In The Intelligent Portfolio (Book Review), the author has published real expected returns from various asset classes calculated by Financial Engines. Financial Engines uses a technique called reverse portfolio optimization - i.e. use estimated volatilities and correlations from history and solve for expected returns from an optimal portfolio, the market portfolio.
Cash - 1.7%
Short bonds - 2.6%
Long bonds - 3.6%
Large-Value US Equities - 7.0%
Large-Growth US Equities - 7.6%
Small-cap US Equities - 7.4% to 8.0%
Europe - 7.1%
Pacific - 6.4%
Emerging Markets - 6.6%
It’s interesting to note that growth stocks have higher expected returns than value stocks, US equities have higher expected returns than foreign stocks and small caps have roughly the same expected returns as large-cap equities. These returns are also much higher than estimates from other sources that Canadian Investor posted recently.
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2 responses so far ↓
1 telly // Jul 24, 2008 at 9:23 am
I’d love to see those kinds of real returns from US equities in the near future!
I haven’t checked the link yet but are those predicted rates long term going forward?
2 Canadian Capitalist // Jul 24, 2008 at 10:21 am
telly: Me too. My assumptions (I took the lower end of Bogle’s estimates) are much more conservative. Hopefully, if the other estimates are closer to what we actually achieve, we could retire years earlier!
Canadian Investor posted expected long-term real rates of return from various sources including Richard Ferri, US Social Security Administration and CPP. All are higher than my assumptions but lower than the ones posted here.
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