Benjamin Felix

So for stocks, we use the inverse of the Shiller-Cape ratio.

For bonds, we use the bond yield.

That's one piece, the market-based expected return.

And then we use what we call the equilibrium cost of capital, which is the very long-term return for that asset class.

And for that, we use the Dimson-Mars-Daunton data that goes back to 1900.

And then we combine them in different ways, depending on the asset class.

For equities, we use 75% historical and 25% market-based expected return.

So that's 75% world equity return from the Demis Damar Stanton data.

We do adjust that for valuation changes.

So if equity returns have been high recently because valuations have increased a lot, or if valuations have increased a lot and that's contributed to recent stock returns, we do adjust for that in that long-term measure.

And I mean, likewise, if stock valuations plummeted all of a sudden and the historical return dropped, we would adjust for that valuation change.

And then we combine that with 25% market-based expected return, which as I mentioned is the inverse of the Shiller CAPE.

It's not

statistically robust, but we ran a bunch of regressions on how predictive has the Shiller Cape been historically for future returns.

Statistician would probably mock us for our methodology on this specific part, but we figured that a 25% contribution from the market-based expected return was

roughly in line-ish approximately sort of with the historical predictive power of that metric.

And then for fixed income, we do the inverse where it's 25% historical return and 75% the current yield to maturity on bonds.

And again, that's because historically bond yields have been much more predictive of future realized returns than the CAPE has over future realized stock returns.

But again, they're not perfect statistically derived numbers.

They're rough estimates that work well for doing our expected return estimates.