Fall is an excellent time of year for sports fans. With every major professional sport underway and college football in full swing, a fan can enjoy a game every night of the week and all day long on Saturday and Sunday. As a born and bred Wisconsinite, the season offers heavy doses of the highs and lows that accompany cheering for the teams of our home state.
Unfortunately, the Brewers’ regular-season success fizzled early in the post-season, and just seven games into the Packers' season, 30 years of uninterrupted Hall of Fame quarterbacking appears to have ended. Cheeseheads’ remaining optimism lies with the Bucks—who made a blockbuster trade leading into the season and are predicted to contend for an NBA title this season.
All told, it’s a big time not only for sports but for sports predictions. When it comes to sports, my approach to forming expectations for my teams is far from rigorous … and is prone to the emotional swings that fandom can produce. My outlook can change from game to game and even play to play. That's the benefit of something as unserious as watching sports.
But when it comes to helping our clients reach their financial goals, nothing could be more important—which brings us to another season of predictions. Fall also marks the time of year when financial predictions, known as capital market assumptions, are released for the years ahead. Nearly every major financial institution attempts to predict the investment returns of major asset classes based on current market conditions. They change each year … sometimes a little, sometimes a lot.
Financial market prediction season
We collect and evaluate predictions from numerous sources. Here’s what we do with them:
First, we compare them and determine where there is agreement and differences.
Next, we combine the forecasts with financial models that suggest the portfolio allocations that produce the highest return for different levels of risk and assess existing portfolios for potential changes.
We can then glean valuable insights around key investment disciplines, including:
- Setting expectations: The potential return for an investment depends on the starting point. Trees don't grow to the sky, and strong recent returns often come at the expense of weaker future returns. Our process allows us to develop appropriate future return expectations based on current economic conditions and market valuations of each asset class.
- Focusing on long-term goals: Markets are inherently volatile, and short-term fluctuations are a part of the game. To achieve financial objectives, it's valuable to take a step back from the mood of the moment and instead calibrate portfolios based on big-picture trends and opportunities that will drive future returns.
- Mitigating risk: By understanding the potential portfolio contribution of many different investments, we can make informed decisions and manage portfolios to target a specific return objective while mitigating risk to the greatest extent possible.
Implications of this season’s predictions
So, what does the current round of forecasts suggest for portfolios?
As highlighted by my colleagues in recent commentaries, fixed-income returns have become more attractive than at any time in recent history. For some investors, financial objectives may be attainable with a larger bond allocation than in the past. Return expectations for equities have declined from a year ago, a result of the strong year-to-date returns of the market. Compared to long-term averages for equities, the current forecasted returns are modestly lower.
Alternative investments, such as real estate, private equity, and private debt, are forecasted to generate competitive returns while providing portfolio diversification. Where suitable for investors, we believe alternative investments have an important role to play by generating returns somewhat independent of the performance of stocks and bonds.
We recognize no individual forecast is perfect but believe our investment process is a sound—and deliberate, unlike my own approach to sports predictions—approach to building robust portfolios.
