Forecasting Stocks Long-Term Total Return

Your portfolio will not achieve precisely median long-term results 99+% of the time – 49+% will be better and 49+% will be worse. Median is merely a point within the spectrum of historical portfolio returns, as this set of 10-year assumptions for domestic and international equities from Vanguard illustrates. 

Your US large-cap allocation over 10-years will probably return between about negative 2.5% to positive 10+% with a median of about 4% based on visual inspection of the Vanguard forecast. Global ex US stocks are expected to do materially better. Overall, global stocks are expected to have a median return of 5.3% with a 5% chance of a negative 0.1% return (because of US stocks), and a high (at the 95th percentile) of 11%.

Looking at 148 years of monthly rolling 10-yr returns for US large-cap stocks, the median total return was 9.36%, with a range of 2.69% to 15.76% at the 25th and 75th percentiles, and negative 4.77% to 21.75% at the 5th and 95th percentiles. 

Vanguard sees the next 10 years at lower return than historically with a narrower spread from best to worst.

The most recently completed monthly rolling 10-year period growth is way into the above median area for earnings, dividends, price and total return:

  • Earnings Growth Rate 27.64% (100th percentile)
  • Dividends Growth Rate 7.35% (80th percentile)
  • Price Growth Rate 15.59% (97th percentile)
  • Total Return Growth Rate 20.02% (90th percentile).

Yes, the latest 10-year growth rate is coming out of the depths of the 2009 earnings crash (and mandated bank dividend cuts), but that is all the more reason not to expect the next 10 years to be as good.

The next 10 years are beginning from the current well above average levels of growth.  The mean reversion principle strongly suggests that the next 10 years will be modest compared to the last 10 years. 

Combining Vanguard’s 10-year view of US Aggregate bonds with their view of global equities into key strategic allocation levels, they view the next 10 years this way:

They forecast the popular 60/40 Own/Loan allocation to have a 10-year median probability of 4.9%, with a 5th percentile to 95th percentile range of 1.5% to 8.4%. However, that is for the cumulative 10-year period.  Individual years are expected to have wider ranges,

Because the 60/40 global balanced portfolio has a 9.4% expected volatility (standard deviation), individual years might be expected to have a 67% probability of a range from negative 4.5% to 14.3% (+/- 1 standard deviation); and a 96% probability of a range from negative 13.9% to 23.7% (+/- 2 standard deviations). Then there is always the small possibility of a Black Swan. That might go negative 3 standard deviations with a return of negative 23.3%.

The current CAPE Ratio (price to 10-year average inflation-adjusted earnings) is very high; currently at the 95th percentile of its history since 1881. 

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

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