[runako]

This perspective seems common, so I’m curious where you are keeping your money that you have been seeing returns in the 5% range given that basic S&P 500 index funds have turned in a 10-year average of closer to 17%.

What types of investments are you using to generate the perspective that 7% is rather optimistic?

[divbzero]

I was thinking US stocks.

US stocks have experienced stellar returns over the past 10 years that exceed growth in underlying earnings. Returns over the next 10 years will likely be lower as the stock market reverts to the mean. The cyclically-adjusted P/E ratio (CAPE ratio)—defined as current stock price divided by average annual earnings over the past decade—is a common way of looking at mean reversion. The relevant results can be found in Figure 5 (page 10) of a 2016 study by StarCapital Research [1] or Figure 1 of a 1996 study by Robert Shiller [2].

As of Fri Dec 3 2021 the CAPE ratio for the S&P 500 was ~38 [3].

[1]: https://mebfaber.com/wp-content/uploads/2016/02/Research_201...

[2]: http://www.econ.yale.edu/~shiller/data/peratio.html

[3]: https://www.multpl.com/shiller-pe

[runako]

Valuations are important, thanks for raising the CAPE ratio. My intuition is to adjust every valuation concern for the extremely low level of prevailing interest rates. Fortunately, Schiller (of the CAPE ratio) already has a measure for this: excess CAPE yield[1]. Current ECY is roughly where it was in a decade ago, near the beginning of a long bull run. TL;DR; as long as interest rates stay low, equity valuations are not necessarily out of whack.

Interest rate forecasting is a different beast entirely, but worth noting that we have not had "normal" interest rates for ~15 years (and then only for a couple of years), and Japan has not had "normal" rates for close to 30 years.

[1]: https://www.marketwatch.com/story/sky-high-stock-prices-make...

[2]: https://en.macromicro.me/charts/27100/us-shiller-ecy