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GMO's 7-year Asset Class Forecast

Last week I introduced you to Palm Valley Capital. This week, I want to introduce you to another investment firm, GMO, which stands for Grantham, Mayo, & van Otterloo. They cater to high net worth individuals and institutional investors, but they have an amazing investment research library available for free to anyone.

One of the founders, Jeremy Grantham, had been their top researcher/personality at the firm, particularly in the last few decades with his research on bubbles and accurately and timely identifying the 1999 and 2007 bubbles. He has taken a step back and allowed up-and-coming investment professionals take the lead on research, but he still offers insights every now and then (including claiming we are in yet another bubble from his posting on June 17, 2020). 

James Montier is another investment professional at GMO that I follow closely. His work is always incredibly insightful, and he has a great way of simplifying very complex happenings in the markets and explaining the bigger picture of what is really going on. I highly recommend reading up on his research.

I also check GMO's website once a quarter just before the quarter ends because they post a 7-year forecast for major national and international markets. The latest one that was just posted on September 18 is particularly eye opening.

As you can see from the chart above, there is only one asset class where they expect a return greater than the 6.5% U.S. Equity Long Term Average Return, and that is Emerging Market Value with a projected return of 9.3%.

On top of that, there isn't a single other asset class where they project earning more than 1.0%. And six of the asset classes are actually forecasted to lose money over the next seven years. This includes -6.5% for U.S. large cap stocks and -4.5% for U.S. small cap stocks. What is even more surprising are the magnitude of forecasted losses for bonds, which in the past have risen in value when stocks fall. GMO is projecting losses of -3% to -4% for U.S. and international bonds including inflation linked bonds.

Cash is only projected to lose -0.5% so that is looking pretty darn good at the moment given all the other options. From everything I am seeing and reading, I think we are in store for a volatile 1-2 years in the markets (not in a good way), so cash will be a good thing to have. Then those with cash will have the opportunity to buy in at lower prices and have a shot to actually earning positive returns instead of these terrible returns that GMO is forecasting at current prices.

Just another reminder to continue to be very careful with investing in most everything right now. As much as people are trying to convince us not to hold cash, I still think it is one of the best things to have at this moment (in addition to gold, silver, platinum, bitcoin, ethereum, and emerging market value stocks).