When it comes to predicting the markets over the short-run, the only realistic answer is "who knows?" Forecasting where the markets will be in twelve months is notoriously difficult, and most experts get it wrong.
But when we do financial planning for our clients, we need to make long-term assumptions about market returns. Having at least a ten-year outlook is much more reasonable than guessing where we will be year by year.
Vanguard, one of our key money management partners, offers a sophisticated capital markets model that uses simulations to project returns over the next decade. Here are the highlights from Vanguard's most recent Economic and Market Outlook.1
• High valuations, lower economic growth rates, and expected contraction in valuations has led to a guarded outlook for global equities, which are expected to return 5%–7% over the next decade.
• The trends that have defined the last decade are not expected to persist. Stock markets outside the U.S. should outperform, largely because of lower valuations and higher dividend yields. Value stocks are expected to outperform growth stocks.
• While future returns for bonds look low, they remain important for their role in diversification and risk mitigation.
So what can investors do in an environment that offers lower returns? Start by focusing on what you can control.
While you can’t control investment returns, you do have a say in three of the most important factors in financial planning – how much you save while working, when you retire, and how much you spend during retirement. Consider boosting your savings as much as possible while working. Give some thought to working a few additional years - it can make a big difference in the success of a plan. And, when you do retire, make sure that your spending is conservative relative to your portfolio.
Stick to your financial plan. Reaching for higher returns means taking on extra risk. A diversified, balanced portfolio offers the best probability of meeting your goals over time while providing protection against the inevitable downturns along the way.
David Rappaport, CFP®
David is the Co-Founder of Rappaport Reiches Capital Management. He acts as personal CFO to entrepreneurs and corporate executives, providing organization and clarity in their finances. Please connect with David below. He loves to talk about investing, financial planning, and Aspiritech, a non-profit hiring individuals on the autism spectrum.