‘Almost’ only counts in horseshoes and hand grenades, or so the saying goes. We want to add a third situation to the list: Long-term Capital Markets Assumptions, or CMAs for short.

At the beginning of every year we update these CMAs, trying to answer the questions, “How much will XYZ return over the long-run, how volatile will it be, and how closely will it mimic other investments?”

Sound difficult? It is. And inevitably we hear calls about how these projections are always wrong. Well, of course they will be wrong. That’s not the point. Columbus didn’t punch “The Bahamas” into his GPS system and get an exact route, weather alerts, or an anticipated time of arrival. He just went west. (Never mind that he wasn’t even looking for the Bahamas.)

We are not that different from Columbus. CMAs help point us in the right direction. If we intend to set sail for retirement in 15 years, let’s fill the boat with enough supplies to get us there. Should an unexpected storm knocks us off course, we can always re-evaluate and adjust. Like everything else in the business of investing, there is no guarantee these CMAs will be accurate. But we do believe they serve an important purpose.

How do we use these CMAs? Primarily in two ways:

1)       Financial planning

2)      Asset allocation

The assumptions are intended to give us a best guess for planning needs, as well as how much to allocate in US stocks, international stocks, bonds, etc.

Consider this example. John and Jane have $500,000 in investments, all intended for retirement. They expect to need $3,000,000 in 20 years. How much do they need to save each year to get there? To keep the math simple, let’s leave taxes out of the discussion for now.

Should they save $15,000 per year, or shoot for $50,000? It all depends on the assumptions you use in the planning process. Expecting 8% per year in market returns would lead you to saving $15,000. Expecting just 3% less would suggest you save $50,000 – quite a difference. We prefer using estimates from several firms, all with deep and dedicated resources and a lot of experience doing this type of work. We also prefer to err on the side of caution when it comes to planning.

Secondarily, we mentioned asset allocation. The CMAs can help point portfolios to areas with higher expected returns, lower risk, or both.

Our advice – don’t stress over lack of precision. Keep in mind these are long-term assumptions, and dynamic. Re-evaluate each year and adjust as necessary. Point your portfolio in the right direction and save the stress for other things that you can actually control.

Interested? Reach out to DIVVI to continue the conversation.

Opinions expressed herein are solely those of Divvi Wealth Management and our editorial staff. The information contained in this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed. All information and ideas should be discussed in detail with your individual adviser prior to implementation.