Single year predictions can help make sense of why the market is behaving a certain way in real time, but long-term predictions provide a much better signal for portfolio allocation decisions. At the beginning of every year, investment research groups publish reports on market conditions for a variety of forward-looking time frames. Two of my favorite reports are the ones from BlackRock and BNY Mellon. The chart below contains the average of their predictions along with some historical information from Morningstar:
What is most striking here is the forecast for U.S. versus international equities. These predictions show both that developed markets (DM) such as Europe and Japan, as well as emerging markets (EM) like Mexico and China will outperform U.S. stocks. On top of that, they are predicting that stocks in general will have lower than historical returns for the foreseeable future.
Not all analysts predict underperformance by U.S. equities, but that is the aggregate consensus. There is much more to discuss here like the relationship between REITs and private real estate and different choices for bonds, but that will come in a future newsletter.
Decision Points
So what should the average investor do with all this? The good news is, most likely nothing. The most helpful thing that annual predictions provide is the knowledge that there wasn’t some obvious scheme you could have followed to perfectly position yourself for whatever market craziness might come that year. If there is a big downturn you’ll hear all kinds of people come out of the woodwork showing how they predicted it, but don’t be fooled when it happens.
Also, it’s worth a reminder that the past decade was unusually good for U.S. stocks. The figure below shows BNY Mellon’s prediction for U.S. Large Cap stocks from 2014 and how much the actual returns exceeded that prediction:
The takeaway here is to recalibrate our expectations and prepare for a future with lower returns in general. With all that in mind, here is my take on 2024:
- Feel confident maintaining your portfolio exactly as it was last year. A diversified set of funds with a volatility appropriate for your timeline remains the core of good investing, as always. Discussions around active or passive funds, advisor or self-managed, or domestic vs international all amount to minor optimizations.
- If you are interested in minor optimizations, incorporate some amount of international stock exposure in your portfolio if you aren’t doing so already. I’ll go into more detail in a future newsletter, but BNY Mellon and Fidelity use a roughly 60/30/10 breakdown for US/DM/EM allocations.
- For even more optimizations, add hedge funds to your portfolio. When done properly this has added around 2% to aggregate annual returns historically and is standard practice for clients at places like Goldman Sachs and Morgan Stanley. There is a process to this that is a bit complicated to explain, but actually implementing it is straightforward. I’ll save a full explanation for a future time, but below is a glimpse into what it might look like.