Financial Planning Assumptions


In this paper we devise an evidence-based approach for setting expectations for stocks, bonds, bills, inflation, and housing for use in asset allocation and financial planning decisions. This paper marks an evolution in PWL Capital’s methodology which has been in use for more than half a decade.

Table of Contents

  1. Setting Expectations
  2. Historical Returns
    • (Very) Long Run Returns
    • Decomposing Historical Returns
  3. Economic Variables and Predictability
    • Risk or Behavior?
    • Predictability in the Literature
  4. Combining Historical and Predictive Expected Return Estimates
    • Predictive Power of Predictive Metrics
  5. Expected Inflation
  6. Primary Residence
  7. Asset Class Expected Returns
    • Market-Based Expected Returns
    • Equilibrium Cost of Capital
    • Expected Returns
    • Expected Standard Deviations
    • Expected Correlations
  8. Composition of Asset Class Returns
  9. Portfolio Expected Returns

This report was written by the Research team at PWL Capital Inc. The ideas, opinions, and recommendations contained in this document are those of the authors and do not necessarily represent the views of PWL Capital Inc.