Morgan Stanley is sounding the alarm on a popular investment portfolio.
The bank is warning investors that the annual return on a traditional portfolio made up of 60% stocks and 40% bonds could fall to 2.8% over the decade, a near-century low and roughly half of the average over the last 20 years.
The figure is based on the S&P 500 gaining about 4.9% annually and 10-year Treasuries yielding 2.1% over the next 10 years.
Here’s a graph depicting the historical returns of a traditional 60/40 portfolio and its predicted decline, according to Morgan Stanley.
“The return outlook over the next decade is sobering – investors face a lower and flatter frontier compared to prior decades,” the firm wrote in a note to clients Sunday. “Investors will need to accept much higher volatility to eke out small incremental units of return.”
Morgan Stanley’s analysts pointed to low growth prospects, weak inflation, and sliding yields as the primary drivers for muted returns.
“US equities expected returns are dragged down by a combination of lower income return, low inflation expectations and penalties on both higher-than-average valuations and above-trend growth that cannot be sustained for the next decade,” the analysts added.
The firm also expects investors to shift capital out of high-yield bonds and into investment-grade credit as returns continue to slump.