Experts Foresee Lower Returns Across Asset Classes

They are telling investors, young and old, to get their portfolios in order now—not in the throes of the next recession. 

By Lee Barney | May 03, 2017
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Over the past five years, equities have delivered an average annual return of 15%, which is not sustainable, says Jim Smigiel, chief investment officer at SEI in Oaks, Pennsylvania.

“We do not expect that to continue in the foreseeable future, perhaps even the next 10 years,” Smigiel says. “Rather, we expect equities to deliver annual returns in the 6% to 7% range, which is a decent level of return but not what investors have experienced.”

Bond returns will be muted as well, Smigiel says. “The last five years have delivered an annual average return of 2.5%. We expect 3% over the next 10 years,” he says. “Thus, looking at a portfolio of equities and bonds, it will probably deliver a return in the mid-single digits.”

SEI is not recommending that its investors take on a large amount of additional risk in order to boost those returns. Instead, the company is recommending that clients invest in some high yield and emerging market equities and bonds, but overall, SEI is “having the hard conversation” to reset clients’ expectations for lower returns, Smigiel says.

Smigiel also believes that investors should buck the recent trend to turn to passive, lower cost investments and consider actively managed funds. “If you can add even 50 to 100 basis points to your return net of fees, that is pretty meaningful. Every little bit helps,” he says.

Robert Johnson, president and CEO of The American College of Financial Services in Bryn Mawr, Pennsylvania, also expects that equity and bond market returns over the next 10 years could be significantly lower. He is hopeful that once investors catch wind of this, it will motivate them to save more. For younger investors, Johnson does not think they should dramatically change their allocations, as they have a long time horizon ahead of them.

However, older investors within 10 years of retirement are truly in the “red zone,” Johnson says. The worst thing they could do is to embrace more risk, he says. “If you are behind on retirement savings, there isn’t a whole lot you can do to make up the difference other than try to stay in the workforce longer, save more money, plan on a lower standard of living in retirement and delay taking Social Security” until the payments would reach the maximum.

Aash Shah, senior portfolio manager at Summit Global Investments in Salt Lake City, Utah, believes that in light of the projected lower returns, investors should build a “defensive portfolio.”

NEXT: Building a defensive portfolio