The projected total return for the Global Market Index (GMI) continued its upward trend in July, marking another month of improved expectations. However, the long-term outlook remains below the index’s actual performance over the past decade, although the difference has gradually narrowed.
GMI is a market-capitalization-weighted portfolio that combines major asset classes (excluding cash) through ETF-based proxies. The current projection is calculated as the average of three underlying valuation models.
The latest forecast estimates an annualized return of 8.0%, slightly higher than last month’s projection. Despite the recent improvement, the expected return remains below the benchmark’s trailing 10-year annualized performance, which has been around 9.6%, though the gap has continued to shrink.
Similar to recent updates, many components within GMI are still expected to deliver lower returns than their historical results over the previous decade. The largest gap remains in U.S. equities, where models suggest future performance may moderate compared with the strong returns seen historically, while still remaining positive.
Overall, GMI’s long-term return outlook has improved but remains more conservative than its recent history, with projected annual returns of 8.0% compared with 9.6% over the past 10 years through July.
The Global Market Index (GMI) serves as a theoretical benchmark representing an “optimal” portfolio designed for the average investor with an unlimited investment horizon. While real-world investors face practical constraints, GMI provides a useful foundation for developing and adjusting asset allocation strategies based on individual goals, expectations, risk tolerance, and investment preferences. Historical data indicates that this passive benchmark has delivered competitive results compared with many active asset-allocation approaches, particularly after considering risk exposure, transaction costs, and taxes.
However, the forecasts presented should be viewed with caution, as some or even all projections may differ from actual future outcomes. GMI’s overall forecast is generally expected to be more reliable than predictions for individual asset classes because combining multiple market forecasts can help reduce the impact of errors and volatility over time.
These projections can also be used as a reference point for refining investment expectations. Investors may enhance the estimates by incorporating additional models, assumptions, and factors not included in the current framework. Portfolio strategies should ultimately be tailored to each investor’s specific circumstances, including risk capacity, investment horizon, and financial objectives.
To provide historical context, GMI’s performance can be evaluated through its rolling 10-year annualized returns. Compared with U.S. stock and bond ETFs, the benchmark has maintained strong long-term results. As of the latest update, GMI delivered a 9.6% annualized return over the past decade, slightly lower than the previous month but still reflecting strong historical performance.
The forecasts for the Global Market Index (GMI) are generated using three different models: Building Block (BB), Equilibrium (EQ), and Adjusted Equilibrium (ADJ). Each approach uses a different methodology to estimate future expected returns.
Building Block (BB) Model:
The Building Block model estimates future returns based on historical performance. It analyzes data from January 1998 onward, calculates each asset class’s historical risk premium, converts it into an annualized return estimate, and then adds an expected risk-free rate. The risk-free rate is based on the latest yield of the 10-year Treasury Inflation-Protected Security (TIPS), which represents the market’s estimate of a safe, inflation-adjusted return.
Equilibrium (EQ) Model:
The Equilibrium model estimates expected returns by focusing on risk rather than directly forecasting returns. Since risk metrics are generally considered more predictable than future returns, the model uses three key inputs:
- The expected market price of risk, measured by the Sharpe ratio (the relationship between risk premium and volatility).
- The expected volatility of each asset class within GMI.
- The expected correlation between each asset class and the overall GMI portfolio.
This approach first calculates expected risk premiums and then adds the risk-free rate to determine projected total returns.
Adjusted Equilibrium (ADJ) Model:
The ADJ model follows the same framework as the Equilibrium model but incorporates short-term momentum and long-term mean-reversion factors. Forecasts are adjusted based on current asset prices compared with their 12-month and 60-month moving averages.
- When prices are significantly above their recent averages, expected returns are reduced.
- When prices are below their historical averages, expected returns are increased.
This adjustment reflects the idea that overvalued assets may experience weaker future returns, while undervalued assets may have stronger potential.
Average (Avg):
The average forecast represents the simple mean of the three models (BB, EQ, and ADJ) for each asset class. This combined estimate is used as GMI’s overall expected return projection.
10-Year Return (10yr Ret):
This metric shows the actual annualized total return achieved by each asset class over the previous 10 years up to the current reporting period, providing historical context for comparison.
Spread:
The spread measures the difference between the average forecast and the historical 10-year return. A negative spread indicates that future expected returns are below recent historical performance, while a positive spread suggests expectations are higher than past results.
