Asset Class Return Expectations: The Complete Table
Asset class expected returns: historical, real, and forward-looking estimates for 2025
| Asset Class | Historical Nominal CAGR | Real After Inflation | 2025 Forward Estimate | Best Calculator Rate |
|---|---|---|---|---|
| U.S. Large Cap (S&P 500) | ~10.2% | ~7% | 5 to 8% (elevated valuations) | 7% |
| U.S. Small Cap | ~11.5% | ~8.5% | 6 to 9% | 7.5% |
| International Developed | ~7.5% | ~5% | 6 to 9% (cheaper valuations) | 7.5% |
| Emerging Markets | ~7.8% | ~5% | 6 to 10% (high uncertainty) | 7% |
| U.S. Investment Grade Bonds | ~4.5% | ~2% | 4.5 to 5.5% (current yields) | 5% |
| U.S. High Yield Bonds | ~6.5% | ~4% | 6 to 7% | 6.5% |
| Real Estate (REIT) | ~8% | ~5% | 5 to 8% | 6.5% |
| Commodities Broad Index | ~4% | ~1.5% | Highly variable, 2 to 6% | 4% |
| Global 60/40 Balanced | ~7 to 8% | ~4.5 to 5% | 5.5 to 7% | 6.5% |
The Valuation Problem for U.S. Stocks
The Shiller CAPE ratio for the S&P 500 in 2025 is approximately 35 to 37 versus the historical average of 16 to 17. The CAPE has moderate predictive power for 10-year forward returns. At current CAPE levels, multiple academic models estimate 10-year forward U.S. equity returns of 4% to 7%, compared to the 10% long-run historical average. This does not mean avoiding U.S. stocks. It means using 7% rather than 9% or 10% as your planning rate, and considering international diversification where CAPE ratios are 10 to 15.
European stocks (EFA, VXUS) trade at CAPE ratios of 10 to 15 in 2025. Japanese stocks trade at CAPE of approximately 17. Emerging market stocks (EEM) trade at CAPE of approximately 12. These significantly lower valuations suggest meaningfully better forward return prospects for international stocks relative to U.S. stocks. A 30% to 40% international allocation in equity portfolios is broadly supported by academic evidence on diversification and valuation-based return expectations.
Bond Returns: The Changed Picture in 2025
From 2010 to 2021, investment-grade bonds yielded 1% to 3%, making them unattractive. In 2025, 10-year Treasury bonds yield 4.2% to 4.5%, investment-grade corporate bonds yield 5.0% to 5.5%, and short-term T-bills yield 4.5% to 4.75%. These yields are the best forward return estimate for bonds because current yield is the strongest predictor of future bond return. The 5% bond return assumption for a 60/40 portfolio improves the overall portfolio return estimate meaningfully compared to the 2% bonds of the 2010 to 2021 era.
Real Estate: Returns Beyond Property Prices
Real estate total return combines income (rental yield) and appreciation. REITs (publicly traded real estate investment trusts) have delivered approximately 8% annualized total return historically, competitive with U.S. large cap stocks with moderate correlation. REITs provide real estate exposure within standard brokerage accounts, offer daily liquidity unlike physical property, and require no management. Vanguard Real Estate ETF (VNQ) is the most common vehicle, with expense ratio of 0.13%.
Blended Portfolio Return Calculator
To find your blended portfolio return: multiply each asset class allocation percentage by its expected return and sum the results. Example: 60% U.S. stocks at 7% plus 30% international at 7.5% plus 10% bonds at 5% equals: (0.60 x 7) + (0.30 x 7.5) + (0.10 x 5) = 4.2 + 2.25 + 0.5 = 6.95% blended return. Round to 7% and use that in your investment calculator.
Blended return calculations for common portfolio allocations using 2025 rate assumptions
| Sample Portfolio | Allocation | Blended Return |
|---|---|---|
| Classic 60/40 U.S. | 60% US stocks, 40% US bonds | 6.2% (0.6x7 + 0.4x5) |
| Growth portfolio | 80% US stocks, 20% international | 7.1% (0.8x7 + 0.2x7.5) |
| Global 60/40 | 40% US, 20% intl, 40% bonds | 6.5% (0.4x7 + 0.2x7.5 + 0.4x5) |
| Conservative income | 30% US, 70% bonds | 5.6% (0.3x7 + 0.7x5) |
| Aggressive growth | 100% global stocks | 7.1% (0.7x7 + 0.3x7.5) |
Enter Your Blended Portfolio Return
Calculate your allocation-weighted return rate and project your specific portfolio growth.