I was using the morningstar asset allocator tool on T Rowe Price and I was surprised at the results:
For VFINX, a proxy for the S&P 500 with 100% allocated to equities, the expected annual return is 7.74%. That's ,I assume, after fees but before tax.
More surprising is how little effect adding bonds to the portfolio had on the expected annual return. For example the expected annual return for my darling fund Vanguard Wellington (65% large cap stock / 35% bonds) was 7.26%, only about 6.2% lower than VFINX. Off course the standard deviation was much lower for Wellington than for VFINX as expected (possible 3 month loss was 14.9% for VFINX Vs. 9.4% for Wellington, a 37% drop due to the addition of bonds).
So what gives? Do they know something I don't know to use expected annual return numbers this low? Clearly it seems like they don't think we will continue to get the often mentioned 10-12% annual returns on stocks in the future. So when planning for retirement should we still be counting on the 8-10% returns that most people and financial planners use or should we count on the much lower numbers that M* uses in this tool?
For VFINX, a proxy for the S&P 500 with 100% allocated to equities, the expected annual return is 7.74%. That's ,I assume, after fees but before tax.
More surprising is how little effect adding bonds to the portfolio had on the expected annual return. For example the expected annual return for my darling fund Vanguard Wellington (65% large cap stock / 35% bonds) was 7.26%, only about 6.2% lower than VFINX. Off course the standard deviation was much lower for Wellington than for VFINX as expected (possible 3 month loss was 14.9% for VFINX Vs. 9.4% for Wellington, a 37% drop due to the addition of bonds).
So what gives? Do they know something I don't know to use expected annual return numbers this low? Clearly it seems like they don't think we will continue to get the often mentioned 10-12% annual returns on stocks in the future. So when planning for retirement should we still be counting on the 8-10% returns that most people and financial planners use or should we count on the much lower numbers that M* uses in this tool?