Low Stock Market Return Expectations For The Next Decade (2020-2030)

We’ve seen that stock market investors have been rewarded for investing regularly during the last decade. $10,000 invested in the Vanguard Target Retirement 2045 fund in January 2010 would have grown to $25,000 in January 2020. $10,000 invested in the Vanguard S&P 500 Index fund would have grown to $35,000 from 2010-2020!

However, the FactorResearch article Global Pension Funds: The Coming Storm summarizes why we should have more reasonable expectations for the next decade. First up, we have low interest rates. If you have low interest rates now, then your future bond returns are highly likely to be similarly low.

For stocks, we have a historically low earnings yield (or historically high P/E ratio). While the correlation is not as high, a low earnings yield usually leads to low future equity returns:

Based on this combination of low starting interest rates and low starting earnings yield, the author’s model predicts an annualized average return of 3.1% nominal for a traditional 60% stocks/40% bonds portfolio over the next 10 years.

(Time to set a reminder for 1/1/2030!)

These predictions can be dangerous in terms of market timing. Low interest rates and relatively high valuations were also true a year ago, but then the US stock market went up another 30%! If you avoided stocks, you would have missed a huge gain only to find yourself with even lower forward return expectations. Returns are lumpy – there might be only a few big positive years and many negative years to average out to a 5% return. What if you just missed one of the huge positive years?

My only takeaway is to maintain both stock market exposure and reasonable expectations. Various factors combined to make 2019 a big year for stocks (and most other major asset classes) and I’ll certainly take it, but also remember that it won’t be like that every year. There is a quote that happiness = reality minus expectations. For investing, maybe it changes to: likeliness of panic selling = reality minus expectations.