I decided to pull expected return projections from a few big names in the asset/fund management industry for easy access to information (and for fun).
I have seen many laypeople projecting returns of stocks quite loosely based on historical data. A common estimate is in the ballpark of 7-10% p.a. nominal returns. This estimate may appear “conservative enough” given the spectacular performance of stocks in recent history. Unfortunately, backward-looking data can be limited, since it is future returns that we want to model. The standard projections of forward-looking returns in academia tend to use some valuation metric—a measure of how highly priced stocks are today (e.g. with respect to earnings). This is an imperfect, but possibly our best forward-looking prediction.
Nobody can predict the future. But it would still be useful to at least get a different set of opinions on future returns compared to the lay investor projections. Note that returns projection tend to be inaccurate in the short and even medium term. All projections are geometric (compounded) and per annum. Here are the tables:
10-year real returns projection
| Vanguard | Blackrock | Research Affiliates | AQR | PWL Capital* | Average | |
|---|---|---|---|---|---|---|
| US Treasuries | 2.25% | 1.17% | 2.10% | 2.50% | – | 2.01% |
| US TIPS | 1.27% | 1.75% | 2.20% | – | – | 1.74% |
| Global Aggregate Bonds | 2.63% | 1.46% | 2.50% | 2.00% | 1.09% | 1.94% |
| US Equity | 2.25% | 2.43% | 0.80% | 4.20% | 4.06% | 2.75% |
| SG Equity | – | 5.56%* | 6.10% | – | – | 5.83% |
| Global Equity | 2.88% | 3.12% | 2.40% | 4.40% | 4.91% | 3.54% |
10-year nominal returns projection
| Vanguard | Blackrock | Research Affiliates | AQR | PWL Capital | Average | |
|---|---|---|---|---|---|---|
| US Treasuries | 4.30% | 3.90% | 4.60% | 4.60% | – | 4.35% |
| US TIPS | 3.30% | 4.50% | 4.70% | – | – | 4.17% |
| Global Aggregate Bonds | 4.68% | 4.20% | 5.00% | 3.30% | 3.62% | 4.16% |
| US Equity | 4.30% | 5.20% | 3.30% | 4.35% | 6.66% | 4.76% |
| SG Equity | – | 8.20% | 8.60% | – | – | 8.40% |
| Global Equity | 4.94% | 5.90% | 4.90% | 6.80% | 7.53% | 6.01% |
US Government projection for 10-year treasuries are:
2.23% (real) and 4.57% (nominal).
Notes on missing data
- Where a company gave only nominal returns, I calculated in their expected inflation to get real returns.
- Where a company gave only real returns, I calculated in their expected inflation to get nominal returns.
- Real return = ((1 + nominal return)/(1 + inflation rate)) – 1
- Where a company gave only US asset and ex-US asset projections, I mashed the two together in proportion to a global index. Example: MSCI ACWI: 65% US, 35% ex-US, I took (65% x US returns) + (35% x ex-US returns).
Observations/thoughts
- Volatility is not included here
- Don’t take the averages seriously
- A standard 100% Global equity portfolio should plan with modest expected return assumptions
- Vanguard and RA expect a very small equity risk premium, so bonds look good from their perspective
- Returns tend to be lower than expected because geometric (compounded) returns are less than arithmetic returns
- Real returns are what matters
- Even if SG inflation is lower than US inflation, a SG investor with equity in USD might still get lower real returns due to exchange rates. Explanation (in a different context) here.
- Contrary to popular belief Singapore stocks are not “boring” or “slow”, they are actually quite volatile.
I think the poor expected returns projection highlight a rather counterintuitive aspect of stock markets. When the market is doing exceptionally well, future returns are expected to be lower; whereas if the market is doing exceptionally poorly, future returns are expected to be higher. There is some amount of reversion to the mean expected.
This means that for a long term investor (e.g. a young person), it is actually better for them if the stock market crashes. Market crashes naturally result in lower valuations, in turn increasing future expected returns. On the other hand, a retiree would obviously not want the stock market to crash. This is the insight behind Buffet’s quote:
Be fearful when others are greedy, and be greedy only when others are fearful
The best predictor of how much you earn from an investment, is how much you paid for it. You earn more if you pay less, and earn less if you pay more. When everything is soaring at sky highs, you unfortunately have to pay more. This doesn’t mean you should sit at the side and wait to invest—you will likely lose out more from sitting out of the market. But it does mean we should tone down our expectations of investment returns.
Phoxchp 
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