GMO 7 year forecast for Asset classes

[stocknoob4111]

https://www.gmo.com/americas/research-l ... t-3q-2020/



Looking at the above forecast and it does not look pretty. What would be your fixed income allocation at the moment if you were retiring in about 2 years from now and what type of fixed income would you hold? Bonds?, Cash? From that above chart it looks like even Bonds will lose about 4% annualized which would be super painful.

This article here claims one should be in cash for the next 7 years which also seems like an extreme view to me.

https://seekingalpha.com/article/439995 ... xt-7-years (view on mobile if you can't read it)

[Nathan Drake]

That seems....extremely bearish on all fronts

What was their reasoning? There’s no larger report on the link

[rich126]

This won't be popular here but learn how to value stocks and in the long run you'll do better. Sure you'll miss on more than a few but simply eliminating companies that aren't profitable can help a lot.

Of course most here will just hope the future will provide the 6%+ returns of the past.

[stocknoob4111]

What was their reasoning? There’s no larger report on the link

There is an explanation in the SeekingAlpha article. The general gist is that valuations are stretched beyond belief and we are even worse now than in early 2000 and in addition the 40 year Bond Bubble will unravel so there is no place to hide except cash.

[secondopinion]

https://www.gmo.com/americas/research-l ... t-3q-2020/



Looking at the above forecast and it does not look pretty. What would be your fixed income allocation at the moment if you were retiring in about 2 years from now and what type of fixed income would you hold? Bonds?, Cash? From that above chart it looks like even Bonds will lose about 4% annualized which would be super painful.

This article here claims one should be in cash for the next 7 years which also seems like an extreme view to me.

https://seekingalpha.com/article/439995 ... xt-7-years (view on mobile if you can't read it)

That suggests that US bonds lose (in real terms) around 22% over the 7 years (and inflation linked bonds). How would that be even possible unless there was a severe interest rate spike? Even then, how would bond durations averaging 6 to 8 years in many bond funds maintain such a loss over 7 years? And how would emerging debt dodge that spike?

Seems like an advertisement for "Emerging Value" more than anything.

[theorist]

I’m not sure that there is value in forecasts, but if so, it may be helpful to contextualize GMO’s take amongst the forecasts of many comparably eminent firms. See this from Morningstar today:

https://www.morningstar.com/articles/10 ... 21-edition

[Tamalak]

Why would the expected return on any non-insurance asset class be negative nominal?

US bonds, -3.5% real?? How is that supposed to happen? Even safe bonds are returning 1% nominal, so either:

-They think inflation will be 4.5% annually going forward (but it can't be, because they list cash as -0.6% real?)
-They are talking about bonds with a substantially greater than 7 year term

[surfstar]

How Did GMO Asset Return Forecasts Actually Turn Out? 2011-2018
https://www.mymoneyblog.com/gmo-asset-r ... -2018.html

Some quick and simple observations:

US Large-Cap and US Small-Cap stocks did a lot better than forecasted. Compounded over the full 7 years, the difference was on the order of doubling your money vs. making nearly nothing.
International Developed Large-Cap and International Small-Cap stocks also did significantly better than forecasted.
Emerging Market stocks did significantly worse than expected.
Bonds did about as expected across the board.



So, OP, I would not rely on this (OR ANY) "forecast" for how to construct your AA/portfolio.

[klaus14]

After GMO posted this, markets rose further and now they are even more bearish:
https://www.gmo.com/americas/research-l ... t-4q-2020/

they assume all valuations will revert to mean. They think TIPS AND Nominal bonds AND stocks will do badly. This is unlikely. "Everything will revert to its historical mean" is a silly way of forecasting things.

I find Vanguard predictions more useful because they actually simulate different asset classes together under different conditions (gdp, inflation etc). Here is their latest.
They also give some details about different paths simulations may take (less inflation vs more), and best portfolio for each. See page 46 here.

[3funder]

What was their reasoning? There’s no larger report on the link

There is an explanation in the SeekingAlpha article. The general gist is that valuations are stretched beyond belief and we are even worse now than in early 2000 and in addition the 40 year Bond Bubble will unravel so there is no place to hide except cash.

International valuations are stretched beyond belief, though? I disagree with them on that front.

[Anon9001]

I would not be surprised if returns are poor for US stocks. They certainly are very popular to own even outside USA.

[JBTX]

I think GMO’s 7 year forecast assume a reversion to mean over seven years. That has not been true in decades. Whether it is true going forward who knows.

In various writings, Grantham has admitted that the 7 year mean reversion isn’t a given. It is entirely possible that returns stagnate over a much longer period of time. Hell vs purgatory I think is what he called it.

I find Grantham very informative, but take GMO predictions with a grain of salt.

I am not even sure how one invests in emerging markets value. Does such a fund even exist?

[klaus14]

I am not even sure how one invests in emerging markets value. Does such a fund even exist?

I use AVEM.

[JBTX]

I am not even sure how one invests in emerging markets value. Does such a fund even exist?

I use AVEM.

Interesting. I actually unwittingly have a tilt to this, I just discovered, in EELV

https://www.morningstar.com/etfs/arcx/eelv/portfolio

A low volatility fund, but tilts value, more so than AVEM.

Correction: EEMV, modest value tilt, less than EELV.

[RonSea]

...Why would anyone keep reading these? Sure he'll eventually be [temporarily] right but the people trusting his word are going to end up worse-off in the long run.

[klaus14]

...Why would anyone keep reading these? Sure he'll eventually be [temporarily] right but the people trusting his word are going to end up worse-off in the long run.

Wow. Everything in this prediction was wrong. Not even relatively correct. US Stocks vs ExUS, US Bonds vs ExUS, Emerging vs Dev all wrong.

[bog007]

nobody knows nuttin

[AlohaJoe]

...Why would anyone keep reading these?

Because certain people love thinking catastrophe lurks around every corner so they continually seek out things that confirm their bias.

It isn't like we see people posting BlackRock's forecast, or BNY Mellon's forecast, or Robeco's forecast. That's how we know they don't actually care about forecasts.

[freyj6]

Odd that they include emerging value but not US or international value.

Regarding allocating to EM value, AVEM appears to be a good fund and all the Avantis funds got a big thumbs up from our ex-resident expert Larry Swedroe.

I currently hold VWO instead, but only because of 401k constraints.

[Forester]

https://www.gmo.com/americas/research-l ... t-3q-2020/



Looking at the above forecast and it does not look pretty. What would be your fixed income allocation at the moment if you were retiring in about 2 years from now and what type of fixed income would you hold? Bonds?, Cash? From that above chart it looks like even Bonds will lose about 4% annualized which would be super painful.

This article here claims one should be in cash for the next 7 years which also seems like an extreme view to me.

https://seekingalpha.com/article/439995 ... xt-7-years (view on mobile if you can't read it)

This forecast implies prolonged higher inflation. The real returns in that graphic are very similar to the 1970s for US stocks and US bonds. It's likely OTT. Personally I could cope with this thanks to my gold & gold miners. Ultimately the GMO track record is not good.

[Scott S]

As this thread is showing, it takes more than the ability to create impressive-looking graphs and charts to predict the future. My hat is off to the posters finding polite ways to describe the validity of GMO predictions -- I don't think I could.

[SKJUN]

GMO specializes in alternative investments. So their marketing strategy is to scare stock and bond investors in every news letter. And pick some clients or at least make some money move in alternatives.

All doom sellers have been dead wrong since 2008, no-one has the crystal ball or DeLorean for telling the future of markets. I have tracked GMO chart on and off for 10+ years. Just to keep reminding me of alternatives to diversify my portfolio, as we often forget about these. It seems that it has been a mistake to overdiversify.

[asif408]

Wow. Everything in this prediction was wrong. Not even relatively correct. US Stocks vs ExUS, US Bonds vs ExUS, Emerging vs Dev all wrong.

FWIW, I did an analysis of their last 20 years of predictions and, historically, they have always predicted developed ex-US and emerging equities will have higher returns than US stocks (on average, ~3% in the case of developed ex-US and ~6% for emerging). In fact, I never found a year they predicted US stocks would have higher returns than foreign.

At this point, I think there absolute forecasts aren't worth much, but their relative forecasts may be. So I pay attention when there relative predictions are wider or narrower than normal, that's where they appear to be useful. About 2-3 years ago their relative predictions widened in favor of foreign stocks, and it's too early to tell how that will play out. From 2006-2011 their relative predictions narrowed considerably between US & foreign stocks, and those were years you didn't want to be loading up on foreign stocks. So I'll wait and see how their 2018, 2019, & 2020 predictions pan out before I call their forecasts useless. They may be useful, just not in the way they are presented or actually used.