Investors, it’s time to tone down your expectations.
That’s a key takeaway from my nonannual roundup of investment providers’ capital markets assumptions for the next decade. In their most recent release, nearly every firm in my roundup had reduced their return expectations for US stocks. Meanwhile, every firm in my survey is expecting higher returns from non-US stocks than domestic over the next 10 years, and some firms’ 10-year bond market forecasts are higher than their return expectations for US stocks.
How to Use the Forecasts
Although it’s reasonable to be skeptical about predicting the market’s direction, especially over the short term, the fact is that you need to have some type of return expectation in mind when you’re creating a financial plan. If you can’t plug in a long-term return assumption, it’s tough to figure out how much to save and what sort of withdrawal rate to use once you retire. Long-term historical returns are one option. But at certain points in time—like 2000—they might lead to overly rosy planning assumptions, which in turn might lead you to save too little or overspend in retirement.
To draw some conclusions about what sorts of return assumptions might be reasonable for planning, I have been amalgamating investment firms’ capital markets assumptions at least once a year. Firms use different methodologies to arrive at their capital markets assumptions, but most employ some combination of current dividend yields, valuation,…
