This article updates our estimates of medium-term expected returns for major asset classes, and also includes an analysis exploring the historical accuracy of yield-based return estimates, compared to reasonable alternatives.
How have our return estimates changed since last year?
• Most estimates have fallen slightly over the past year
• For equities, higher valuations are partly offset by slightly higher growth estimates
• Bond return estimates are little changed since last year, with U.S. Treasuries seeing a small reduction due to a flatter yield curve
• Credit return estimates are somewhat lower due to tighter spreads
How accurate are yield-based return forecasts?
Using over a century of data, we find that yield-based forecasts have been more accurate than alternative methods for a 10-year horizon. But we also show that 10-year outcomes can stray far from forecasts, and that naïve statistical measures such as correlations may be unreliable guides to predictive power. The results support our view that such estimates are more useful for setting appropriate medium-term expectations than for aggressive tactical allocation decisions.
The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.