COTW: Near cycle low in U.S. balanced portfolio expected returns

August 8, 2019

While predicting the future is impossible, starting conditions—valuations, margins and dividend yields for stocks and yields for bonds—have a remarkably strong correlation with subsequent long-term forward returns. With stock valuations and margins on the high side and dividend and bond yields on the low side, the factors that drive long-term returns in stocks and bonds are at levels associated with forward returns of around 3.9% per year. To put that in context, over the last decade, a U.S. balanced stock and bond portfolio has delivered 10.0% per year. Forecasts using the methodology employed in the chart below may be higher or lower than what eventually occurs, but generally not by more than about 2%. So we would estimate the range of expected returns to be anywhere from 1.9% to 5.9% per year (on average; individual years will vary dramatically, of course).


How low is 3.9% relative to history? Well, if these well-established historical relationships hold, investors in U.S. core balanced portfolios will experience lower returns over the next 10 years than at almost any 10-year period in 70 years. The only lower time, in fact, was for people investing near or at the peak of the Tech Bubble in 1999. As a result, investors should lower their expectations for forward returns and consider diversifying into alternative assets.


The chart below can be downloaded here.



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