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korin43 comments on Twenty basic rules for intelligent money management - Less Wrong
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Comments (51)
You are comparing the historical return of one asset class to the prospective return of another.
"Apples and Oranges"
How else would you compare them? The values I chose are meant to be the expected returns. For bonds I chose the listed rates, since those are (I think?) guaranteed, so historical rates would be meaningless. For stocks I chose the historical rates since that's all we have. Did I use the wrong rates for bonds somehow?
Stocks: It is difficult to predict future returns, but I would at least calibrate my expected returns based on inflation expectations. Research indicates that equity expected returns and expected inflation move together…
http://www.federalreserve.gov/pubs/feds/1999/199902/199902pap.pdf
…and if expected inflation is lower than average (which I think it is)…
http://www.tradingeconomics.com/united-states/inflation-cpi
http://www.tradingeconomics.com/euro-area/inflation-cpi
…then, all else equal, current expected stock returns should be lower than historical stock returns.
Bonds: I agree with you that the yield to maturity for high quality government bonds is the best estimate for their expected returns, I would just make sure the maturity matches the time horizon. For a 25 year time horizon, I look at bonds that mature in 25 years.
Disclaimer: this is not investment advice.