Experts Foresee Lower Returns Across Asset Classes

They are telling investors, young and old, to get their portfolios in order now—not in the throes of the next recession. 

Over the past five years, equities have delivered an average annual return of 15%, which is not sustainable, says Jim Smigiel, chief investment officer at SEI in Oaks, Pennsylvania.

“We do not expect that to continue in the foreseeable future, perhaps even the next 10 years,” Smigiel says. “Rather, we expect equities to deliver annual returns in the 6% to 7% range, which is a decent level of return but not what investors have experienced.”

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

Bond returns will be muted as well, Smigiel says. “The last five years have delivered an annual average return of 2.5%. We expect 3% over the next 10 years,” he says. “Thus, looking at a portfolio of equities and bonds, it will probably deliver a return in the mid-single digits.”

SEI is not recommending that its investors take on a large amount of additional risk in order to boost those returns. Instead, the company is recommending that clients invest in some high yield and emerging market equities and bonds, but overall, SEI is “having the hard conversation” to reset clients’ expectations for lower returns, Smigiel says.

Smigiel also believes that investors should buck the recent trend to turn to passive, lower cost investments and consider actively managed funds. “If you can add even 50 to 100 basis points to your return net of fees, that is pretty meaningful. Every little bit helps,” he says.

Robert Johnson, president and CEO of The American College of Financial Services in Bryn Mawr, Pennsylvania, also expects that equity and bond market returns over the next 10 years could be significantly lower. He is hopeful that once investors catch wind of this, it will motivate them to save more. For younger investors, Johnson does not think they should dramatically change their allocations, as they have a long time horizon ahead of them.

However, older investors within 10 years of retirement are truly in the “red zone,” Johnson says. The worst thing they could do is to embrace more risk, he says. “If you are behind on retirement savings, there isn’t a whole lot you can do to make up the difference other than try to stay in the workforce longer, save more money, plan on a lower standard of living in retirement and delay taking Social Security” until the payments would reach the maximum.

Aash Shah, senior portfolio manager at Summit Global Investments in Salt Lake City, Utah, believes that in light of the projected lower returns, investors should build a “defensive portfolio.”

NEXT: Building a defensive portfolio

This would consist of 35% of the portfolio invested in “20 blue-chip, low-volatility, dividend-paying, free-cash-flow paying stocks like Procter & Gamble, Intel and Microsoft, with no more than four stocks in any one sector,” Shah says. He believes that investors should have another 25% of their portfolio invested in physical real estate.

Next, he recommends 20% in laddered, investment grade municipal bonds in large states that have high taxes, like California. “By laddering them, you can eliminate interest rate risk and benefit by reinvesting if the rates go up,” he says.

The next portion of the portfolio, 15%, should be in laddered intermediate government and high-quality, investment-grade corporate bonds, with the final 5% in short-term bonds with a one- to two-year maturity, Shah maintains.

Ron Madey, president and chief investment officer of Wealthcare Capital Management in Richmond, Virginia, agrees that there should be a place for bonds in a lower-return environment in order to manage downside risk, noting that long-term Treasuries did “exceptionally well” following the Great Recession of 2008.

INTECH, however, believes investors should remain committed to stocks, says John Brown, head of global client development at the firm, based in West Palm Beach, Florida. The firm has developed an investment strategy whereby rather than evaluating stock fundamentals, it looks at a stock’s volatility propensity, he says.

“This doesn’t result in blazing outperformance, but it is designed for a defensive posture, and can reduce risk by 40%,” Brown says. “We think this approach makes sense, particularly for folks in a defined contribution plan because protecting on the downside is critical when you look at long-term compounding because the amount you need to get back to whole is less.”

Life Events Can Be a Crucial Consideration for Well-Being Programs

Debt, caregiving and "boomerang" children can take a financial toll on people's lives, as well as a physical toll.

What’s going on in people’s lives impact many other aspects of life and reveal a strong connection between health and wealth, Fidelity contends.

This year, the average person will most likely experience four life events such as starting a new job, caring for a family member, buying a new house or having a child. Fidelity collaborated with the Stanford Center on Longevity and surveyed more than 9,000 employees to understand how those events affected a person’s health and wealth.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

Not only does debt take a financial toll on people’s lives, but the survey found nearly 70% of women indicated taking on debt led to higher stress levels, compared to 47% of men. Thirty-six percent of women sleep worse (21% of men), 34% of women gained weight (17% of men) and 29% of women were less active (12% of men).

On the flipside, paying off debt has a major impact on overall happiness, especially for women: fifty-nine percent of women reported paying off debt made them happier, compared to 50% of men, 62% of women indicated their lives were improved (53% of men), and 44% of women reported lower stress levels (37% of men).

Adult children who move back home can also take a toll. One in nine Boomer parents surveyed said their kids returned “to the nest” in the past year. Fidelity found those new housemates come at a cost: 76% of parents said they face higher expenses. The health impacts are significant for women, as 46% reported sleeping worse and 40% reported gaining weight.

Coming Up: The generation experiencing the most negative impact from life events

Thirty percent of people surveyed had a reorganization at work in the past year, and more employees cited reorganizations as the most significant life event than any other life event in the survey. Reorganizations had negative impacts on each area of well-being, with 64% of people reporting feeling less happy and 30% feeling worse about their finances.

Being a caregiver is significant for everyone, but the burden is highest for Boomer women, the survey found. One in four reported taking on the caregiving role for a sick or elderly family member in the past year. Thirty-seven percent of women report saving less after becoming a caregiver (26% of men).

Generation X has experienced the most negative impact on well-being from life events. They are the new “sandwich generation,” trying to raise kids, save for college, pay off debt and care for aging parents, all while trying to save for retirement and health care. The study revealed 65% of Gen Xers had a life event that negatively impacted their well-being versus 60% of Boomers and 57% of Millennials.

“The study reveals that a sense of well-being isn’t always about who you are, how old you are or how much you make but it has more to do with the moments in your life that matter. Two people with the same basic demographic profile could be at very different places in their lives and need different help to support their finances, health and happiness,” says Jeanne Thompson, senior vice president of Thought Leadership, Fidelity Investments. “The good news is that most employers offer a wide array of benefits to help employees navigate life, everything from retirement and health care, to financial wellness and Employee Assistance Programs. The challenge is many don’t take advantage of the full range of benefits offered. A critical part for employers is understanding how life events impact a person’s total well-being and engaging employees with the right benefit to the right person at the right time.”

«