• Investors in traditional diversified portfolios consisting of 60% U.S. stocks and 40% U.S. bonds have been well rewarded over the past decade. These portfolios have produced real (net of inflation) average annual returns of approximately 9.2% and 4.5%, respectively, over the 5-year and 10-year periods ended October 31, 2017.25
  • Through most of the past decade, domestic equity and fixed income assets have benefited from a combination of a healthy corporate profit landscape, slow-but-steady economic growth, low inflation and ultra-low interest rates.
  • However, Research Affiliates estimates that generating real returns for a traditional 60/40 portfolio could be significantly more challenging in the coming decade. According to its most recent estimate, a 60/40 portfolio could produce real returns of less than 1% in the next 10 years.25
  • In fact, the authors of a November 2017 Research Affiliates article, Building Portfolios: Diversification without the Heartburn, liken buying U.S. equities at today’s high valuations to riding the “buy low, sell high” wave in the wrong direction.26 The firm estimates that real returns across all domestic asset classes, except for U.S. commercial real estate, could be notably lower in the next 10 years than they were in the past 10.25
  • Research Affiliates’ estimates generally match the conclusions the Federal Reserve Bank of San Francisco reached in a recent Economic Letter.27 The letter notes that today’s cyclically adjusted price-earnings ratio, or CAPE ratio, is likely to decline in the coming years, which “would imply lower returns on stocks relative to those enjoyed in recent years.”27

1 ICE Bank of America Merrill Lynch U.S. High Yield Master II Index.
2 Credit Suisse Leveraged Loan Index.
3 Federal Reserve Bank of St. Louis, S&P 500 Index, http://bit.ly/2d3pN5b.
4 Thomson Reuters Lipper.
5 ICE Bank of America Merrill Lynch U.S. High Yield Telecommunications Index.
6 ICE Bank of America Merrill Lynch U.S. High Yield Consumer Products Index.
7 ICE Bank of America Merrill Lynch U.S. High Yield Broadcasting Index.
8 ICE Bank of America Merrill Lynch U.S. High Yield Healthcare Index.
9 ICE Bank of America Merrill Lynch U.S. High Yield Super Retail Index.
10 OPEC Monthly Oil Market Report – November 2017, page 56, http://bit.ly/2iS1Z8W.
11 U.S. Energy Information Administration, http://bit.ly/1V2gPZQ.
12 Federal Reserve Bank of St. Louis, Crude Oil Prices, http://bit.ly/292Tgue.
13 ICE Bank of America Merrill Lynch U.S. High Yield Energy Index.
14 Credit Suisse Leveraged Loan Index (energy component).
15 Alerian, http://bit.ly/2yKWiRz.
16 Standard & Poor’s, http://bit.ly/2ydsLD0.
17 Econoday, http://bit.ly/1iJOdAP.
18 Bureau of Labor Statistics, http://bit.ly/2k22igk.
19 Bloomberg, based on CME Fed-fund futures data.
20 Federal Reserve Bank of St. Louis, 2-Year Treasury constant maturity rate, http://bit.ly/2anGvQ0.
21 Federal Reserve Bank of St. Louis, 10-Year Treasury constant maturity rate, http://bit.ly/29ecBfp.
22 Federal Reserve Bank of St. Louis, 10-Year minus 2-Year treasury constant maturity, http://bit.ly/2oMWaP2.
23 Reuters, http://reut.rs/2AVzpM5.
24 Federal Reserve Bank of Chicago, http://bit.ly/2j5tNqq.
25 Research Affiliates Asset Allocation Interactive as of October 31, 2017. Latest data available, http://bit.ly/2zp3V0t.
26 Research Affiliates, http://bit.ly/2iokPVR.
27 Federal Reserve Bank of San Francisco, http://bit.ly/2yR40ZN.


The Alternative Thinking Week in Review market commentary and any accompanying data (“Market Commentary”) is for informational purposes only and shall not be considered an investment recommendation or promotion of FS Investments or any FS Investments fund. The Market Commentary is subject to change at any time based on market or other conditions, and FS Investments and FS Investment Solutions, LLC disclaim any responsibility to update such Market Commentary. The Market Commentary should not be relied on as investment advice, and because investment decisions for the FS Investments funds are based on numerous factors, may not be relied on as an indication of the investment intent of any FS Investments fund. None of FS Investments, its funds, FS Investment Solutions, LLC or their respective affiliates can be held responsible for any direct or incidental loss incurred as a result of any reliance on the Market Commentary or other opinions expressed therein. Any discussion of past performance should not be used as an indicator of future results.