Expected Returns

Easy to take for granted, and not as simple as they look

We've become accustomed to expecting certain returns from our portfolios, and we may hardly blink an eye when an advisor tells us that the portfolio allocation we have will return x%.  But do you really know if those return assumptions are valid or informed?  We've put together this basic tool to illustrate the the impact that various asset classes and weights can have on your overall rate of return.  The data we are using is from the Dimensional Fund Advisors 2016 Matrix Book, and the timeframe is the most recent 20 years.  We could have used many different asset classes and sub-classes, but felt it was best to keep it simple for now. Our asset classes and average returns over this period are as follows:

  • U.S. Large Cap Stocks - S&P 500 Index: 8.2%
  • International Stocks - MSCI EAFE: 4.4%
  • U.S. Small Cap Stocks - Dimensional U.S. Small Cap Index: 11.5%
  • Bonds - Barclays U.S.Aggregate Bond Index: 5.3%

 

You are free to change the returns for these asset classes as desired.  If you do, imput your return assumption in decimal format, i.e. a 7.5% return would be entered as .075.

Additionally, make sure that your allocation weights are whole numbers and that all four of them add up to 100%