The 3 Pillars of Reliable Portfolio Growth Projections

But one lesson from his article is pertinent to you, the ultra-high net worth investor looking for long term growth and security in your portfolio. Here’s your key takeaway:

Though it wasn’t his article’s purpose, Dalio reveals the essential importance of using historical data dating back over 100 years when making portfolio growth projections.Why is this so critical for you to understand? Because so few wealth managers and financial advisors do this when making projections for their clients. For example:

Current Growth Projections

Here’s an article from Morningstar reporting on long term investment growth projections from several of the biggest firms, including Vanguard, Blackrock, and others. Reading through their projections, you realize quickly what Pillar has been advising high net worth clients in Walnut Creek, Palo Alto and the San Francisco Bay Area and beyond for more than 30 years – no one can predict the future of market or economic behavior.

Some predict international growth will outpace U.S. growth. Others predict negative large cap growth, but stronger emerging market growth. Still others expect middling growth in the 4-6% range for most equities.

While there is some overlap in their projections, there is little attention given to the underlying question and greatest problem with this: What are these projections based upon? From the text, it appears they’re based mostly on analysis of current events and recent data, extrapolating out five to seven years from now.

But using current events and data to make projections is foolish. And the writer of the article admits as much in the introduction, because everyone knows predicting market behavior is impossible. But, she also makes an important caveat:

“Even long term, strategically minded investors need some type of market-return forecast to craft a financial plan.” This is true.

We need something to base our projections on. The question is – what should that be? Current economic data and observable trends? Political realities? Tax laws? Comparisons of what we see now with similar moments in history (this is what Dalio attempts to do in his article)?

The Best Portfolio Growth Projections We Can Make

While it is admittedly not possible to predict market or economic behavior, it is possible to leverage historical data to make more reliable portfolio growth projections.

Many wealth managers attempt to do this to a degree. But as Dalio’s article demonstrates, this approach only has value if your historical data reaches far enough back.

Let’s take a brief look at what Dalio says.

Ray Dalio Sees Analogous Data Between Today and the Great Depression

Dalio’s analysis centers on three main points:

1. He believes we’re coming to an end of the long term debt cycle.
2. He observes an enlarging wealth gap, resulting in increasing political friction.
3. He notes the rising influence of China challenging the U.S. position as the world’s leading power.

Back in the 30s, many of these same trends were happening in different forms, but with a similar confluence.

Banks can’t lower their interest rates much more. During the past decade of bull-market growth, rates have been near 0 most of the time. “Debt and non-debt obligations” such as healthcare, pensions, and Social Security are becoming “larger than the incomes required to fund them.”

Political and wealth gaps and polarization are increasing internal conflicts, such as between socialists and capitalists. And they’re increasing external conflicts as well, such as the current trade war with China.

Dalio finds commonalities between these trends and the latter half of the Great Depression. He also furthers his argument using data from the 1970s and early 1980s, when the dollar was de-linked from gold, and huge interest rates were erected as a means to combat runaway inflation.

The point for us, however, is again not to delve into all these details or the politics associated with them. We see Dalio’s argument as simply another example for why any portfolio growth projections even worth looking at must be based on historical data going back to the time periods he’s referencing.

How Far Back Does Your Wealth Manager’s Methodology Go?

Economic upheaval happens. And we have seen it happen during many previous eras of history. Had you been investing during these earlier periods of time, how would your current portfolio have performed? Have you ever wondered that? We have. And we obsess about it. Here’s an extreme example of what we’re talking about:

If your wealth manager were to make portfolio growth projections for long term performance based on data beginning in 2009, that would be deceptive and irresponsible. 2009 represents the bottom of the barrel, when the 2008 recession hit bottom and slowly began to revive.

So if your projection data began there, you’d be painting a pretty rosy picture about the future, projecting 10% – 20% growth as we’ve seen over the last decade. No responsible financial advisor would argue for that approach. But how much better is it to base your growth projections on data going back 30 years? Or 40 years?

Go back just 30 years, and you don’t include the inflation of the 1970s and subsequent interest rate surges that Dalio references. Go back just 40 years, and you miss out on the space race of the 1960s and the Vietnam War and Civil Rights Movement. Go back 60 years, and you miss out on World War 2.

Whatever system your wealth manager uses to project your portfolio’s growth, if it reaches back anything less than 100 years – before the Great Depression and the events Dalio references from the 1930s – it’s doing you a disservice. It is an inadequate projection based on incomplete historical analysis.

How does Pillar Project Portfolio Performance?

Pillar’s approach to portfolio projection goes far beyond just about any other wealth management firm, and we’re hoping Dalio’s piece helps shed some light on why.

How do we use historical data to make projections about your investment performance? How do other wealth managers and financial advisors do it?

Our approach centers on three foundations, three pillars without any one of which, the system wouldn’t work. And we know of no other wealth managers or advisors using all three of these in unison in quite the way we do. Consider that…

Here are the three foundations:

Pillar 1: Use Historical Data Going Back 100 Years

The world has seen massive upheaval and change in the last 100 years, from wars, depressions, technological change, increased lifespans, globalization, inflationary excess, and much more.

Throughout all these changes, markets and economies have forged ahead. Sometimes they prosper. Sometimes they flatline. Other times they wither. But we have performance data from all these periods of history.

And we can use that data to measure how portfolios from today would have performed through those times of change.

But our approach doesn’t stop there. That’s just one foundation. One pillar.

Pillar 2: Test Your Portfolio against 1000 High-Stress Scenarios

Based in part on the real historical performance data from the last 100 years, we have created 1000 unique, high stress scenarios. Some of these mirror history, such as the ones Dalio examines in his article. Others are so extreme they’ve never happened, such as back to back recessions combined with a war.

What Pillar does is run your portfolio through each of these 1000 stress tests, and see how it performs over its expected lifetime.

It’s not enough to just see how your portfolio will perform during periods of history. Because while history repeats itself sometimes, far more often it proceeds in ways few predicted it would.

All these investment experts in the Morningstar article predicting growth in global stocks will outpace U.S. stocks – what are these predictions based on? Nothing but continued trends extrapolated based on today’s data.

But what if an earthquake causes a tsunami to hit the eastern seaboard in 2022? What if a plague decimates a couple continents? What if a new technology elevates a previously struggling nation into prominence? We don’t know what’s going to happen.

But when it does, it will thrash their attempts at projecting things like how U.S. stocks will perform against international ones.

That’s why one of our key pillars relies on running your portfolio through 1000 possible high-stress scenarios. In other words, way more upheaval than will ever happen in real life, but enough to measure your portfolio’s performance in a vast diversity of economic and political environments. Get it? We want to see how your portfolio holds up in extreme stress.

Pillar 3: Re-Run the Simulations Every Quarter

Using 100-year historical data to build 1000 stress test scenarios that we can test your portfolio’s performance against is a great approach to creating your financial plan.

But if it stops there, what happens five years later when your life situation changes in a major way? What if you switch careers, or retire, or have to care for an aging relative?  What if you sell your business, or start a new one? And what if while your life is changing, major world events cause economic upheaval of the sort we’ve been discussing?

Your portfolio projections will never be firm or static. And unless we rerun the tests frequently and continually adjust and optimize your plan, the projections will become worthless.

We rerun each portfolio through all 1000 stress test scenarios every quarter, four times per year. This ensures your plan never becomes outdated or becomes irrelevant to your life.

Your Continuously Updating Investment Plan

We have perfected this three-pillar approach, and use it with extreme confidence to recommend a customized asset allocation and investment plan for each of our clients.

With your plan in place, we can see how your portfolio would perform in 1000 scenarios. But with continuous monitoring and adjustment, we can assure you of the long term stability you need as your life and the world change.

As long as your portfolio projects to exceed your goals in between 750-900 of the high stress scenarios, we consider it to reside in the Comfort Zone. That means you can relax.

This is the most firm and data-backed portfolio growth projection you will ever find.

Because while no one can predict the future, we can leverage the knowledge of history to calculate far more confident projections about how your specific investment plan will perform over time. By amplifying that historical data with 1000 stress tests and quarterly monitoring, you have a system in place that will stick by you for life.

That’s an investment approach that high net worth and ultra-high net worth investors can put their trust in.

Want to See How Your Portfolio Holds Up in the 1000 Stress Tests?

Sign up for a free Wealth Management Analysis meeting, and we’ll take your data and run the tests to customize an investment plan that will secure your portfolio in the Comfort Zone.

Find My Portfolio’s Comfort Zone