Long-Term Capital Market Assumptions & Strategic Portfolio Allocations, 2024
Each year, the Inspire Investment Management Team analyzes historical return, risk, and correlation statistics for different asset classes and then formulate assumptions based on current market conditions.
At the beginning of each year, the Inspire Investment Committee analyzes and updates its capital market assumptions for various asset classes. The assumptions below are long-term in nature (ten years+) and can be used to model different portfolio allocations, which in turn can be utilized by investors for investment planning purposes. The Inspire Investment Committee reviews historical return, risk, and correlation statistics for different asset classes and then formulates its assumptions based on current market conditions. These assumptions are based on our best estimates with the information available at the time of this writing, and there are no guarantees that these assumptions will be realized.
Key Takeaways
Return Assumptions:
Inflation: High and sustained level of inflation, but slightly decreased to 2.5% given the recent moderation and contraction of the money supply
US fixed income: Increased to 4.75% given higher expected long-term level of interest rates
US equity: 7.5 – 9% range, with US small-cap equities outperforming their mid- and large-cap counterparts
Non-US developed & emerging market equity: Maintained at 9.5% for non-US developed and slightly decreased to 10.0% for emerging markets, both with a probability of outperforming US equity
(Historical long-term returns sourced from Bloomberg)
Risk & Correlation Assumptions:
Risk(standard deviation) and correlation assumptions are in line with historical figures with a very modest increase for fixed income given the prospect of more interest rate volatility
Portfolio return assumptions have remained nearly the same as last year, given modest changes to capital market assumptions (e.g., a 60% Equity/40% Fixed Income portfolio is expected to return 7.2% over the next ten years versus 7.0% previously).
(Source: Bloomberg)
Inspire strategic allocations reflect long-term assumptions with overweights to US small-cap, US mid-cap, and international large-cap equity and underweights toUS large-cap relative to the global equity market (as represented by the MSCI ACWI IMI Index, which is one of the most comprehensive global all cap indices available with over 9,050 constituents and covering 99% of the global equity investment opportunity set).
*Source:MSCI.com as of 12/31/2023
Below are the Inspire strategic allocations as of March 31, 2024. These allocations remain unchanged from the previous year.
Investor Implications
There are many instances in the Bible that offer wisdom about planning ahead and being prudent with our money (e.g., Proverbs 13:16, Proverbs 15:22, and Luke 14:28-30).
At Inspire, we believe that the most prudent approach for a long-term investor is to maintain a proper asset allocation with disciplined rebalancing. This can be achieved with Inspire globally diversified strategies or individually constructed portfolios utilizing our broad array of ETFs.
If you are working with an investor with a longer time horizon (10+ years), a portfolio with a higher allocation to equities would be appropriate. However, if you work with an investor with a shorter time horizon (<5 years), a lower risk tolerance, and/or increased cash needs (e.g., greater than 5% annual spending), a more conservative portfolio with a higher allocation to fixed income would be appropriate.
Although investors can expect slightly higher long-term returns now versus one year ago, those assumptions are still relatively modest compared to recent history. For example, the S&P 500 returned 12.0% over the last ten years, even with the 26.3% return in 2023. Although US large-cap equities have performed well versus other asset classes, our long-term assumptions and allocations favor US small-cap, US mid-cap, international, and emerging market equities. Investors should also plan for increased volatility (both upside and downside), especially in the near term.
If you have questions on how you can use this information with your clients, feel free to reach out to the Investment Management Team. We stand ready to work with you if you need help to determine where clients may fit on this spectrum and what Inspire disciplined strategy would be most appropriate for their needs, all while investing your values and giving glory to God!
This is a publication of the Inspire Investment Committee, as of April 2024.
Darrell Jayroe, CFA, CFP, CKA, serves as the Senior Portfolio Manager for Inspire, responsible for leading the firm’s Investment Committee, and serving as Lead Portfolio Manager for Inspire’s ETFs and SMA strategies. Darrell has been with the firm since 2016.
*Advisory Services are offered through Inspire Investing, LLC, a Registered Investment Adviser with the SEC. All expressions of opinion are subject to change. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to their financial advisor prior to making any investment decision.
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Long-Term Capital Market Assumptions & Strategic Portfolio Allocations, 2024
Each year, the Inspire Investment Management Team analyzes historical return, risk, and correlation statistics for different asset classes and then formulate assumptions based on current market conditions.
At the beginning of each year, the Inspire Investment Committee analyzes and updates its capital market assumptions for various asset classes. The assumptions below are long-term in nature (ten years+) and can be used to model different portfolio allocations, which in turn can be utilized by investors for investment planning purposes. The Inspire Investment Committee reviews historical return, risk, and correlation statistics for different asset classes and then formulates its assumptions based on current market conditions. These assumptions are based on our best estimates with the information available at the time of this writing, and there are no guarantees that these assumptions will be realized.
Key Takeaways
Return Assumptions:
Inflation: High and sustained level of inflation, but slightly decreased to 2.5% given the recent moderation and contraction of the money supply
US fixed income: Increased to 4.75% given higher expected long-term level of interest rates
US equity: 7.5 – 9% range, with US small-cap equities outperforming their mid- and large-cap counterparts
Non-US developed & emerging market equity: Maintained at 9.5% for non-US developed and slightly decreased to 10.0% for emerging markets, both with a probability of outperforming US equity
(Historical long-term returns sourced from Bloomberg)
Risk & Correlation Assumptions:
Risk(standard deviation) and correlation assumptions are in line with historical figures with a very modest increase for fixed income given the prospect of more interest rate volatility
Portfolio return assumptions have remained nearly the same as last year, given modest changes to capital market assumptions (e.g., a 60% Equity/40% Fixed Income portfolio is expected to return 7.2% over the next ten years versus 7.0% previously).
(Source: Bloomberg)
Inspire strategic allocations reflect long-term assumptions with overweights to US small-cap, US mid-cap, and international large-cap equity and underweights toUS large-cap relative to the global equity market (as represented by the MSCI ACWI IMI Index, which is one of the most comprehensive global all cap indices available with over 9,050 constituents and covering 99% of the global equity investment opportunity set).
*Source:MSCI.com as of 12/31/2023
Below are the Inspire strategic allocations as of March 31, 2024. These allocations remain unchanged from the previous year.
Investor Implications
There are many instances in the Bible that offer wisdom about planning ahead and being prudent with our money (e.g., Proverbs 13:16, Proverbs 15:22, and Luke 14:28-30).
At Inspire, we believe that the most prudent approach for a long-term investor is to maintain a proper asset allocation with disciplined rebalancing. This can be achieved with Inspire globally diversified strategies or individually constructed portfolios utilizing our broad array of ETFs.
If you are working with an investor with a longer time horizon (10+ years), a portfolio with a higher allocation to equities would be appropriate. However, if you work with an investor with a shorter time horizon (<5 years), a lower risk tolerance, and/or increased cash needs (e.g., greater than 5% annual spending), a more conservative portfolio with a higher allocation to fixed income would be appropriate.
Although investors can expect slightly higher long-term returns now versus one year ago, those assumptions are still relatively modest compared to recent history. For example, the S&P 500 returned 12.0% over the last ten years, even with the 26.3% return in 2023. Although US large-cap equities have performed well versus other asset classes, our long-term assumptions and allocations favor US small-cap, US mid-cap, international, and emerging market equities. Investors should also plan for increased volatility (both upside and downside), especially in the near term.
If you have questions on how you can use this information with your clients, feel free to reach out to the Investment Management Team. We stand ready to work with you if you need help to determine where clients may fit on this spectrum and what Inspire disciplined strategy would be most appropriate for their needs, all while investing your values and giving glory to God!
This is a publication of the Inspire Investment Committee, as of April 2024.
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