It doesn’t seem like much to ask for—a 5% return. But the odds of making even that on traditional investments in the next 10 years are slim, according to a new report from investment advisory firm Research Affiliates.
The company looked at the default settings of 11 retirement calculators, robo-advisers, and surveys of institutional investors. Their average annualized long-term expected return? 6.2%. After 1.6 percentage points were shaved off to allow for a decade of inflation, the number dropped to 4.6%, which was rounded up. Voilà.
So on average we all expect a 5%; the report tells us we should start getting used to disappointment. To show how a mainstream stock and bond portfolio would do under Research Affiliates’ 10-year model, the report looks at the typical balanced portfolio of 60% stocks and 40% bonds. An example would be the $29.6 billion Vanguard Balanced Index Fund (VBINX). For the decade ended Sept. 30, VBINX had an average annual performance of 6.6%, and that’s before inflation. Over the next decade, according to the report, “the ubiquitous 60/40 U.S. portfolio has a 0% probability of achieving a 5% or greater annualized real return.”
One message that John West, head of client strategies at Research Affiliates and a co-author of the report, hopes people will take away is that the high returns of the past came with a price: lower returns in the future.
“If the retirement calculators say we’ll make 6% or 7%, and people saved based on that but only make 3%, they’re going to have a massive shortfall,” he said. “They’ll have to work longer or retire with a substantially different standard of living than they thought they would have.”