Total Return Forecasts: Major Asset Classes | 2 November 2022

PUBLISHED Nov 4, 2022, 12:05:00 PM        SHARE

imgThe Capital Spectator Blog

Expected long-run returns for most of the major asset classes continue to look relatively attractive after this year’s market declines, based on updates of models run by CapitalSpectator.com. In turn, a broad measure of risk assets points to a performance premium in the future vs. recent history.

The average of three models that forecast total returns indicate premiums over the trailing 10-year return for the Global Market Index (GMI), an unmanaged, market-value-weighted portfolio that holds all the major asset classes (except cash). Although the ex ante estimate is only slightly above the trailing 10-year result, the revival of a premium marks a shift from recent years. As recently as data through August estimated GMI’s expected performance was below the realized return for the trailing decade.

Today’s revised estimates, based on numbers through October, show (for a second month) that the majority of the major asset classes are projected to earn returns above their trailing 10-year performances. The lone outlier: US stocks, which are forecast to generate a 7.8% annualized total return in the long run — well below the 12.4% annualized 10-year performance.


GMI represents a theoretical benchmark of the optimal portfolio for the average investor with an infinite time horizon. On that basis, GMI is useful as a starting point for research on asset allocation and portfolio design. GMI’s history suggests that this passive benchmark’s performance is competitive with most active asset-allocation strategies overall, especially after adjusting for risk, trading costs and taxes.

Keep in mind that all forecasts above will likely be incorrect in some degree, although GMI’s projections are expected to be more reliable vs. the estimates for the individual asset classes shown in the table above. By contrast, predictions for the specific market components (US stocks, commodities, etc.) are subject to greater volatility and tracking error compared with aggregating forecasts into the GMI estimate, a process that may reduce some of the errors through time.

For historical perspective on how GMI’s realized total return has evolved, consider the benchmark’s track record on a rolling 10-year annualized basis. The chart below compares GMI’s performance vs. the equivalent for US stocks and US Bonds through last month. GMI’s current 10-year return (green line) is a solid 5.9%. That’s fallen substantailly from recent levels and it’s slightly below the current long-run projection.


Here’s a brief summary of how the forecasts are generated:

BB: The Building Block model uses historical returns as a proxy for estimating the future. The sample period used starts in January 1998 (the earliest available date for all the asset classes listed above). The procedure is to calculate the risk premium for each asset class, compute the annualized return and then add an expected risk-free rate to generate a total return forecast. For the expected risk-free rate, we’re using the latest yield on the 10-year Treasury Inflation Protected Security (TIPS). This yield is considered a market estimate of a risk-free, real (inflation-adjusted) return for a “safe” asset — this “risk-free” rate is also used for all the models outlined below. Note that the BB model used here is (loosely) based on a methodology originally outlined by Ibbotson Associates (a division of Morningstar).

EQ: The Equilibrium model reverse engineers expected return by way of risk. Rather than trying to predict return directly, this model relies on the somewhat more reliable framework of using risk metrics to estimate future performance. The process is relatively robust in the sense that forecasting risk is slightly easier than projecting return. The three inputs:

  • An estimate of the overall portfolio’s expected market price of risk, defined as the Sharpe ratio, which is the ratio of risk premia to volatility (standard deviation). Note: the “portfolio” here and throughout is defined as GMI

  • The expected volatility (standard deviation) of each asset (GMI’s market components)

  • The expected correlation for each asset relative to the portfolio (GMI)

This model for estimating equilibrium returns was initially outlined in a 1974 paper by Professor Bill Sharpe. For a summary, see Gary Brinson’s explanation in Chapter 3 of The Portable MBA in Investment. I also review the model in my book Dynamic Asset Allocation. Note that this methodology initially estimates a risk premium and then adds an expected risk-free rate to arrive at total return forecasts. The expected risk-free rate is outlined in BB above.

ADJ: This methodology is identical to the Equilibrium model (EQ) outlined above with one exception: the forecasts are adjusted based on short-term momentum and longer-term mean reversion factors. Momentum is defined as the current price relative to the trailing 12-month moving average. The mean reversion factor is estimated as the current price relative to the trailing 60-month (5-year) moving average. The equilibrium forecasts are adjusted based on current prices relative to the 12-month and 60-month moving averages. If current prices are above (below) the moving averages, the unadjusted risk premia estimates are decreased (increased). The formula for adjustment is simply taking the inverse of the average of the current price to the two moving averages. For example: if an asset class’s current price is 10% above its 12-month moving average and 20% over its 60-month moving average, the unadjusted forecast is reduced by 15% (the average of 10% and 20%). The logic here is that when prices are relatively high vs. recent history, the equilibrium forecasts are reduced. On the flip side, when prices are relatively low vs. recent history, the equilibrium forecasts are increased.

Avg: This column is a simple average of the three forecasts for each row (asset class)

10yr Ret: For perspective on actual returns, this column shows the trailing 10-year annualized total return for the asset classes through the current target month.

Spread: Average-model forecast less trailing 10-year return.

Originally Posted in The Capital Spectator

Sound investments
don't happen alone

Find your crew, build teams, compete in VS MODE, and identify investment trends in our evergrowing investment ecosystem. You aren't on an island anymore, and our community is here to help you make informed decisions in a complex world.

More Reads
Wealth Managers May Need A Complete Rethink

Economics textbooks define inflation as ongoing increases in the general price level for goods and services in an economy over time, or variants thereof. This innocuous sounding definition belies the cataclysmic consequences for investors of inflation becoming high, then entrenched.

Dividend Stock Watch List: Lanny’s November 2022 Edition

Welcome back to another dividend stock watch list article! The stock market is still down almost 19% year-to-date, but the last full week of October there definitely was a big push!

Is Verizon a Good Dividend Stock?

Despite the recent uptick, the bear market is still growling in 2022. The Nasdaq and S&P 500 Index are down more than 20% each, while the Dow 30 is doing somewhat better. Consequently, many high-quality stocks’ stock prices have also declined, along with valuations. One such stock is Verizon Communications (VZ), trading near its 52-week low and the lowest price in a decade. But is the stock a value trap, or is Verizon a good dividend stock?

AWK Stock Forecast - Is American Water Works A Good Stock To Buy?

American Water Works (AWK) is a good stock to buy. Investors can take advantage of the lower price of this utility stock and get a stable dividend every quarter. AWK stock forecast is also positive.

How to Conveniently Manage Your Private Investments

It’s not easy managing your private investments, but it doesn’t have to be a pain. There are many ways you can make the process easier and more convenient for yourself.

Market Musing 10-31-2022, Halloween, Will Fed Pivot future Rate Hikes after Wednesday?

High Volatility: VIX > 26. The US Markets are waiting on FOMC Rate Hike of 75 basis points on Wednesday

Initial Exchange Offering (IEO): Crypto Exchange Managed Fundraising

Have you ever wondered what an IEO is and how it relates to fundraising in crypto? Read more in this article.

Initial Coin Offering (ICO): Blockchain-based Fundraising

Ever wanted to find out about ICOs? Here an article explaining in detail.

What Stocks are Consumer Discretionary | consumer defensive vs consumer cyclical vs consumer staples

Consumer Discretionary stocks mostly outperform the market. Adopting good strategies helps to get maximum benefit. Learn more.

The Dollar Returns from the Weekend Bid

The dollar has come back from the weekend bid. After the ECB and BOJ meetings last week, the focus has shifted back to the US where the FOMC meeting concludes in the middle of the week and the October employment report is out ahead of the weekend.

Is Life Insurance Better Than Traditional Investing?

There are lots of social media videos where “experts” say life insurance is a superior investment to 401(k) and IRA accounts.

How to Value Utility Stocks

Stable, well-run utilities can be predictable to value. We’ll walk through the steps you need to do to find the intrinsic value of a utility

Risk Rated Funds Are Broken

I have a piece being published in CityWire this week which I think might make some waves. Its message is that passive and active risk rated funds, in which tens if not hundreds of billions are invested worldwide, are broken and could remain so for years. The reason? High inflation.

Recent Stock Purchase October 2022

As you know by now I make a stock purchase every single month no matter what is going on in the world and despite the doom and gloom headlines. Perhaps I am naive or more of an optimist that we will get through these dark financial times somehow. Either way, I have been busy buying up some stock this month and was happy to put some fresh and recycled capital to work to try and recoup some of my lost dividend income courtesy of the numerous cuts bestowed upon my portfolio in recent years.

October 2022 Stock Considerations

A new trading month is about the begin and boy do we have a seemingly endless crop of stocks that are becoming fair valued to undervalued. The reality of the day is that we’ll continue to see stock prices continue to come down as interest rates rise. No reason to believe interest rates will stop climbing anytime soon.

Earnings and Cash Flows: A Primer on Free Cash Flow

It is never pleasant to be in the midst of a market correction, but a market correction does operate as a cleanser for excesses that enter into even the most disciplined investors' playbooks in the good times. This correction has been no exception, as the threat of losing investment capital has focused the minds of investors, and led many to reexamine practices adopted during the last decade. In particular, there has been more talk of earnings than of revenue or user growth this year, and the notion of cashflows driving value seems to be back in vogue.

Deleveraging to Build Back Better

Hey everyone This is a post that is a long time running and one that I actually didn’t really want to sit down and write. For the first time since we started investing, I have actually turned bearish. We decided to sell off some stock to pay off our home equity line of credit completely. This will definitely destroy our passive income at the moment but I feel like its a good move being debt free once again.

30 Frugal Living Tips to Build a Fortune

You can live a rich life by spending less… Frugal living doesn’t mean skimping on what’s valuable. Instead, it’s a way to maximize value in your life. This is the big difference with being cheap… Cheapskates try to find the lowest price tag on everything. As a result, they often buy goods that don’t last long.

5 Funeral Home Stocks and Death Care Trends

There are two certainties in life… death and taxes. Most people plan for taxes each year but few plan their funeral. It’s a tough topic to discuss but your family will be relieved that you had it planned. Losing a loved one is difficult and when you’re emotionally fragile and grief-stricken, planning a funeral is even harder. Funeral homes know this. They’re for-profit companies, and their industry is booming thanks to the world’s growing (and grieving) population.

Current Open Options Trades

As described in my goals post here, my focus has changed to only choosing “Quality” companies for my options trades. Chasing premium is nice when it works, but as you will see below, I have been left with some companies that I would rather not own.

Resources for Publishers
Resources for New Investors

Boosted with BossCoin