Every year, the low-fee investment advisor Portfolio Solutions, LLC founded by Rick Ferri provides a 30-year market forecast based on their analysis of several factors. In their own words:
Each year, we analyzed the primary drivers of asset class long-term returns including risk as measured by implied volatility, expected earnings growth based on expected long-term GDP, market implied inflation based on the spread between long-term Treasury Bonds and TIPS, and current cash payouts from interest and dividends on bond and stock indexes. These factors plus others are used in a valuation model to create an estimate for risk premiums over the next 30 years. In a sense, we believe these expected returns reflect what the market is estimating will be a fair payment for each asset class over T-bills over the long-term.
You can view all the asset classes on their site, but I have included some of the major ones below for preservation and reference. Another set of estimates to throw into the mix.
|
Asset Classes |
Real Return |
With 3% Inflation |
Risk* |
|
Government-Backed Fixed Income |
|||
|
Intermediate-term U.S. Treasury notes |
1.5 |
4.5 |
5.0 |
|
Long-term U.S. Treasury bonds |
2.0 |
5.0 |
5.5 |
|
Corporate and Emerging Market Fixed Income |
|||
|
Intermediate-term high-grade corporate (AAA-BBB) |
2.3 |
5.3 |
5.5 |
|
Foreign government bonds (unhedged) |
2.5 |
5.5 |
7.0 |
|
U.S. Common Equity and REITs |
|||
|
U.S. large-cap stocks |
5.0 |
8.0 |
15.0 |
|
U.S. small-cap stocks |
6.0 |
9.0 |
20.0 |
|
REITs (real estate investment trusts) |
5.0 |
8.0 |
15.0 |
|
International Equity (unhedged) |
|||
|
Developed countries |
5.0 |
8.0 |
17.0 |
|
Developed countries small company |
6.0 |
9.0 |
22.0 |
|
All emerging markets including frontier countries |
8.0 |
11.0 |
27.0 |
*The estimate of risk is the estimated standard deviation of annual returns.
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They don’t indicate whether these return estimates represent the arithmetic average of 30 years’ worth of returns, or the annualized cumulative return. It makes a huge difference. If you look at two assets with the same arithmetic average return, they probably won’t have the same cumulative return. Specifically, the one where returns fluctuated more (i.e. that had the higher standard deviation) will have a lower cumulative return.
Quick example: over a 3-year period, asset A had returns of 30%, 0%, and 30%. Asset B had returns of 20% all three years. Both had an “average” return of 20%. But if you invested $100 in each, after three years asset A would be worth $169, while asset B would be worth $172.80.
@Jim – I’m 99% sure these are annualized (geometric) returns. Arithmetic averages wouldn’t be very useful, and so I don’t think they’d use those.