Friday, August 23, 2013

Jeremy Grantham's Expected Asset Returns--Next 7 Years

Jeremy Grantham,  one of the most respected investors in the world, has come out with a report that ranks various asset classes for their expected inflation-adjusted performance over the next 7 years.   His company, GMO, manages about $100 Billion for investors.

From The Big Picture, I've included a graph of his projections.  The takeaway is that US stocks are very pricey, with negative expected returns of -2% for large US Stocks and -3.5% for Small US Stocks.  He says that "high quality" US stocks should return about 3% per annum.  I'm not sure what he means, but I'm interpreting "high quality" as large cap stocks with international exposure like those in the S&P 500.  Normal equity returns are above +6% per annum (excluding dividends). 

But, according to his analysis, international and emerging stock markets are cheap(er) with +2% and +6% expected returns, respectively.  Notice that emerging market debt is cheaper too.  He includes timber as an alternative asset class as a sort of 'teaser.'  I guess he's saying that commodities might be a good investment.   All in all, the world's stock markets are too expensive.  If you can wait for a 20% correction, then expected returns would be much better.  If you're patient, you'll get it.  I think that such a correction may very well be underway now and that there may be a selling "climax" in October of this year--not unlike 1987.

Here's the graphic (Click graphic to enlarge).

Projected Annualized Real Returns Of Assets Over 7 Years (from GMO)   
Given this information,  I need to adjust my projected portfolio mix shown in my blog Easy Investment Portfolio Management Using ETFs to a mix more heavily weighted in international and  emerging market stocks and bonds.  Here's the new and adjusted mix:  My Adjusted ETF Portfolio Mix.  Again, I intend to wait for a correction this fall.  

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