An accurate reflection of the New Normal, or another pessimistic 401(k) prediction destined to pass?
“Portfolios dominated by mainstream asset classes have a very low probability of earning a 5 percent annualized real return over the next decade,” writes Research Affiliates in a brutal new report.
It’s a reality most investors are “blithely overlooking,” according to the California-based firm.
“A comparison of the most popular investing strategies used to build retirement nest eggs suggests the chances of any producing a 5 percent annualized real return for investors over the next decade is quite slim. Portfolio alpha and/or alternatives allocations are unlikely to change this conclusion.”
It studied the default returns in 11 retirement calculators, robo-advisors and institutional investor surveys built on hundreds of underlying participants. The average and median annualized long-term expected returns, it found, were 6.2 percent and 6 percent, respectively.
After reducing the “nominal 10-year average and median returns we arrive at 5 percent. If investors are counting on earning a 5 percent real return, what are the odds they will be able to do it?”
Allowing that “perfect foresight” eludes them, they find a 60/40 portfolio has a 0 percent probability of achieving a 5 percent. A target date fund TDF+10 glide path achieves a real return of 5 percent in only 2 percent of their range of returns.
As for alternative investments, “If the vast majority of the portfolio is expected to produce a 2.5 percent real return, then the pie slice of alternatives has to earn closer to a 12 percent real return after all fees and expenses in order for the entirety of the plan to generate a 5 percent real return.”
Adding mischief to misery, Research Affiliates further asserts, “Allow us to observe that these estimates may be, in fact, too optimistic.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
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