Brief survey of expected return forecasts – nothing new

About once a year I go through various future expected return forecasts. Here are some recent updates on what the investment community is saying about future asset class returns, most of them focused on US stock returns, over the next 10 years. In short, nothing really new from last year, expect future returns to be lower, but worth a review

Lets start with the folks at Research Affiliates. Here’s the scatter plot from their most recent update on forecasted 10 year real returns for various global asset classes. There’s various ways to look at the data which you can play around with yourself here. Basically a 60/40 US stock bond portfolio is forecasted to deliver 1% real returns over the next 10 years. But foreign assets are expected to do much better. Here is another way they look at it, the probability of generating a 5% real return for various portfolio types.


Next, let’s look at probably the most watched and famous asset return forecast. The 7 year real return forecasts from GMO. Here is a snapshot from the their latest (see here) but also plotted with volatility. Similar story here. Zero real return for US assets and positive for foreign assets but not as optimistic.


Next up, some less pessimistic forecasts. Lets look at Vanguard. Here is a blog post referencing an interview with John Bogle the founder of Vanguard. Basically, he’s looking at approximately 5% nominal returns for US stocks. Combine that with 2% nominal for US gov’t bonds and a 60/40 portfolio is forecasted at about 3.8% nominal.


Finally, I’ll point you to one of the models I like that I’ve been following for a while. Back in late 2013 Philosophical Economics posted on a supply/demand model for US stocks that has a pretty good history of forecasted returns. Much better than the very popular Shiller CAPE models that are the most often quoted and abused. Here is the key chart from that post.


You can track this metric in FRED here. The model says the forecast 10 yr nominal return for US stocks is about 5-6% going forward. Throw in the 2% bonds and you have about 4% nominal for a 60/40 portfolio. Similar to the Bogle forecast. For the last full 10 year period, starting at the beginning of 2006, ending in 2015, the SP500 total return was 6.8% annualized. Looking at what the model was saying at the end of 2005, that seems pretty close.

OK, that seems like enough. Basically, all these models are saying lower future returns than the long term historical averages for US stocks, bonds, and diversified portfolios.  And better for foreign stocks. Nothing new here from the last time I looked at these. I tend to side with the optimists so at least for US stocks the optimistic outlook is that the next 10 years are just slightly lower than what we just experienced, despite that being 30-40% lower than the long term historical average. That seems reasonable. That also means adjusting expected returns lower for any TAA or quant strategies, despite expecting that they continue to outperform on a risk-adjusted or relative basis. Also, tilting any portfolio, buy and hold, TAA, or quant strategies to foreign stocks seems to make sense as well.

And as far as for retirees in the withdrawal phase there doesn’t seem to be anything new here, except the GMO forecast, that would suggest the 4% SWR is in jeopardy. Remember the worst case SWR of 4% was driven by the period starting in 1966 when the next 10 year real return for US stocks was negative. I must say though if interest rates rise significantly the bar for risky portfolios will be raised as the income from fixed ‘guaranteed’ sources goes up. For example, here is a table from July 2016 of the payout rate you could receive from various ‘annuatized’ methods.


With rates rising since then quite a bit these payout rates are probably higher now. Something to keep in mind.

That’s about it. A brief survey of what the investment community is saying about future returns. All of this talk will get louder and more frequent as we approach the end of the year. Now you have some sources you can go check for yourself. And of course also keep in mind that all this can change rather quickly. For example, a blow off top like the late 90s would sure change things quite a bit. And vice versa of course.




Full Disclaimer - Nothing on this site should ever be considered advice, research or the invitation to buy or sell securities. These are my personal opinions only.

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3 Responses to Brief survey of expected return forecasts – nothing new

  1. Tony says:

    Hi Paul,

    It seems that most forecasts and metrics for the market as a whole (or large market segments) don’t tell us much about what can be expected from a more concentrated portfolio.

    Can you provide any insight on how you think these forecasts play into future returns for the TAA and Quant portfolios?

    • says:

      Hey Tony, I tried to take a look at that in last year’s post. Historically, in TAA portfolios the relative outperformance increases during tough times. Makes sense since this is what they are built for. In traditional quant portfolios it varies; safer strategies like consumer staples/utilities do better, while others like momentum and value do worse (i.e their drawdowns are worse). Overall, I would just use approximately the same metric as the overall forecasts, that both TAA and quant returns will be lower than the past (say 30-40% lower nominally) but on a relative basis they will do what they have always done. You can make it a lot more complicated than that, forecast by strategy type in your portfolio, but I’m not sure it adds value to the process.


  2. Roger Anderson says:

    Just wanted to say “Thanks”. I really enjoy reading your posts……
    Safe travels….

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