It is important to set the right expectations with investing and one way is to look at historical averages for different asset classes. That will give you a sense of what is achievable, albeit there will be years when returns are considerably above or below these levels.

Another way of setting your expectations is by looking at predictions for future returns, which is where Pictet’s annual Horizon report comes in handy. The asset manager weighs up the state of the world and predicts average returns for the next 10 years across different parts of the market and a range of asset classes.

This year’s report has just been published and includes a prediction that global equities, as measured by the MSCI World index, will return an annual average of 6.5% including dividends over the next decade. It foresees emerging market equities as returning 7.8% on average a year over the same period, and a bit less from UK equities at 5.8%.

The returns from certain government bonds could be negative over the next 10 years, such as UK, Japanese and German bonds. Corporate bonds might be a better place for your money with Pictet estimating 5.3% returns from global high yield bonds and 3.1% from global investment grade bonds.

Having an idea what you could potentially make in the future can help with financial planning. While there is no guarantee forecasts will pan out, having a realistic estimate means you can work out if a certain goal is achievable.

For example, you might want to have £60,000 in 10 years’ time so your two children can go through university and not be saddled with massive debts at the end of it. Someone who has a £1,500 lump sum could invest that amount and then put £400 in the market each month and have £60,200 after a decade, based on 4.5% annual investment growth and 0.75% charges.

That’s a conservative growth rate assumption as it is less than Pictet’s entire equity predictions. But often it pays to be conservative with your expectations as markets have a habit of serving up both good and bad surprises along the way.

And don’t forget to diversify – just because someone’s predictions say you could generate a certain rate of return through a specific type of investment doesn’t mean you should just put all your money in that area. Spread your risks through having lots of different types of equity exposure and other asset classes.

Interestingly, Pictet says the widely followed 60:40 rule of equities (60%) and bonds (40%) may not be the most appropriate for portfolio asset allocation today.

It suggests having one third of assets in equities, one third in bonds, and one third in private equity, gold, real estate and potentially infrastructure which it believes have the potential to boost long-term returns. It says this is like endowment investing and involves putting money into less liquid assets. We’ll endeavour to explore asset allocation in more depth in a future issue of Shares.

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