The figure of long-term 7% real returns is accurate assuming a 60-40 stock bond portfolio, averaged over around 100 years of US stock market. This estimate does not include the information about the current over or under valuation of the stock.
However, if you start investing now, in 2016, not at some average starting time in the past 100 years, note that the US stock market is over-valued according to the CAPE metric. As well as average real returns of 7%, historical data also makes a strong case for CAPE valuation being a good predictor of expected market returns over the following 10 years.
If your long-term forecast takes the additional information of the current over-valuation of the US stock market into account, the 10-year forecast of expected real returns for a 60-40 stock bond portfolio is roughly 4-4.5%.
One fairly obvious way to mitigate this might be to over-weight your portfolio to focus on stocks that are currently regarded as under valued by the CAPE metric instead of simply investing according to current market capitalization weights.
shoo|9 years ago
However, if you start investing now, in 2016, not at some average starting time in the past 100 years, note that the US stock market is over-valued according to the CAPE metric. As well as average real returns of 7%, historical data also makes a strong case for CAPE valuation being a good predictor of expected market returns over the following 10 years.
If your long-term forecast takes the additional information of the current over-valuation of the US stock market into account, the 10-year forecast of expected real returns for a 60-40 stock bond portfolio is roughly 4-4.5%.
One fairly obvious way to mitigate this might be to over-weight your portfolio to focus on stocks that are currently regarded as under valued by the CAPE metric instead of simply investing according to current market capitalization weights.
Further details in this article from 2012 (things look slighly more over-valued 4 years later): http://www.researchaffiliates.com/Production%20content%20lib...