Modern portfolio theory is the framework around which many advisors build portfolios.

But MPT came with a warning label: The model is only as good as the assumptions you make about estimated returns, said well-known market researcher Ed Easterling, founder of Crestmont Research.

And the assumptions advisors are making today about expected returns are, in many cases, way off base, said Easterling, who describes himself as a “market climatologist.”

That’s because advisors are not taking into account the fact that the market is seriously overheated because of high valuations.

Normalized P/E ratios on U.S. stocks (of near 30) are higher than they’ve ever been except for the late 1990s, Easterling said in an interview Tuesday.

That means advisors can expect, at best, a 5 to 6 percent annual return over the next decade. And that best-case scenario will occur only if inflation stays low, which supports higher multiples. If inflation moves up to around 3.5 percent, that could cause multiples to shrink and returns to drop to 1 percent. If slower growth causes multiples to contract even further, average annual total returns from U.S. stocks over the next decade could run into negative territory, Easterling said.

“I have no ability to predict what the market will do next year, but I’m pretty confident over 10 years,” Easterling said.

(Similarly, money manager Research Affiliates is estimating a mere 0.6% average annual return for the S&P 500 index over 10 years: Two percent from dividends, 1.3 percent from earnings growth, but a loss of about 2.6% per year from a contraction in the current 10-year Shiller P/E of 29.)

While it is likely returns will be below average for the next five to 10 years, there are things advisors can do to mitigate the damage, Easterling said. The foremost thing is to minimize losses.

“The tortoise might have the advantage over the hare,” he told attendees last week at the Investment Management Consultants Association’s annual meeting in San Diego. “If you reduce the variability of return, you get a greater compounded return.”

For example, from 2000 through 2016, by getting half the upside and half of the downside of the S&P 500, a $1,000 investment grew to about $1,800 versus $1,500 for a buy-and-hold approach.

Advisors should use broadly diversified portfolios to reduce volatility, and include asset classes and strategies that they might have overlooked in the past, Easterling tells Financial Advisor.

“Advisors’ instincts are to compare returns” among investments, he said, and when they assume U.S. stocks will return 10 percent, everything else looks bad.

“The reality is, you should run your Monte Carlo simulator using relevant return assumptions, as [Harry] Markowitz [the founder of MPT] told us to do,” he said. “With stocks, if your best case is 5 or 6 percent, all of a sudden there are a lot of investments that look pretty attractive” as diversifiers.

Examples include REITs tied to real property, certain MLPs and inflation-linked bonds, he said. These assets can respond to inflationary scenarios, which would drive down valuations.

Easterling adds that it has been tough for bears like him to be taken seriously as the market moves higher. He includes in that bearish camp Research Affiliates founder Rob Arnott; John Hussman, the founder of the Hussman Funds; and Jeremy Grantham, co-founder of GMO.

“If we maintain the integrity of our message and call them as we see them, the result is so negative it almost doesn’t seem credible,” Easterling said.

But the current U.S. valuation level is dangerous. “We’re in the top 10 percent—well into top 10 percent—of all [valuation] periods in history,” he said.