • savvy June 5, 2017, 1:25 pm

    I’m mostly staying the course because I feel like I should be “doing something”. One on the hand, I’m considering make my asset allocation (77/15/8 stocks/bonds/RE) more conservative since I plan to semi-retire in 4.5 years. Although the other hand says stay the course because full retirement is 11 years away so my portfolio will have time to recover.

    In unrelated news, I did just buy a rental property and sold some of my REIT shares so as not to be overloaded in RE.

    • retirebyforty June 5, 2017, 9:38 pm

      Good luck with the rental property. REIT is pretty attractive now because the yield is much higher than SP500.

  • Dave July 25, 2017, 12:33 pm

    Great analysis. Save more is always a great option. So is to expand your horizons and add some developed and EM international exposure to your portfolio. I have found that adding some bonds to smooth out the ride during volatile markets helps to keep emotions in check.

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