The report’s authors, Elroy Dimson of Cambridge University and Paul Marsh and Mike Staunton of London Business School, begin by looking at average investment returns since 1900. They estimate that baby-boomers (defined here as those born 1946–64), Generation X (born 1965–80) and Millennials (born 1981–96) have all earned average real returns of at least 5% on equities and at least 3.6% on bonds. The authors then forecast what Generation Z might expect to earn in the coming decades. To do this, they assume that the real return on equities will be equal to the inflation-adjusted return on a risk-free asset (represented by Treasury bills), which they estimate at -0.5%, plus a “risk premium” for buying equities of about 3.5%, for a real return of just 3%. For bonds, the authors assume the current, negative real yields on the index-linked variety. All of this adds up to annualized returns for Gen Z of a mere 2% on a 70:30 portfolio of stocks and bonds—not even a third of the historical return of the baby boomers (see chart). These guesses could prove too pessimistic, but perhaps not dramatically so. The authors concede that a serious bout of deflation could drive up bond returns. But currently, inflation, not deflation, is the worry.
Young investors must not draw ill-advised lessons from the pandemic, either. Having plummeted during the early months of the outbreak, stocks quickly bounced back. Crashes are rarely so fleeting, and Gen Z should recognize this, says Mr. Marsh. “Equity markets are risky and this time we got lucky.”