Each year around this time I update my article on expected future return forecasts for stocks and bonds. The article includes a compilation of annual forecasts from various investing companies. While no one can predict the future exactly, the investing goals in a mindful investing plan should be consistent with realistic expected future rates of return. Many investing plans (even professional ones) use historical data to estimate future return rates, apparently without considering if those rates are reasonable for the future. For example, the historical annualized average return of the U.S. stock market is about 9%, but most recent forecasts for the next 7 to 15 years are in the range of 2% to 7% nominal annual return (not adjusted for inflation).
The 2019 Data
This plot shows the return expectations for common asset classes evaluated by many of the companies.
You can check out the details of this years’ forecasts in my expected future returns article. This post won’t rehash all that information.
The Trend
Instead, I wanted to look at how much the forecasts have changed between 2018 and 2019. This plot compares the two years’ forecasts for those companies that published estimates in both years. Again, the forecasts are for the next 7 to 15 years, depending on the study.
You were probably expecting a bar graph or something like that, so I should explain this plot. The horizontal axis shows last years’ forecast, and the vertical axis shows this years’ forecast. Each dot represents one company’s forecasts for the asset class noted in the color legend. The black “match line” indicates where dots would fall if there was no change in the annual forecasts. When dots fall above the match line, that means this years’ forecast is higher than last year—the forecast went up. When dots fall below the match line, that means the forecast went down.
The good news is that most of these companies shifted their return expectations upward slightly for most asset classes. The starkest exception is that GMO is predicting substantially lower returns for U.S. large stocks, U.S. bonds, and international bonds as shown by the lowest three dots on the above plot.
The Plan
My investing plan assumes a 5% nominal future return for U.S. large stocks, which is right in the middle of the 2% to 7% range I noted above. Therefore, these new 2019 forecasts suggest that my plan’s return assumption is slightly more reasonable than it was last year, and I’m slightly more likely to meet my investing goals. But “slightly” is the keyword here. Most of the higher return forecasts involve less than a 1% upward shift in expected returns. These forecasts are evolving slowly.
The Uncertainties
It’s also important to consider the uncertainties behind the estimates. I present some uncertainty data for two of the company’s forecasts in the updated article. In summary, the forecasts for U.S. stocks could easily differ by 3% to 5%, based on the 25th percentile and 75th percentiles of a simulation’s distribution. Here’s a Vanguard graph illustrating the range of uncertainty across various percentiles of the simulation distribution.
As the picture on the right side shows, the 25th to 75th percentile range only represents 50% of the simulation distribution. If we look at the 5th and 95th percentile estimates, the expected returns expand to a range from less than -2% to more than 10%! A 1% increase in a forecast with an uncertainty range of 5% or even 12% isn’t a compelling reason to overhaul an investing plan. But if the current upward trend in return estimates continues for several more years, it might be reasonable to reassess your assumed rate of return.
The Conclusion
Updating these return forecasts annually gives me a good sense of how my investing plan’s return assumptions might be diverging from reality over time. Plus it’s fun to see how the “expert’s” opinions are or aren’t changing and why. Given the uncertainties of these estimates, I can’t say my opinion of my plan’s return assumptions has changed at all. But if you like to look on the bright side, there’s certainly reason for a small hurray because most of these return expectations seem to be trending upward and not downward.
