Expected Long-Term Returns for Traditional Asset Classes


Expected return for various asset classes over the forthcoming 7-year period:  

7-Year Asset Class Real Return Forecast from Grantham, Mayo, Van Otterloo


Expected return for the S&P 500 over the forthcoming 12-year period:

Firstly, note the close correlation (i.e. accuracy) of expected returns and the actual outcome over the subsequent 12-year period.  It’s important to use a valuation method that correlates well with actual outcomes if you’re looking for an accurate valuation tool; it’s worth noting that accuracy is alarmingly lacking in many other valuation methods.

The nominal annual total return for the S&P 500 over the forthcoming 12-year period is ~1% (i.e. at the close of the forthcoming 12-year period expect the S&P 500 to have averaged about 1% per year).



Chart Source: John Hussman’s weekly market comment entitled Red Flags Waving

The Misalignment of Expectations

When the above expectations are compared to the customary 6-8% (annual) return, used by many financial advisors for retirement plan projections — as well as by pension plans — one can see that a dangerous misalignment of expectations has already formed.

And although the long-term return expectation for bonds is lower as well (more severely concentrated in credit-sensitive bonds — i.e. high-yield bonds, bank loans, floating rate bonds, & corporate bonds), when comparing the 2.6% yield for 10-year treasury bonds to the expected return for stocks, one can see that 10-year treasury bonds are likely to outperform the S&P500/stocks at the end of the forthcoming 10-year period.