Wells Fargo Investment Institute (WFII) has created capital market assumptions (CMAs) to provide reasonable expectations for asset class performance in the future. Chris Haverland, WFII Global Asset Allocation Strategist, explains how the CMAs are developed—and what they may mean for investors today.

Transcript: Capital Market Assumptions

Title graphic: Capital Market Assumptions

Developing an investment plan can help investors meet the financial needs that occur at various points in their lives. These needs can be immediate, short term, or long term. Therefore, we must differentiate between what's happening now in the financial markets, what may happen next, and what may happen in the future.

We have created capital market assumptions, or CMAs, that provide reasonable expectations for asset class performance in the future. They are long-term averages designed to reflect what investors may experience through two or more economic and market cycles. During this period, financial markets are likely to rise and fall as the economy experiences both expansions and contractions. The CMAs take historical relationships into consideration, but do not assume the future will be exactly like the past.

CMAs are the foundation for our strategic asset allocation models and are also used in investment planning software designed to forecast an investor's probability of meeting their long-term financial goals.

Title graphic: Developing Our 2017-2018 CMAs

When we develop capital market assumptions, we consider long-term themes, looking out 10 to 15 years. This year, six key global investment trends helped shape our strategic view:

  • First – On the inflation front, we expect inflation to be lower than long-term averages, but still above the Federal Reserve's 2.0 percent target.
  • Second – We see interest rates slowly rising to accommodate improving economic growth and moderate inflationary pressures.
  • Third – We expect higher volatility in the capital markets and lower-than-historical total returns for many asset classes.
  • Fourth – We think developed-market growth will improve, with emerging-market growth leveling off.
  • Fifth – Commodity-price gains are likely to be modest as supply and demand balance.
  • And finally – We believe alternative investments will play a greater role in potentially reducing traditional asset-class risk in a diversified portfolio.

Title graphic: Investor Implications

We use our asset class CMAs to help develop strategic asset allocation recommendations for globally diversified portfolios differentiated by an investor's goals and risk tolerance. Our 2017 recommendations continue to:

  • Lean toward U.S. assets in our fixed income and equity allocations
  • Favor real estate over commodities in our real assets category
  • And include allocations to alternative investments that may improve risk-adjusted return expectations

It is important for investors to maintain a well-diversified asset allocation to help manage volatility and take advantage of evolving long-term opportunities. Comparing the risk and return characteristics of various asset allocations may help investors choose the portfolio that best suits their individual needs.

For more information, please see our Special Report—2017 Capital Market Assumptions and Strategic Asset Allocations.