Data and Research

Market Growth Expectations Continue to Drop Long-Term

Looking to 2017 and beyond, investors must accept that expectations for market returns over the next 10 to 15 years have declined for most asset classes. 

By John Manganaro editors@strategic-i.com | January 09, 2017
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Sharing advanced data from their forthcoming 2017 Long-Term Capital Market Assumptions report, J.P. Morgan Asset Management researchers tell PLANADVISER they expect marginally tougher investing conditions during 2017, continuing the trend of declining long-term return assumptions.

“In an overall portfolio context, the return for a simple 60% world equity and 40% U.S. aggregate bond portfolio is expected to be in the neighborhood of 5.5% to 6.0%, roughly 75 basis points below our 2016 assumptions,” explains Anne Lester, head of retirement solutions for the firm’s global investment management solutions group. “Volatility forecasts are also marginally higher.”

According to J.P. Morgan’s assumptions, the combination of lower fixed-income returns, a decline in economic growth assumptions and reduced equity returns “pulls the efficient frontier uniformly down.”

“In fact, the major components of this 60/40 portfolio are among the asset classes with the proportionately greatest decline in return assumptions versus last year’s estimates,” Lester warns. “Plan sponsors face a stark choice once they have acknowledged the outlook for lower returns.”

Some plan sponsors will choose to stay the course—with participants contributing at their current deferral rates, often into relatively undiversified portfolios.

“Alternatively, they can take action to help improve retirement outcomes, such as encouraging participants to save more,” Lester suggests. “They could consider investment strategy options that can make portfolio diversification easier; and provide participants with the opportunity to enhance returns through the use of active management.”

Naturally, the firm is encouraging participants to save more and start earlier.

“We’ve said it many times, and it still bears repeating. The downgrading of our long-term economic growth and market return assumptions, combined with longer life expectancy, points to a heightened possibility of participants outliving their retirement savings,” Lester says. “Saving more is the most obvious and effective way to improve retirement outcomes.”

NEXT: Saving more simply a necessity