It depends on who you ask.
Ask the man or woman in the street, and they might say an investment return of 10%, 12% or even more, is the norm. (Not).
But among professionals, expectations continue to ratchet downward.
Some of the biggest pension funds and other large professional investors are afraid that future returns on stocks and bonds will fall short compared to those of the past, a legacy of slowing global growth, aging populations and pervasively low interest rates.
For example, top officials at Calpers, the California pension fund that is the largest in the U.S., say investors need to expect returns of less than 7.5% per year.
The State of Florida aims even lower. Its pension consultant wants to base forecasts on only a 7% rate of return.
Burton Malkiel, author of the investment classic A Random Walk Down Wall Street, says realistic long-term projections for stocks should be in the 5 to 7% range, with a balanced portfolio returning significantly below that.
What’s behind the grim forecasts
“Right now, things look pretty bleak for the next 10 years,” says David Blanchett, head of retirement research at Morningstar, in an interview with Bloomberg.
That doom and gloom outlook marks a huge change for the U.S., where investors have largely enjoyed decent investment returns, except during the tech and financial downturns.
Part of the problem is today’s low interest rate environment.
Current bond yields are considered an accurate predictor of future bond returns. According to officials at Vanguard, that would place mainstream bond returns over the coming decade at only 1 to 2 percent.
That’s far below long-term historical bond returns (from 1926-2015) of about 5.4% per year.
Based on current stock prices, dividend yields, and anticipated growth rates, over the next decade stocks might earn only 5 to 7 percent, below long-term average returns of 10% per year.
That would mean a balanced portfolio, with a roughly equal mix of stocks and bonds, might earn only 4 to 6%.
What you can do to fight back
Unless you’re a gazillionaire, those paltry returns won’t get you where you want to go.
So first of all, be aware that despite all the grim talk, absolutely no one knows what market results will be over the coming decade, and beyond.
Forecasters have an uncanny knack for being wrong, and these gloomy investment projections may turn out to be way off base.
(Remember those 1980’s predictions that Japan would take over the U.S. economy? Recall the panic over Y2K? Forecasts of monumental inflation over the Fed’s easy money policy? It’s always something, and usually it’s wrong).
But one thing is true.
“Over the next 10 years, the markets aren’t going to bail you out if you haven’t saved enough,” says Bill McNabb, chief executive officer at Vanguard.
So here’s some expert advice for an uncertain financial future.
Focus on what you can control. That means how much you save, how much you spend, how much you withdraw in retirement, and how you invest. Don’t count on investment returns to do the heavy lifting for you; you’ve got to do your part first. For most people, that means saving enough (10-15% of gross income), not overspending, and avoiding consumer debt.
Choose the right asset mix. Stocks have more risk, but they also hold the promise of greater returns. If bond returns turn out to be as low as we expect, you better have enough stocks in your portfolio to keep your portfolio chugging along. You might need to tweak your portfolio allocation to suit the changing times.
Know when to dump the index. We all know the virtues of an inexpensive index-driven, or passive, approach. But sometimes the index just won’t cut it, especially in the bond world. To get the returns you need, you’ll need to step off the beaten path and seek out fresh opportunities using flexible and customized strategies.
Keep it real. Here’s a final word of wisdom. These returns might seem lower than what we’ve enjoyed in the past, but if inflation stays low, your take home is still pretty decent. Remember when inflation was above 10%? Earning 11% in that context still netted you only 1%. That makes today’s returns look positively princely.