Compare 10-Year Projections Using Historical And Forecasted Returns

Institutions generally agree that total returns over the next 10 years will be lower than the long-term historical level:

  • 5.42% mean for US large-cap stocks vs 11.92% from January 1987 – April 2018
  • 3.19% mean for Aggregate US bonds vs 6.07% from January 1987 – April 2018.

Forecasted returns used here are averages of forecasts by BlackRock, State Street Global Advisors, JP Morgan, Bank of NewYork/Mellon, Callan Associates (pension consultants) and Research Affiliates.

Considering mean return history or forecasts is not adequate for setting portfolio expectations, because future results have a wide spread of possibilities around the mean due to the impact of volatility (often made worse by investors selling in panic at bottoms and re-entering late in Bulls).

This table shows simulated probabilities for a $1,000,000 bonds or stocks portfolio at the 10th, 25th, 50th, 75th and 90th percentile probabilities (covering 80% of likely outcomes, but still leaving 10% more extreme possibilities at either end of the spectrum undefined).

(Click on image to enlarge)

This table shows four common allocations: 40/60 (conservative balance), 50/50 (allocation Vanguard uses in their target date funds for investors age 65 just beginning retirement), 60/40 (traditional balanced fund allocation) and 70/30 (aggressive balanced allocation).

(Click on image to enlarge)

If the institutions are correct in their assumptions, you should expect lower returns, and lower cumulative values for your portfolio over the next 10 years. The differences in cumulative portfolios per million Dollars of starting capital between simulations based on historical data and forecasted data are in the hundreds of thousands of Dollars.

For example, per $1,000,000 for a 50/50 portfolio allocation at the 50th percentile simulation probability, you should expect an inflation adjusted (real) portfolio value at the end of the next 10 years to be about $624,000 smaller (about 35% less) based on forecasted returns and volatility rather than based on historical returns and volatility. Maximum drawdowns are expected to be similar.

1 2 3
View single page >> |

Disclaimer: "QVM Invest”, “QVM Research” are service marks of QVM Group LLC. QVM Group LLC is a registered investment advisor.

Important Note: This report is for ...

more
How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.