10 Year Forecast (October 2020)

October 13, 2020  | By Kevin Smith

Predicting the future is out of the question, but developing reasonable expectations for planning purposes is necessary. Calculating expected returns on investments is a difficult task, but fairly simple models have been accurate enough to help with long term planning. Here is a relatively simple model that uses expected cash flows, expected growth, and expected valuation changes (meaning an asset becoming more expensive or cheaper).


Expected Return on Stocks: Dividend + Corporate Growth + Inflation + Valuation Change


Expected Return on Bonds: Current Yield + Change to Cash Yields + Valuation Change


We continually survey some of the most sophisticated investment research departments to monitor their current views on expected returns for the next 7 to 10 years, on average. Our sources include Vanguard, JP Morgan, BlackRock, PIMCO, and Research Affiliates. Here are the averages of their expected returns by investment category:


4.7% US Large Companies
4.8% US Small Companies
6.6% Non-US Developed Market Companies
8.0% Emerging Market Companies
5.2% US Real Estate


1.6% US Bonds (Aggregate Index)
4.7% US High Yield Bonds
1.6% US Treasury Inflation Protected Bonds
2.0% Non-US Developed Market Bonds
3.7% Emerging Market Bonds


These figures are BEFORE inflation is considered, which is generally estimated to be 2-3% going forward. This is a discouraging outlook for investors planning on 6-8% returns to make their financial plans work comfortably. The main drivers behind these low expectations are very low dividend yields on stocks and interest rates on bonds, in combination with expensive valuations of US stocks, on average.


If this guidance is useful, what can an investor do? Here are a few ideas:


  • Global diversification across stocks and bonds, with emphasis on emerging markets, which have higher growth expectations, higher starting yields and youthful demographics.
  • Rebalancing from the now expensive ‘growth’ stocks to more attractively priced ‘value’ stocks, in combination with a focus on profitability and quality.
  • Accepting higher volatility than one might prefer in a higher expected return environment. Unfortunately, the safest assets will not likely keep up with inflation, so there is more risk in holding cash and bonds than usual.
Posted in: Investing
Kevin X. Smith, CFA
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Kevin is responsible for advising clients for whom he is the lead financial advisor. He also manages the operations and development of the firm, and oversees all of the investments of Austin Wealth Management clients. Kevin is on a mission…Read More

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