GMO 7-Year Asset Class Return Forecast Check-in: 2020 vs. 2013

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Although I avoid daily stock market quotes, I have been reading Jeremy Grantham’s quarterly letters and the GMO 7-Year Asset Class Return Forecasts for over 10 years now. These projections are based on their proprietary models, with a strong focus on historical valuation. Each year, I can now compare their current forward-looking forecast against how their past forecasts have turned out. Here’s the GMO forecast looking forward as of November 2020:

Here was their forecast back in July 2013:

Using the S&P 500 as US Large Cap, we see that the forecast of -2.1% annualized real return was quite far off. ETFReplay shows that both the IVV and VOO S&P 500 ETFs returned +117% between July 30, 2013 to July 30, 2020. That is an annualized return of 11.7%. SmartAsset shows annual inflation ran 1.8% during that time. That results in a 7-year annualized real (inflation-adjusted) return of 9.9% between July 2013 and July 2020.

One takeaway here is that making investment moves (market timing) based on valuation can be quite unreliable and painful. If you’re out of the market and get it wrong, when do you go back in? You’ll have to swallow your pride and admit a mistake. In my experience, it is simply easier to do nothing than to jump in and out. Instead, I use these forecasts to help me remain a buy-hold-and-rebalance investor. Here’s how:

  • They usually temper the urge to put all your money in hot and popular asset classes. They help keep your expectations reasonable. For example, right now it is unreasonable to expect another 7 years of 10% annual returns from the S&P 500.
  • They usually provide support for rebalancing and buying more of beaten-down and currently unpopular asset classes. Manage your risk.
  • They remind you that future 5/7/10-year bond returns will be very close to current 5/7/10-year bond yields.
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Comments

  1. Is it just me or is emerging market equity always forecast to have the highest return (most risk, most reward?), but it never actually materializes (in recent history, over 10+ years)?

    On the plus side, I’ve managed to hold emerging markets (according to my asset allocation) throughout all of this, so I guess I’ve proven that I can stick to the plan and not panic sell 🙂

    • Emerging Market did have a great run for a while and it definitely hasn’t been that hot over the last decade. The valuations are pretty low, so I am still optimistic. One worrying observation that I did read was from Bill Bernstein, who suggested that the not-widely-acknowledged reason why EM stocks haven’t performed that well is corruption. People are getting rich, but it’s not always flowing to the shareholders. The legal system in EM countries is not as strong as in the US and other developed markets.

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