What Asset Class Returns are Expected in the Future?


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.

History doesn’t always repeat, but it rhymes!

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.”


Ha, but true enough.

While this quote is 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 2022?

Those who do not learn from history may be doomed to repeat it.

Questions today abound, and even more remain out of our control:

How much higher will inflation go?

How much higher will interest rates climb (to combat inflation)?

How much higher will taxes go?

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 where the market is headed, we will suggest:

  1. It’s prudent to reduce or at very least re-evaluate some risk in your portfolio,
  2. Near-term returns may be lower than what history tells us, and
  3. If you haven’t already done so, it’s time to embrace more volatility.

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 short answer is: that rising inflation poses risks for bonds.
  • Maturity and credit risks. When choosing bonds for your portfolio there are only two factors you can control: maturity and credit risk. 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, they really only benefit long-term investors 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 will rise, a bit, we personally believe you should consider the following for lower, overall returns over time.

  • Low-interest rates. Current and expected interest rates are much lower than what has been experienced historically, especially compared to the high-interest-rate environment of the 1980s. While interest rates are moving up, they remain historically low and likely to remain that way comparatively speaking.
  • 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 demographics among other factors, we simply don’t see huge economic growth waves ahead – just steady growth at best.
  • Equity valuations. Valuations did appear to be rich (especially in the U.S.) over the last year, during a pandemic no-less, but that’s also a warning sign that high valuations might lower returns/expected earnings moving forward. So, any time lofty stock prices occur, without a proportionate increase in future earnings that means lower expected returns going forward.

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.

However, something to always keep in mind, thanks to the power of compound returns—that is, the cumulative effect that gains or losses have on an original investment—what investors like you and I do (or better still, don’t do) can have a significant impact on the likelihood of achieving any of our long-term investment goals.

To help you stick to a plan you can believe in, we believe you should:

  1. 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 anticipated that exceed your financial goals – bonus!!
  2. Expect the unexpected. 2021 was a phenomenal year for equities and yet here so far in 2022, most of those returns have vanished. Expected returns will fluctuate from year to year and returns in any given year are far from a linear thing.
  3. 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 can help you minimize impacts on your overall portfolio value.

What asset class returns could you expect in the future?

We believe, given the poor extended returns of international markets, it might be time for international large-capitalization stocks to shine. This is mainly due to the risk premium involved. International stocks are generally riskier than U.S. stocks and investors should expect to be compensated for taking on this additional investment risk. You’ll see some of that thinking reflected in emerging markets below. Something to consider but by no means are we predicting the future.

Based on our work with many clients, dozens of clients in the last few months alone, we’re largely aligned with asset class returns standards released and published annually by The FP Canada Standards Council.

You can download your own free copy here!

That means, in a nutshell before fees and taxes are accounted for in 2022:

FP Canada 2022

And for reference, this was the council’s guidance for 2021 including the following, actual, asset class returns in a quilt for 2021 as well to see what guidance got right! :)

FP Canada 2021

And now the quilt:

2012-2021 Asset Class Quilt

Source: Morningstar. 

What asset class returns could you expect in the future summary

Joe and I at Cashflows & Portfolios will be the first to tell you we have no idea what the future holds – for any asset class. 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, be ready to change your plans from time to time, always keep some cash readily available, save money like a pessimist and invest like an optimist (in mostly equities). In doing so, we believe you’ll be rather successful with those steps in mind over time.

Need help with understanding your cash flow or your portfolio for 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…
Knowing how to demystify the retirement income puzzle is not trivial work but it’s absolutely something we can help with – we’ve helped dozens of clients in the last few months alone!
If you need some help solving your retirement decumulation puzzle (i.e., how to efficiently withdraw from your retirement accounts), or figuring out if you have enough saved from any portfolio you’ve constructed we’re here to help answer those questions and more!

If you are interested in obtaining private projections for your financial scenario, please contact us here to get started.

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