Assumptions for Risk and Investment Returns

The effectiveness of any effort to assess your future financial security depends on using assumptions about many variables.  These include your life expectancy, saving and spending levels over time, inflation, and hypothetical investment returns on your savings.  Each variable must be considered very carefully, and the results need to be viewed under multiple scenarios.  This gets complicated, especially since there are competing methodologies about how to build the variables, and much of this guesswork is getting more scientific (and accurate) on a daily basis.

Of course, it is very obvious to everyone that there will be a lot of room for disagreement about future investment returns, depending on how the computations are made, and the weight of historical returns over different time periods.  Bessemer Trust is certainly a reputable and sophisticated institution that caters to the ultra wealthy, so I am confident that their published guesses are as sound as any out there.  The link to these is here: Bessemer, Asset Risk & Return Assumptions, 10.15

You will see that assumptions are broken down among discrete asset classes, and are comprehensive, including equities, fixed income, and alternative investments-both US and Global.  Your personal combination of asset classes will be very dependent on your circumstances, goals and risk tolerance – each of which also change, over time.  You will also note that they are using 2.8% for an assumed long term guesstimate for inflation.  We have not seen inflation that high in the U.S. since 2011.

The Will Doctor believes that the best financial plan can only be effective if it is embraced and understood by the client.  One way to assure that is to involve everyone in the process, and give the client more opportunities to adjust the plan as it is constructed.  The other way is to present the results that are understandable and actionable.  This is difficult, and many firms recognize this and are developing new ways to see the insights which can be gleaned from a good plan.

Posted in Perspectives, Planning Opportunities, WillPlan Blog.