How much can returns vary?

The primary determinant of investment returns in the long-run (and often short-run) is asset allocation, i.e. the mix of stocks and bonds. Below is an example array of stock/bond mixes (see the advice output of the Investment Advice page for current projections). Each stock bond mix (e.g. 100/0 = 100% stocks, 0% bonds) shows a 10-year “expected return”, and one-year “high” and “low” ranges:

Hypothetical example for illustration purposes:
Stock/bond mix:               100/0     75/25     50/50     25/75
Expected return:               7.0%        6.3%      5.5%      4.2%
Higher-range:                   44.1%      33.6%    23.1%    13.8%
Lower-range:                    -21.3%    -16.0%  -10.2%    -4.7%

The “expected return” is the yearly midpoint of a statistical/probabilistic projected range of geometric average returns. In other words, the “expected return” is not a specific prediction for any given year but rather can be thought of as the expected average return over time. There is a 5% chance that returns will fall above the “higher-range,” and a 5% chance that returns will fall below the “lower-range.” In other words, there is a 90% chance that returns will fall between the “higher” and “lower” range numbers. You will notice that the range of returns increases as the amount of stocks increases. This reflects the additional variability and price fluctuations of stocks. Stocks have higher highs and lower lows, and a higher average over long time periods. Note that the projections WealthStep uses for advice calculations rely on a blend of 10-year projections and 30+ year projections. 30-year projections may more closely approximate long-term historical return averages and will vary from the 10-year projections above. Return projections used in the advice module assume a gradual shift in stock bond mix over and within age ranges. Additional information about return projections specific to age ranges/groups is available inside the info-bubbles within the Planning/Saving Advice module. As general reference, for users with access to 4 target allocation portfolios (the following will vary for different investment option arrays), typical/generally recommended age/average allocation ranges are as follows: “<age 40: 90-100% stocks/0%-10% bonds, age 40-60: 75% stocks/25% bonds, age 60-75: 50% Stocks, 50% bonds, age 75+: 25% stocks/75% bonds. The most appropriate portfolio selection for a given person may vary from these general recommendations, which are shown for general planning purposes and as a starting-point recommendation. See the “General information and limitations” FAQ for additional information.