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Kiplinger's Personal Finance: Keeping an eye on future investment returns
Kiplinger’s Personal Finance

Kiplinger's Personal Finance: Keeping an eye on future investment returns

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Long-term forecasts don’t necessarily have a long shelf life.

Financial markets have been good to investors for the past decade.

But the consensus of expert opinion is to expect returns that are lower than we’ve been used to over the next several years.

Long-term forecasts are revised regularly as market conditions change, producing ripples of change in future returns.

Here’s a sampling of what experts expect from financial markets:

Next five years:

  • The soothsayers on the Capital Market Assumptions team at Northern Trust Asset Management expect moderate U.S. economic growth of 2.1%, on average, over the next five years, while interest rates remain low and inflationary forces are checked by productivity-boosting technology and automation.

The forecast calls for U.S. stocks to return 4.7% annualized, including dividends. You might get 5.4% annualized in European shares and the same from emerging-markets stocks, says Northern Trust.

A big risk to the forecast is a resurgence in inflation, says chief investment strategist Jim McDonald.

Fixed-income returns overall will barely beat inflation, with investment-grade bonds in the U.S. likely to deliver an annualized return of 2.3% over the next five years, according to Northern Trust.

Ten-year Treasuries will pay an annual interest rate of 1% over the period, with short-term rates at zero or below. Investors who can tolerate the risk might earn an annualized 5.5% return in U.S. high-yield bonds, according to Northern Trust.

Next 10 years:

  • Once you start looking 10 years out, the view improves, especially for stocks, say strategists at BofA Securities.

Ten-year returns for the S&P 500 index have been negative just 6% of the time, going back to 1929.

BofA is neutral-to-negative on stocks over the short term. But even figuring in today’s elevated valuations, the firm’s expectations for corporate earnings growth suggest an annualized price gain of 3% to 4% for the S&P 500 index over the next decade.

Adding in two percentage points of dividend yield gives you a 5% to 6% annualized total return over the period, says BofA.

BofA recommends high-quality stocks with strong balance sheets and consistent earnings, especially if the rising tide of low interest rates, easy money and federal stimulus starts to ebb.

Next 30 years:

  • Jean Boivin, head of the BlackRock Investment Institute, admits it’s “pretty heroic” to estimate market returns so far in advance.

Nonetheless, investors with a long view need a starting point from which they adjust their portfolio over time, he said.

BlackRock sees large-company stocks returning an annualized 7.2% over the next three decades. But given the uncertainties of such a long-range forecast, returns as high as 10.5% and as low as 4% fall within a reasonable band of probability.

U.S. small-cap stocks should edge their bigger brethren, with an expected annualized return of 7.5% through 2050.

The top-performing stock groups: Chinese shares (10% annualized return), followed by large-cap emerging-markets stocks (8.9%) and European large caps (7.6%). The U.S. bond market in aggregate could deliver 2.5%, according to the 30-year forecast.

Send questions to moneypower@kiplinger.com. Visit Kiplinger.com for more on this and similar money topics.

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