2014 Capital Market Assumptions

Note: These assumptions are now outdated. Our current capital market assumptions and our white paper documenting their construction can always be found on our Capital Market Assumptions page.

Sellwood Consulting’s 2014 Capital Market Assumptions are now available. These assumptions are the primary input for our asset allocation work for clients, being the input variables for mean-variance optimization, Monte Carlo analysis, and risk budgeting.

This year, though we have made incremental enhancements to our methods for gauging the future value of assets, we have maintained our focus on the primary, reliable drivers of risk and return.  Our assumptions are anchored in the empirical facts presented by long-term capital markets rather than speculative observations on recent market conditions.  We avoid unnecessary complexity, preferring instead to rely upon transparent strategies that work reliably.  Our analysis is comprehensive, but not complicated – because we are convinced that the most robust solutions have no hidden constraints and few moving parts.  These same principles – pragmatic research and simplicity in execution – guide all of our work for clients.

The past year’s changing markets have, broadly speaking, introduced the push and pull of two contradictory forces on forward-looking portfolio returns: rising fixed income yields have provided higher expected returns for many asset classes, while rising equity market valuations have dampened our expectations for global stock market returns.  The tension between these two forces is evident in higher expected returns for bond markets, and lower expected returns for stock markets, according to our analysis.

Even after 2013’s rise in many fixed income yields, our assumptions imply a prospective relative low-return environment for financial assets.  Further evidence of this environment has recently been highlighted by several credible industry researchers.  Our assumptions are consistent with this analysis.  Please also see our post, Realism in Forecasting, which explains our comfort with having forecasts outside the range of our peers.

Presented in arithmetic average terms, our 2014 assumptions are depicted in the following chart:

Sellwood Consulting updates its capital markets assumptions on an annual basis. Our 2014 assumptions reflect information as of December 31, 2013, unless otherwise noted.  Our assumptions are forward-looking in nature and reflect a ten-year investment horizon.

We have comprehensively documented our methodology and process for creating these capital markets assumptions in our updated 2014 Capital Market Assumptions white paper.

2014 Capital Market Assumptions by Sellwood Consulting LLC is licensed under a Creative Commons Attribution-NoDerivatives 4.0 International License.