Over the next decade, the traditional 60-40 portfolio will post average lower annual returns than many online bank accounts do today, according to a web tool from Newport Beach, Calif.-based Research Affiliates.
A portfolio consisting of 60 percent equities and 40 percent bonds will post average annual real returns of just 50 basis points over the next decade, said Jim Masturzo, Research Affiliates’ senior vice president, asset allocation, on a Wednesday webcast.
“Investing is hard, and this market will kick you in the teeth,” said Masturzo. “The focus should be on how do we create portfolios well-positioned for the future that are able to meet our future spending obligations. For a majority of investors, risk is failing to meet their long-term spending needs.”
Masturzo explained that most of the firm’s assumptions lie on projections for 50 basis points of annual growth from large-cap stocks. The S&P 500 is projected to produce an average annual dividend yield of 2 percent and long-term earnings growth of 1.3 percent, but lose 2.8 percent in valuation annually.
By comparison, annual percentage yields of 1 percent or more are available in online savings accounts from Ally and Synchrony, and online checking accounts from Aspiration.
The low return estimate might come as a shock to some investors, admits Masturzo. In equities markets, earnings growth has failed to keep up with rising stock prices, while fixed-income returns will continue to be muted by low short-term interest rates and monetary tightening by central banks.
Yet a 60-40 portfolio had returned 4.9 percent net of inflation year to date through May 31, said Masturzo, with the Bloomberg Barclays U.S. Aggregate Bond Index yielding 1.2 percent, while U.S. large-cap stocks have returned 7.4 percent—a “spectacular rise in the markets.”