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Components of building and maintaining a comprehensive financial plan are analogous to driving a car. When driving, first and foremost, it is important to know where you want to go. It is also important to have a forward-looking view. After all, no one drives while locking eyes with the rearview mirror. That is not to say what has happened in the past should not play a role. Rather, it should only assist with your ride as opposed to being the driving force in your experience. 

For decades, investment professionals forecasted future returns based primarily on historical returns – essentially driving with all focus on the rearview mirror. History provides some insight into the relative expected returns of stocks, bonds, and alternatives, their volatility, and correlations. But evidence shows that while the historical return of U.S. large cap stocks is approximately 10% annually since 1926, that may not be a good estimate over any given period – even those as long as 20 years. The difference may not seem enormous, but expecting a 10% annual return and only achieving an 8% return over a 20-year period could disrupt an individual’s financial plan.

Following the 2007-2009 financial crisis, Savant joined the “Tactical Think Tank” (TTT) group which represented ten Registered Investment Advisory firms from across the country. This group set out with the goal of determining whether or not it was possible to estimate forward-looking returns over short and long time horizons. While tests of factors used to estimate shorter-horizon returns proved fruitless, observing over longer time horizons resulted in several fundamental factors proving useful in creating a more accurate picture of forward-looking returns. For stocks, valuation-related factors such as the current Price/Earnings ratio and the Price/Book ratio were among those that have a strong correlation with future returns (see Figure 1). When looking at bonds, we learned that current interest rates, inflation, and credit spreads all play a key role in long-term return expectations.

Forward-Looking Returns : Correlation of PE Ration

A decade later, Savant continues to review, research, and adjust our proprietary forward-looking return methodologies, as they permeate every client’s experience in three primary ways. First, our forward-looking return methodologies assist us in crafting a better asset allocation due to a more precise and consistent view of future expectations. Second, having a view of future risk and returns allows clients to better assess which asset allocation best fits their need for return combined with ability and willingness to take risk. Lastly, the forward-looking returns help improve inputs into our financial planning models, especially when expectations stray from historical averages. This allows us to have a realistic conversation on how to help position our clients for a greater chance of success in meeting their financial goals.

Forward-Looking Returns

For more information on Savant’s forward-looking return process, read our most recent white paper.

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Savant Capital Management is a Registered Investment Advisor. This information is not intended as personalized investment advice. The index returns herein assume reinvestment of all dividends and interest and do not reflect fees or expenses. Index portfolios reflected in this publication are not representative of any actual client returns. Savant’s marketing material should not be construed by any existing or prospective client as a guarantee that they will experience a certain level of results if they engage the advisor’s services.

Savant’s 20-year (long-term) asset class return estimates were developed using various methodologies. For each of the asset classes, there is a stated methodology. For some asset classes, we use an average of several methodologies to avoid placing too much emphasis on any one input such as historical risk premiums. Savant may change the methodology from time to time based on further research or other pertinent information.

Please remember that past performance is not indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Savant Capital Management), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Some of the information given in this article has been produced by unaffiliated third parties and, while it is deemed reliable, Savant does not guarantee its timeliness, sequence, accuracy, adequacy, or completeness. Moreover, you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from Savant Capital Management. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to their individual situation, they are encouraged to consult with the professional advisor of their choosing. Please Note: “Ideal” is not intended to give assurance as to achieving successful results. Savant Capital Management is neither a law firm nor a certified public accounting firm and no portion of the article content should be construed as legal or accounting advice. If you are a Savant Capital Management client, please remember to contact Savant Capital Management, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of Savant Capital Management’s current written disclosure statement discussing our advisory services and fees is available upon request.

About Savant Wealth Management

Savant Wealth Management is a leading independent, nationally recognized, fee-only firm serving clients for over 30 years with more than $7 billion in assets under management. As a trusted advisor, Savant Wealth Management offers investment management, financial planning, retirement plan and family office services to financially established individuals and institutions. Savant also offers corporate accounting, tax preparation, payroll and consulting through its affiliate, Savant Tax & Consulting.

Savant Wealth Management is a Registered Investment Advisor. Different types of investments involve varying degrees of risk. Savant’s marketing material and/or rankings should not be construed by a client or prospective client as a guarantee that they will experience a certain level of results if Savant Wealth Management is engaged, or continues to be engaged, to provide investment advisory services nor should it be construed as a current or past endorsement of Savant Wealth Management by any of its clients. Please see our Important Disclosures.