Understanding your future expected returns is an important part of your investment plan.
Your expected return is the average annual growth that you can reasonably hope your portfolio will deliver over time. It may be a real return of 4% per year, for example.
With a credible expected return figure you can work out [1] whether you’re investing enough money to meet your goals – just by plugging your number into an investment calculator.
Give us a few minutes and we’ll show you how it’s done.
What are expected returns?
Expected returns are estimates of the future performance of individual investments – typically asset classes. Expected return figures are provided as average annual returns that you might see over a particular timeframe. Say the next five or ten years.
The figures are usually based on historical data, but modified by current valuation metrics.
The Gordon Equation [2] is one of the better-known expected returns formula.
Because future returns are highly uncertain, some sources offer a range of expected returns or probabilities. This emphasises the impossibility of precise predictions.
Think of expected returns as a bit like a long-range weather forecast. You’ll get some guidance on conditions coming down the line. But expected returns can’t tell you when exactly it will rain.
Even so, expected returns are a useful stand-in for the ‘rate of return’ required by investment calculators and retirement calculators [3].
For instance:
[4]You’d put your portfolio expected return number in your calculator’s [5] ‘rate of return’ slot.
By collating estimates for individual asset classes, we can calculate a portfolio’s expected return. See the table below.
Moreover, because expected return calculations are informed by current market valuations, they may be a better guide to the next decade than historical data based solely on past conditions.
Expected returns: ten-year predictions (%)
| Asset class / Source |
Vanguard [6] (12/11/24) |
Research Affiliates [7] (31/7/25) | BlackRock [8] (30/6/25) | Invesco [9] (31/12/24) | Median (2/9/25) |
| Global equities | 5.3 | 5.4 | – | 5.8 | 5.4 |
| Global ex US equities | 6.1 | – | – | 7.4 | 6.8 |
| US equities | 3.9 | 3.6 | 4.3 | 5 | 4.1 |
| UK equities | 6.7 | 8.4 | 5.6 | 6.6 | 6.7 |
| Emerging markets | 6.3 | 8.6 | 8 | 9.1 | 8.3 |
| Global REITs | – | 6.4 | 4.9 | 7.1 | 6.4 |
| UK gov bonds | – | 4.3 | 4.7 | – | 4.5 |
| Global gov bonds (£ hedged) | – | – | 3.9 | 5.3 | 4.6 |
| Inflation-linked bonds | – | 6 | 5.2 | – | 5.6 |
| Cash | – | 2.8 | 3.4 | – | 3.1 |
| Commodities | – | 6 | – | 5.2 | 5.6 |
| Inflation | – | 2.7 | – | – | 2.7 |
Source: As indicated by column titles, compiled by Monevator.
The table shows the ten-year expected returns1 [10] for key asset classes, expressed as nominal average annual percentage returns in GBP.
We have sourced them from a variety of experts.
Make sure you subtract an inflation estimate from the nominal figures in the table. This gives you a real return figure to deploy.2 [11]
For average inflation, you could use the ten-year UK instantaneous implied inflation forward curve (gilts) chart from the Bank of England [12].
Their mileage may vary
As you can see from our table, opinions vary on the expected rate of return.
Methodology, inflation assumptions, and timing all make a difference.
But overall, equity return expectations have dropped dramatically since our last update.
The global equities median expected return was 7.3% in July 2023. Now it’s 5.4%. That’s well below the historical average.
Sky-high US stock market valuations [13] are a major factor. High valuations mean that stock market prices are elevated relative to measures of underlying company worth such as earnings, sales, dividends, and profit margins.
In other words, investors buying US shares today seem to be paying a lot for the chance of benefitting from anticipated future growth.
In that situation, there’s a heightened chance that demand will drop for stocks as market participants decide that prices are too high compared with the likely payoff.
If that view takes hold, then the resultant fall in prices can translate into lower stock market gains – or even outright losses for a time, depending on the period of your investment.
That’s the theory anyway, and indeed market valuation signals like the CAPE ratio [14] have tended to correlate high valuations that exceed historical norms with subdued average future returns (over the next ten to 15 years).
Forecasting models take these signals into account – along with other inputs such as macroeconomic assumptions and historical return factors.
The upshot is most are currently predicting slow growth ahead for the US stock market, which is also the largest component of global equities.
Notice that the prospective returns for Global ex US equities (that is, stock markets other than the US) are significantly better than for global equities ‘inc US’.
Temper your tantrums
Remember, these return expectations are only projections. They’re as good as we’ve got but they’re about as accurate as buckshot. The numbers will almost certainly be off to some degree.
For instance, the CAPE ratio has been shown to only explain about 48% of subsequent ten to 15 year returns.
And some forecasts have predicted low US returns for years, only to be defied by reality as the S&P 500 whipped the rest of the world [15].
Rethinking bonds
Very notably, UK gilts3 [16] and wider global government bonds are forecast to earn only 1% less per year than global equities at present.
That implies a low opportunity cost to diversifying into bonds right now.
So it may well be time to rethink your fixed income holding if 2022’s bond-o-geddon [17] frightened you out of the asset class entirely.
Today’s higher yields mean that bonds are far more likely to be profitable over the next decade than they were at the tail-end of the near-zero interest rate era.
The current yield of a 10-year government bond is a good guide to its average annual return over the next decade. And a 10-year gilt is yielding 4.74% at the time of writing.
Portfolio expected returns
Okay, so now what?
Well, let’s use the asset class expected return figures above to calculate your portfolio’s expected return.
Your portfolio’s expected return is the weighted average of the expected return of each asset class you hold.
The next table shows you how to calculate the expected return of a portfolio. Just substitute your own asset allocation into the example one below:
| Asset class | Allocation (%) | Real expected return (%) | Weighted expected return (%) |
| Global equities | 50 | 2.7 | 0.5 x 2.7 = 1.35 |
| Global REITs | 10 | 3.7 | 0.1 x 3.7 = 0.37 |
| UK gov bonds | 20 | 1.8 | 0.2 x 1.8 = 0.36 |
| Cash | 10 | 0.4 | 0.1 x 0.4 = 0.04 |
| Commodities | 10 | 2.9 | 0.1 x 2.9 = 0.29 |
| Portfolio expected return | – | – | 2.41 |
Portfolio expected return = the sum of weighted expected returns.
This gives us 2.41% in this example.
Feel free to use any set of figures from the range of expected returns in our first table above. Or mix-and-match expected returns for particular asset classes where you can find a source. Research Affiliates and BlackRock should cover most of your bases.
The expected return of your bond fund is its yield-to-maturity (YTM). Look for it on the fund’s webpage [18].
Because most sources present expected returns in nominal terms, remember to deduct your inflation estimate to get a real expected return.
You should also subtract investment costs [19] and taxes. Keep them low!
Taken together, the formula for the expected return of a portfolio is therefore:
- The nominal expected return of each asset class – minus inflation, costs, and taxes
- % invested per asset class multiplied by real expected return rate
- Add up all those numbers to determine your portfolio’s expected return
The resultant portfolio-level expected return figure can be popped into any investment calculator.
You’ll then see how long it could take to hit your goals for a given amount of cash invested.
How to use your expected return
Input your expected return calculation as your rate of growth when you plot your own scenarios [20].
Drop the number into an investment calculator [21] or into the interest rate field of our compound interest calculator [22].
As we saw earlier, the expected return rate we came up with for the portfolio above was a pretty disappointing 2.41%.
Historically we’d expect a 60/40 portfolio [23] to deliver more like a 4% average rate of return.
After a long bull market for equities, market pundits seem to feel there’s less juice left in the lemon. They’ve therefore curbed their expectations.
The long view
If you’re modelling an investing horizon of several decades, it’s legitimate to switch to longer-run historical returns.
That’s because we can assume long-term averages are more likely to reassert themselves over stretches of 30 or 40 years.
The average annualised rate of return for developed world equities [24] is around 6-7% over the past century. (That’s a real return. Hence there’s no need to deduct inflation this time.)
Meanwhile gilts have delivered a 1% real annualised return.
Even though your returns will rarely be average year-to-year, it’s reasonable to expect (though there’s no guarantee) that your returns will average out over two or three decades.
That’s what tends to happen over the long term.
Excessively great expectations
Planning on bagging a real equity return of 9% per year is living in La La Land.
Not because it’s impossible. Golden eras for asset class returns do happen.
But you’ll need to be lucky to live through one of them if you’re to hit those historically high return numbers.
Nobody’s financial plan should be founded on luck. Because luck tends to run out.
So opt for a conservative strategy instead. You’ll be better able to adapt if expectations fall short. You can always ease off later if you’re way ahead.
Remember your expected return number will be wrong to some degree, but it’s still better than reading tea leaves or believing all your dreams will come true.
Don’t like what you see when you run your numbers? In that case your best options are to:
- Save more
- Save longer
- Lower your financial independence target number
These are factors you can control when faced with [25] potential low future returns. All are preferable to wishing and hoping.
How accurate are expected returns?
Expected returns shouldn’t be relied upon as a guaranteed glimpse of the future, like racing tips from a kindly time-traveller.
Indeed the first time we posted about expected returns we collated the following forecasts:
[26]
These were long-range real return estimates. The FCA one in particular was calibrated as a 10-15 year projection for UK investors.
What happened? Well, the ten-year annualised real returns were actually:
- Global equities: 7.6%4 [27]
- UK government bonds: -2.6%5 [28]
- A 60/40 portfolio returned 3.5% annualised.
The 60/40 portfolio expected return forecasts above now look amazingly prescient. Before 2022 they looked too pessimistic, but that turbulent year of rate rises has knocked both equities and bonds down a peg or three.
Previously, the 10-year actual returns had run far ahead of the forecasts. Maybe these realised returns had been juiced by waves of quantitative easing from Central Banks? Perhaps the retrenchment of globalisation more recently has also been a factor.
In any event I wouldn’t expect even the greatest expert to be consistently on-target.
Rather, it’s better to think of a given set of expected returns as offering one plausible path through a multiverse of potential timelines.
Take it steady,
The Accumulator
P.S. This is obvious to old hands, but new investors should note that expected returns do not hint at the fevered gyrations [29] that can grip the markets at any time.
Sad to say, but your wealth won’t smoothly escalate by a pleasant 4% to 5% a year.
Rather on any given day you have a 50-50 chance of tuning in to see a loss on the equity side of your portfolio.
And every year there’s on average a 30% chance of a loss in the stock market for the year as a whole.
On that happy note, I’ll bid you good fortune!
Note: this article has been updated. We like to keep older comments for context, but some might be past their Best Before dates. Check when they were posted and scroll down for the latest input.
- Note that most corporates badge their expected returns calculations as ‘capital market assumptions.’ [↩ [34]]
- Real returns subtract inflation from your investment results. In other words, they’re a more accurate portrayal of your capital growth in relation to purchasing power than standard nominal returns. [↩ [35]]
- i.e. UK government bonds. [↩ [36]]
- Source: Vanguard FTSE All World ETF [↩ [37]]
- Source: Vanguard UK Gilt ETF [↩ [38]]