Are investors facing lower returns in the years ahead?

Predicting investment returns isn’t easy.

Nobody can do this with accuracy, regardless of their experience, intellect or resources.

However, when the collective crystal ball gazing from some of the world’s leading investment firms is collated, it’s worth a look.

US-based Horizon Actuarial has done just that with its annual survey of capital market assumptions.

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It’s collected and compared the long-term return forecasts from global heavyweights like BlackRock, Vanguard, Goldman Sachs, and JPMorgan.

The 41 firms surveyed use a range of different methodologies to come up with their estimates, but the results provide a robust snapshot of what professional investors expect over the next decade or two.

A clear message is that the days of double-digit returns might be behind us, at least for a while.

The survey’s consensus view suggests that US shares will return 6.4 per cent annually over the next decade.

That’s not terrible if the inflation rate averages 2.4 per cent over the period, as this same group expects.

But it’s a far cry from what many investors have become accustomed to in recent years.

The S&P 500 index in the US has delivered an annual return of 14.6 per cent over the past decade, in part due to the very strong gains we’ve seen recently.

The same disparity isn’t expected for other sharemarkets.

Developed markets outside the US are expected to see slightly stronger gains of 7.2 per cent, while emerging markets equities are higher again at 7.6 per cent.

Those numbers are closer to what we’ve seen from those two regional groupings in the past 10 years.

However, the US is the world’s dominant market, representing more than 60 per cent of global indices.

That means a much more modest path of returns from the American market will easily overwhelm the more “regular” gains from non-US shares.

It’s not hard to see why many of these large investors are setting their sights lower.

US share prices look expensive by historical standards, while interest rates are still being carefully managed the Federal Reserve walks a tightrope between growth and inflation.

Meanwhile, economic growth in other developed markets is facing headwinds such as aging populations, while productivity gains have become harder to achieve.

Let’s hope AI can turn that last concern on its head.

In contrast to shares, return expectations for conservative assets have become more encouraging.

Respondents expect US Treasury bonds to deliver 3.6 per cent annually over the next decade.

That might sound low, but in the last decade Treasury bonds have returned just 1.4 per cent per annum, and only three times has a calendar year return beaten that forward estimate during the period.

Global fixed income has been disappointing for years, offering very subdued returns that have barely kept pace with inflation.

That’s changed, with interest rates finally lifting themselves off the floor and giving income-focused investments some breathing room.

One area where return expectations remain healthy is in the alternative assets space, which includes things like private equity, private debt, infrastructure and commodities.

The survey suggests private equity could still deliver returns north of nine per cent annually, while private debt and infrastructure might manage 7-8 per cent.

These types of assets are no longer the domain of only the uber wealthy, with regular investors able to get an exposure much more easily.

What makes this survey particularly valuable is what it tells us about uncertainty, and the limitations of forecasting.

The firms involved have armies of analysts and a wealth of resources at their disposal, yet the range of expectations among them is enormous.

Some are predicting returns more than double the estimates of others, for the same hypothetical portfolio.

That won’t surprise anyone who’s been involved in financial markets.

Markets are inherently unpredictable, and anyone claiming to know where they’ll go next is probably trying to sell you something.

What we can say with more confidence is that the consensus points toward more modest returns than we’ve become used to.

That doesn’t mean opportunities don’t exist, because they certainly do.

It just means the easy gains of recent years might be behind us for now, and investors will need to work harder for their returns.

They’ll need to pay closer attention to fees and costs, be more discerning about investment options and most importantly, adjust their expectations.

The investor who expects a 10 per cent annual return and takes excessive risks chasing that is likely to come unstuck, or at least be disappointed.

The one who plans for 6-7 per cent returns and builds a sensible, diversified portfolio is much more likely to achieve their goals.

That should comfortably outpace inflation, and you’ll go close to doubling your money in a ten-year period.

We just need to recognise that we might be entering a period where patience and discipline matter more than market timing and stock picking.

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