Newspaper article Sarasota Herald Tribune

A Forecast of Market Returns You Can Expect for 10 Years

Newspaper article Sarasota Herald Tribune

A Forecast of Market Returns You Can Expect for 10 Years

Article excerpt


had solid returns this year, what's actually critical to investors, whether young and old, working or retired, is not one year's return but returns over decades. To try to more or less accurately forecast these future returns requires consideration of historical market performance to provide context and extrapolation of current economic trends to provide economic scenarios that can provide the foundation for any longer-term predictions.

Here, I am going to provide a forecast for market returns for the next decade. This provides a framework for longer-term investing decisions, for example, strategic asset allocations -- the division of money between stocks bonds and cash.

First, let's look at historical returns.

While the stock market as measured by the S&P 500 index has been essentially flat over the last 13 years, more insight can be gained looking at a longer period. Studies of the real (inflation- adjusted) annualized returns of asset classes in the U.S. since the late 1800s have found stocks returned 7 percent, bonds 3 percent and cash 2 percent.

But it's also enlightening to review the variability of long- term returns. Let's look at annualized returns for 20-year periods. For stocks, the best such return was 12.4 percent and the worst was - .2 percent. For bonds, the best return was 8.3 percent, and the worst -3.5 percent. For cash, the best return was 6 percent, and the worst was

-3 percent.

Next, let's look at a plausible economic scenario.

Europe is in deep trouble; its banks are undercapitalized and several countries are mired in unmanageable debt. Unemployment is over 11 percent and there is little hope of a significant reduction anytime soon. Combining this with the austerity that is needed to manage this debt means more European countries will go into recession and the economy of others will grow only at a glacial pace.

When a European recovery eventually sprouts, today's easy European monetary policy will cause inflation to spike above a "healthy" level of 2 to 3 percent. This will cause governments to "put on the monetary brakes," limiting the upside of the recovery. In short: Europe is likely to suffer slow economic growth for many years. …

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