In getting a handle on potential medium-term returns from an asset class, the key is its starting point valuation. For example, if current yields – say bond yields and dividend yields – are lower than “normal,” this will likely constrain returns relative to the past. Our approach to assessing medium-term return potential is to start with current yields for each asset class and apply simple and consistent assumptions regarding capital growth. We prefer to avoid reliance on forecasting and to keep the analysis as simple as possible. Complicated adjustments just lead to compounding forecasting errors. For equities, a simple model of current dividend yields plus trend nominal GDP growth (as a proxy for earnings and capital growth) does a good job of predicting medium-term returns. This approach allows for current valuations but avoids getting too complicated. Return projections using this approach are shown in the table in the latest Oliver's Insights: (VIEW LINK)
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