Short-Term vs. Long-Term Market Forecasts

I don’t believe in trying to time the market because of the weighty evidence against it. However, I do regularly cite the institutional 10-year market outlooks. I don’t expect these outlooks to be perfect by any means. Vanguard, one of the sources, often gives ranges of 4-5% per year even on their long-term outlooks. But there is data to support the accuracy of 10-year market outlooks when compared to shorter time frames.

Vanguard recently published an article outlining the differences in accuracy between short-term and long-term forecasts.  

Below are the consensus analyst forecasts of 1-year S&P 500 Index levels versus actual returns since 2011.

Source: Vanguard

Below is Vanguard’s 10-year forecast versus actual 10-year annualized returns for globally diversified, balanced portfolios.  

Source: Vanguard

The 1-year market forecasts fall outside their expected ranges 75% of the time while their 10-year market forecasts have historically stayed within their expected ranges. These long-term outlooks can be helpful for two reasons. They can inform some portfolio allocation, resulting in modest increases to asset classes with more attractive risk/return characteristics. And second (and most important), they can be used to update your long-term return assumptions in your financial plan. For example, a 60% US stock portfolio and 40% US bond portfolio historically returned about 8%. The 10-year outlook is roughly 6% for the same portfolio, so lowering your return assumption may be the prudent thing to do.  

Happy Planning,

Alex

This blog post is not advice. Please read disclaimers.