Winners among asset classes keep rotating, in terms of the best returns delivered to investors in any given year, but we were curious to find out what asset class returns you could expect in the future.
Read on in our latest post to learn about some market history and what headwinds might be in store for expected asset class returns.
We’ll also share snippets from our portfolios, what we expect and plan for in our own personalized retirement income projections.
Enjoy!
History doesn’t always repeat, but it rhymes!
When it comes to asset class returns you might expect in the future, indeed…
Sir John Templeton, one of the world’s greatest investors, said this:
“Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria.” – Reference.
Ha. Funny but true enough.
While this quote seems a bit dramatic, it does highlight that market history does have its cycles. An enhanced understanding of historical patterns in the markets can bring some significant awareness about where we are in any current market cycle – encouraging all of us as investors to stay objective with our long-term investment decision-making.
You don’t have to go very far back in time for this quick history lesson:
A review of the 2008-2009 recession, especially in the U.S., was due to an overextension of debt.
Sound familiar in recent years?
Those who do not learn from history may be doomed to repeat it.
Questions today abound in this updated post for 2024:
- Will interest rates go lower over the coming months? By how much?
- Should I be investing in more equities at these all time market highs (ATHs) in 2024?
- What are the longer-term tax implications of changing demographics? Higher taxation?
At Cashflows & Portfolios, before we share some ideas on what asset class returns you could expect in the future, we believe while it is impossible to accurately predict the future we do however suggest:
- It’s prudent to reduce or at very least re-evaluate some risk in your portfolio a few times per year,
- Recent equity returns may be lower than what history tells us, so plan for it just in case, and
- If you haven’t already done so, it’s time to embrace more volatility when markets approach ATHs.
Bonds are portfolio shock absorbers – but with risks
Bonds – also known as fixed income instruments – are used by governments or companies to raise money by borrowing from investors. Consider bonds like an “IOU”.
Bonds are typically issued to raise funds for specific projects or initiatives. In return, the bond issuer promises to pay back the investment, with interest, over a certain period of time.
Bonds can exist in many forms (corporate bonds, government bonds, bond funds, bond ETFs, and more).
Evidence is showing that the road ahead for bonds may be rocky. Here are some key reasons:
- Interest rate risks. When interest rates rise, bonds lose value. The inverse is true. Therefore, there are constant risks with bonds due to changing interest rates.
- Maturity and credit risks. When choosing bonds for your portfolio there are only two factors you can control: maturity and credit risk. (You cannot control interest rates on your own!) The bond’s maturity date is when the face value (your principal) is returned to you. In general, the further away the maturity date, the greater the risk, and therefore the higher the interest rate investors demand. That’s why a 20-year bond tends to carry a higher coupon/interest payment than a 10-year bond, and a 10-year bond delivers a higher interest payment than a 1-year bond. Credit risk is the probability you’ll collect interest on your investment and have the principal returned on maturity. For example, bonds issued by the federal government carry far less credit risk than those issued by a corporation with a troubled balance sheet. The corporate bond, therefore, will pay a higher coupon to compensate investors for the additional risk. So, bond investors need to consider the types of risk they’re willing to accept.
- Limited diversification. Sure, good quality bonds can provide a safety net when equities fall but bonds are not immune to falling prices themselves and are not foolproof when it comes to diversification benefits, in our opinion. While bonds often play a stabilizing role in portfolio construction, bonds may only benefit long-term investors over decades of investing years by shielding themselves from short-term stock market declines. In other words, for investors who are still accumulating, why invest in long-term bonds when investment in long-term stocks will deliver superior returns?
Near-term returns might be lower – demographic headwinds abound
Yes, investing in a balanced mix of stocks, bonds and other asset classes can help you build a portfolio that seeks solid returns, the portfolio can be resilient through many market environments – but we believe demographic changes and other factors are going to pose some headwinds for overall portfolio returns in the coming decade (or more).
While interest rates are expected to move lower in the coming year or so…we also personally believe you should consider lower, overall, equity returns with time.
Why?
These key reasons:
- Low economic growth. Economic growth and inflation typically go hand in hand. Strong economic growth historically causes rising inflation, as demand grows faster than supply (I mean, we’ve seen this after some COVID-19 shutdowns). Inflation induced by growth is a good thing – a robust economy is fundamental to achieving healthy returns from the financial markets. However, with changing/aging demographics, less Boomers in the workforce, among other factors, we simply don’t see huge economic growth waves ahead – just steady growth at best. Your equity return projections should reflect that and be more conservative.
- Equity valuations. Valuations do appear to be rich right now (especially in the U.S.). We are hitting ATHs with the S&P 500 fueled largely by one sector – tech growth. We believe with that upside comes a warning sign – high valuations today might deliver lower returns/expected earnings moving forward. So, any time lofty stock prices occur with ATHs that can signal some danger ahead.
Time to embrace market volatility – if you haven’t already!
We don’t need to share a stock market chart today in this post to tell you that stock markets go down, sometimes quite a bit, in very short order. Again, 2024 YTD has been a stellar investing year. Will it continue?
Nobody knows.
What we do know is thanks to the power of compound returns—that is, the cumulative effect that gains or losses have on an original investment—we need to follow these principles to help achieve any of our long-term investment goals:
- Establish a financial plan based on your goals. So, that means be very realistic if not very conservative about your goals correlated to investment returns, and be quite prepared to change your plan as your life circumstances change. Worse case, you do get higher returns than assumed then you exceed your financial goals – bonus!! See more below related to our own personal retirement income projections.
- Expect the unexpected. 2024 YTD has been a phenomenal year for equities. We’ll see if that continues!? Returns are not linear. See asset quilt below!
- Build a diversified portfolio based on your tolerance for risk. Various asset classes—some key ones you’ll see below-definitely behave differently in ever-changing market conditions. So, keeping a diversified portfolio including cash / cash equivalents can minimize impacts on your retirement spending plans.
My Own Advisor wrote a stellar post on that cash / cash equivalents concept here:
What benchmarks do we use, for our retirement income projections?
At Cashflows & Portfolios, you might be interested to know we tend to use the following benchmarks and assumptions as starting points for our personal projections and those of our clients:
- If you have a 100% equity portfolio, consider 6% long-term RoR (rate of return) and nothing higher to be safe. In fact, Joe and I both use about 5% for our projections since while we have lots of equities (dividend stocks, low-cost ETFs) we also have a mix of cash / cash equivalents in our respective portfolios – so we err on the side of being conservative with future portfolio returns.
- Consider at least 2.5% sustained inflation for your projections and if you are bit more pessimistic (like we are at times) then consider 3% inflation. You can always adjust those assumptions in the following calendar year.
- Referenced above, consider evaluating your retirement income projections at least annually. This way, you can use any data / reports as guardrails to know if you remain on track with your spending assumptions or you need to change course – including raising spending at times since you were more conservative from the start. :)
What asset class returns could you expect in the future?
And now the most recent asset quilt to show how different assets or assets from different regions behave differently year after year:
Source: A Wealth of Common Sense.
To quote Ben:
I have no idea what this quilt will look like next year. The reason this is my favorite performance chart is that it perfectly illustrates how difficult it is to predict the winners and losers in the short run.
There is no rhyme or reason to asset class performance from one year to the next.
Sometimes you get mean reversion. Other times momentum rules the day.
Indeed. :)
What Asset Class Returns are Expected in the Future summary
Joe and I at Cashflows & Portfolios will be the first to tell you we also have no idea what the future holds – for any asset class. But we do have some hunches.
Yes, we both love dividend-paying stocks for income but dividends are never guaranteed and capital gains, while great, are certainly not guaranteed either.
To quote Mr. Mike Tyson:
“Everybody has a plan until they get punched in the mouth.” -Mike Tyson, former heavyweight boxing champion.
Mike’s quote is very relevant to this post because while having a sound and updated financial plan is helpful, there are no guarantees about anything, anytime, in terms of investing outcomes.
“Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.” – Morgan Housel, The Psychology of Money.
So, make some retirement income assumptions. See what your plan is. Be ready to change your plan every year (even just a little bit). Always keep some cash / cash equivalents in your portfolio. Use reasonable returns. Save money like a pessimist and invest like an optimist.
In doing so, we believe you’ll be rather successful with those steps over time!
Need help with understanding asset class returns related to your retirement income planning?
We can help!
We answer client questions like:
- What registered accounts do I draw down first?
- How much income will my investments generate?
- Can I afford a large purchase like a new car or new house during retirement?
- Do I have any idea how long this income might last?
- What amount of taxes will my RRSP withdrawals incur?
- When should I take my workplace pension?
- Is it more beneficial to draw down non-registered money before RRSPs and TFSAs?
- And much, much more…
If you are interested in obtaining private projections for your financial scenario, please contact us here to get started.
Thanks for your ongoing readership and for sharing this site with others – our site is growing thanks to you!!
Further Reading:
- Should you consider building and owning an All-Weather Portfolio?
- Could having a part-time job save your retirement plan?
Hi Mark and Joe,
in your projections, when you mention an expected return of 5%, does that include inflation? Or do you deduct an extra 3% of inflation from that 5% to represent the loss of buying power?
See, I’m 100% equities and I usually use 6% as an expected return including inflation, which I thought was reasonnable. Am I being too optimistic?
Great question. :)
In our (personal) projections, we use 5% total return (the sum of dividends, distributions, interest, capital gains, etc.). We could always use a value higher or lower of course…like any investor could. We tend to be conservative – especially as we both enter semi-retirement or are already in it (like Joe.).
Inflation at 3% is basically used as part of higher spending expectations. So, inflation, by design, demonstrates the need for higher spending / expenses over time since cost of living tend to rise over time. That is also, fairly aggressive which may or may not happen of course. Recall Bank of Canada is about 2% for it’s inflation target. We don’t believe that is always correct.
If you’re 100% equities, then depending on what you are investing in, we believe 6% return on those equities is very likely and could be more “on par” with what the future may hold. Again, our 5% is very conservative since we also hold some cash/cash equivalents with our equities.
If you are saying your 6% returns are after inflation has been accounted for – that could be very aggressive and yes, quite optimistic.
What have your 10-year returns or 20-year returns been? Recall in the U.S. stock market – there was literally a Lost Decade whereby U.S. stocks/S&P 500 basically did not move higher for 10 years. Something to think about!
CAP