Predict Your Financial Future: A Look at Powerful Market Forecasts

October 28, 2024

Do you ever wonder how a financial professional predicts the future success of your financial plan? A critical number for any financial plan is the expected return of your investments over time. It can greatly influence the probability of success in achieving your financial goals. Instead of past returns, long term capital market assumptions are a data driven way to the estimation of future returns. Below is an exploration of these assumptions, their benefits, and what is currently forecasted for the markets over the next 10 to 15 years.

What are Long Term Capital Market Assumptions?
Long term capital market assumptions are forecasts for the risk and return of different asset classes over a long-term time horizon. Key outputs for each asset class include expected performance, volatility, and correlation to other asset classes over time. One major strength of utilizing these assumptions is they are data driven and do not rely solely on historical return data. This process takes into consideration the current economic environment, asset prices, valuations, and many other data points to quantify where markets can go from here. The second major strength is the ability to think long-term. With the focus 10 to 15 years in the future, the long-term forecasts are more accurate than short-term predictions and help investors make reasonable expectations about the future. Investors and portfolio managers use these assumptions to construct better portfolios, develop more accurate financial plans, and make informed asset allocation decisions.

A few important caveats when utilizing these assumptions. No return is guaranteed! Long term capital market assumptions are not a perfect prediction of what an asset class will return over time. Instead, it is meant to serve as reasonable predictions to aid in portfolio planning and strategic decision making. While returns are forecasted over many years, they are updated each year to account for the ever-changing economic environment. Additionally, not all long-term capital market assumptions are created equally. These predictions are released by a wide range of asset managers, all with their own methodologies and building blocks for these assumptions. Since assumptions between asset managers vary, it is useful to consider multiple perspectives on the outlook of asset classes.

What to Expect Going Forward?
As we enter the fourth quarter, updated long term capital market assumptions are being released to reflect the views of asset managers across the world. Globally, the story is one of declining inflation and a shift by central banks from financial tightening to easing. While central banks have started to ease financial conditions, interest rates are currently elevated compared to recent standards. Going forward, this higher starting point for fixed income reinforces favorable projected bond returns over the next 10 to 15 years. 

On the equity side, markets have performed favorably in 2024 with global equities rallying over 17% through October 25th. Due to the strong growth, equities are at a higher starting point than the previous year. Thus, long-term forecasts for equity returns have lowered. Despite a slight decrease from last year, long-term forecasted equity returns remain attractive. While projected returns are attractive, risks remain in the equity market. Stretched valuations and increasing concentration in certain areas of the market continue to highlight the importance of a diversified portfolio.

Security National Bank will update our asset class projections for the coming 2025 year and beyond. These projections will go into effect at the start of 2025 and make their way into your financial plan’s investment returns. If you have any questions about your expected returns or just want to update your financial plan, please reach out to your advisor today for guidance! Your financial success matters to us.