GMO 7-Year Asset Class Return Forecast Is Bleak

Jeremy Grantham has successfully forecasted virtually every major market movement in the past 35 years.  His firm Grantham, Mayo, Van Otterloo & Co. (GMO) has been kind enough to share their 7-Year Asset Class Real Returns chart which was created as of March 31, 2005 with Risk-Controlled Investing.  The return forecasts, which are mathematically calculated, are depicted in the accompanying chart and are real compounded returns after an assumed 2.5% inflation rate.  If a nominal rate of return is desired, simply add 2.5% to the return depicted on the chart.  The returns forecasted are for indexes.  Obviously, GMO’s expectation for domestic equities and bonds is depressing, but not out of line with what Risk-Controlled Investing has been hearing from investing greats such as Steven Leuthold, Warren Buffett, Bill Gross, Cliff Asness, Robert Arnott, John Hussman and many dozens of others as well as some of the more progressive college endowment funds and pension funds.  For those optimists who believe returns will be significantly higher, they should cling to the positive standard deviation number listed at the bottom of the chart and add it to the forecasted return number.  However, please carefully note it says plus or minus.  The sound course of action, in our opinion, is to use the forecasted numbers for planning purposes.  Non-traditional equities and interest rate insensitive fixed income investments offer significantly better potential returns than traditional domestic equities and bonds for the next several years.