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As I mentioned, two of these companies also provided forecasts of volatility one measure of risk in terms of standard deviation. We can see the combined return and volatility estimates using the classic cross-plot of risk versus return that I introduced in Article 6. Both forecasts are similar to historical volatility estimates discussed in Article 6. Nonetheless, it provides a consistent point of comparison that we should not expect stocks and bonds to be substantially more or less volatile in the near future, which eliminates one potential variable.

Just like with predicting future returns, predicting future risks for any given period is a highly uncertain exercise, and these future risk estimates are just central tendencies. We should expect such risk forecasts to be wrong as often as the return forecasts. But they still represent the most likely estimated outcome based on the assumptions of the model used. First, we have to understand how bonds produce positive returns.

Where do bond returns come from? Why are bond returns expected to be so bad? The interest income paid by a bond is determined mostly by prevailing interest rates for loans in general. Bond issuers must keep pace with the prevailing interest rates if they expect people to purchase those bonds.

History of interest rates — What does the history of interest rates tell us about the current and future environment for bonds? This graph, also from Newfound Research, shows year U. Treasury bond rates which reflect interest rates in general since The orange circle on the right highlights that interest rates in were already at truly historic lows.

And now they are even lower, with the year bond yield currently at 0. As shown in the chart below, the current interest rates are nearly unique across all history, which means that future bond returns will be uniquely low as well. For several years now, some countries in Europe and Japan have been issuing intermediate-term bonds with negative interest rates to stimulate their economies.

A negative rate paradoxically means that the bond issuer gets paid income from the bond purchaser. So, sustained and substantial negative interest rates are not likely, and if they were, it would mean that such bonds only have value if rates continue to move even further into negative territory. This would be a questionable long-term investing approach for the individual investor. Future of bond rates — It would be logical to assume that because interest rates have no place to go but up, bonds will soon recover to their former historical rates of return.

The problem is almost no one is predicting a rapid rise in interest rates , and the U. Federal Reserve System the Fed is expecting to keep base interest rates at zero for the foreseeable future. The Fed has also been clear that the pace of any interest rate increases is highly dependent on the health of the economy. If the economy starts to grow very fast and inflation starts to pick up, then interest rates may need to rise higher or more quickly.

But almost no one is predicting a fast-growing economy or a substantial increase in inflation soon. A two percent increase would put the current September yield for a year bond at about 2. But that is still an extremely low yield for such bonds by historical standards.

So, all expectations are that bond returns will continue to be very low. Like any prediction, there is considerable uncertainty around this estimate, but again, it appears to be the most likely scenario. Future of bond prices — There is another problem with the current low bond yields. When bond yields go up, bond prices go down.

This relationship is explained more here. Even though most of the return from bonds comes in the form of interest income, decreasing bond prices still take a bite out of those returns. That calculator provides the following price declines for the year US bond, which yields about 0.

This estimate assumes no reinvestment of interest payments and that neither the yield nor the price of the fund changes further in years 6 through Again, the inflation-adjusted bond returns were negative in this period. These examples are also consistent with a study conducted by Research Affiliates. As shown in this graph using the year U. So, even allowing for the difficulties of predicting future interest rate changes, history suggests that low bond yields today are likely to provide low returns in the future.

Ideas for mitigating bond investing — There is a pretty constant stream of media articles nowadays pointing out ways to partially avoid some of the current problems with bonds. While we can quibble about details that might moderately boost bond returns, all of these approaches likely result in inflation-adjusted returns that hover around zero.

Further, some of these bond scenarios are both more complex to implement and not significantly different from simply holding cash. The best bank savings accounts currently September pay about 0. Timing the bond market? My short answer is, no. I think there is a fundamental difference between stocks and the current bond situation.

And it is very hard to determine when stock prices are so inflated that the bubble is about to burst. The practical floor in bond rates is fundamentally different given there are very few fools who will want to invest in negative yields for the long term. Bond dangers — Even before bond yields reached the unprecedented lows of , many investors were pointing out that bonds are more dangerous in a historically low rate environment:.

Consequently, a mindful perspective tells us we should be skeptical about the standard claims that a diversified portfolio needs to contain a balance of stocks and bonds, or at least we should be skeptical that bonds need to represent a substantial proportion of that balance at all times. I come back to this point in more detail in Article 7. So, it might be reasonable to assume that stocks are also going to suffer greatly as interest rates continue to rise. The Fed is projecting a base interest rate of around 0.

Outside of interest rate rises, is there anything else special about our current situation that would likely impact the future of stocks? There are many international, economic, government policy, technology, and business factors among a few that could impact stock returns and risks in any given period. This is simply taking the stock price and dividing it by the annual earnings per share. Both measures can be useful at times. Attempting to predict stock returns in the next year, or even the next few years, is essentially an impossible exercise because stocks are so volatile and can react suddenly to myriad random events from around the world.

The one thing we know for sure is that stocks will go down as well as up, although the overall trajectory will likely be upward over sufficiently long periods. The future of stocks is very likely to be the same roller coaster it has always been.

A mindful perspective also demands humility. These conclusions are based on history, which will never be repeated exactly. Likewise, predicting the future is notoriously difficult, particularly based on economic and financial models that are imperfect at best. Humility suggests that we cannot entirely ignore the traditional role of bonds in investment portfolios.

Particularly if interest rates unexpectedly sky-rocket in the next few years, many of the dangers of bonds will diminish, and bonds could once again provide a reasonable balance of risk and returns. The appropriate mix of stocks and bonds and cash is discussed more in Article 7 on diversification. After reading your article I have a question, do you believe it is the risk premium in the stock market that has changed, or is the shift in expected stock return solely due to lower interest rate?

Thanks for taking the time to read this post and your thoughtful question. In answer to your question, I would say that neither a change in risk premium nor interest rates explain at least directly the lower expected stock returns moving forward. The direct cause that most of these estimates point to is high current valuations of stocks.

The firms also vary in their approaches to formulating the forecasts, though most rely on some combination of valuations, current yields, and earnings-growth and inflation expectations to arrive at return expectations. BlackRock Investment Institute's Capital Markets Assumption report allows users to home in on return expectations for a broad swath of asset classes and time periods, from five to 25 years. For each asset class, the firm provides a median expected return, as well as "uncertainty bands" depicting returns in a range.

The firm provides assumptions for conventional asset classes as well as nontraditional ones such as hedge funds and private equity. Interestingly, BlackRock's five-year forecasts for U. Indeed, the firm's methodology document indicates that it expects corporations to exhibit decent earnings growth over the next five years, but price multiples are apt to contract.

Its return forecast for U. GMO has been called a "permabear" for its notoriously pessimistic forecast, and the firm's most recent seven-year forecast upholds that characterization. No doubt owing to higher valuations for equities and lower starting yields for bonds, its return forecasts for both asset classes are even worse than they were a year ago.

Yet the firm retains a sunny outlook for one asset class: emerging-markets equities. It's expecting the broad category to return an annualized, inflation-adjusted 4. One major turnabout from GMO's seven-year forecast a year ago is that the firm is much less sanguine on the prospects for emerging-markets debt. While a year ago GMO was forecasting a 2. It's worth noting that the firm's pessimism on U. Morgan's capital markets assumption report is wide-ranging and data-packed.

The firm's to year return expectations for U. The firm pointed to receding "valuation headwinds" as the rationale for the slightly higher projection but also warned that its long-term return expectations were well below historic norms. In addition, the firm expects developed-markets equities outside the United States to outperform U. Like the other firms, J. Morgan sees little cause for enthusiasm for U. Treasuries dropped from 3. Note that J. Morgan Asset Management expresses its return assumptions in nominal, rather than inflation-adjusted, terms.

However, the firm expects inflation to remain mild. Morningstar Investment Management Highlights: 1. Morningstar Investment Management's outlook for U. It's forecasting a 1. MIM's outlook is more sanguine outside the U. In expecting better returns from developed-markets equities than it does from emerging, Morningstar's forecast stands in contrast to those from GMO and Research Affiliates below ; both firms are most sanguine about emerging-markets equities.

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This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Learn more about purchasing power with NerdWallet's inflation calculator. The stock market is geared toward long-term investments — money you don't need for at least five years. Here's our list of the best high-yield online savings accounts.

Between and today, you can see there have been up years and down years, but over this year period, those fluctuations have averaged out as a positive return. The rest of the time they were much lower or, usually, much higher. Volatility is the state of play in the stock market. So what kind of return can investors reasonably expect today from the stock market?

Temper your enthusiasm during good times. However, when stocks are running high, remember that the future is likely to be less good than the past. It seems investors have to relearn this lesson during every bull market cycle. Become more optimistic when things look bad. A down market should cause you to celebrate: You can buy stocks at attractive valuations and anticipate higher future returns.

We take an unconditional long-term view, which means that neither valuation or current economic environment is relevant. These long-term expected returns can be used as the equilibrium returns for asset and liability management ALM studies for long-term investors such as pension or endowment funds.

Researcher at Quant Research team, Robeco. Strategist Global Macro team, Robeco. Expected Returns Outlook Tackling the trilemma. Trends and thematic investing: cutting through short-term noise. Graph of the week.

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How to achieve investment returns of 10% and above?

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Oct 15, — Investors have two options today: Either to prefer a low-risk long-term return that is below inflation in the fixed-income investment universe,. - Or. Oct 25, — Investors have two options today: Either to prefer a no-risk long-term return that is lower than inflation in the fixed income investment universe. Tightening credit spreads have eroded expected returns for investment grade and of returns over different time horizons — from five years out to the long term.