Author Topic: Vanguard warns of decade of muted returns despite strong growth  (Read 4546 times)

kenmoremmm

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Vanguard warns of decade of muted returns despite strong growth
« on: September 24, 2017, 06:40:35 AM »
http://www.seattletimes.com/business/vanguard-warns-of-decade-of-muted-returns-despite-strong-growth/

Quote
By Keiko Ujikane and Min Jeong Lee
Bloomberg News
The world’s biggest mutual-fund company says it’s surprised by the global economy’s strength this year, but that doesn’t mean it’s more optimistic about the investment outlook.

Investors should brace for a decade of “muted returns,” said Nathan Zahm of Vanguard Group, reiterating the $4.5 trillion money manager’s view that equity returns will drop to 5 to 8 percent per year, while those for bonds will decline to 2 to 3 percent.

That’s even as the world economy posts better-than-expected performance in 2017, helped by growth in Japan and Europe, the Hong Kong-based senior investment strategist said.

The S&P 500 Index of U.S. shares has surged 12 percent this year, heading for its biggest annual gain since 2013, while just two of 24 developed equity markets tracked by Bloomberg posted losses for the period.

While stock investors have shrugged off political turmoil in the U.S. and increasing risk of a conflict with North Korea to focus on economic output and corporate profits, Vanguard suggests the good times will slow.

“This year was probably a surprise to the upside, ” Zahm said.

“What we caution investors on, particularly given that landscape and given the very strong run we’ve had, is that forward-looking returns are now quite muted,” he said.

The indexing giant has maintained for decades that low-cost passive funds tend to serve investors better over multiple market cycles than high-priced offerings.

Vanguard’s view on the outlook for the next decade, previously expressed by founder Jack Bogle and Bill McNabb, who steps down as chief executive officer in January, is that the strong returns after the financial crisis just aren’t sustainable.

In this environment, the low-cost indexer is telling investors to control what they can control, such as how much they spend and save.

Many investors will find themselves overweight in equities and needing to adjust their portfolios, said Zahm, who’s part of a 70-strong global investment-strategy team headed by the firm’s global chief economist Joseph Davis.

Aside from suggesting a need to keep costs low, Zahm says his team is also cautioning investors on risk awareness and tolerance before the lower investment returns the money-manager foresees.

gggggg

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Re: Vanguard warns of decade of muted returns despite strong growth
« Reply #1 on: September 24, 2017, 08:15:25 AM »
As much as I love Vanguard (they have some of my money), they, like everyone else, don't know what's going to happen in the future.

Kalergie

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Re: Vanguard warns of decade of muted returns despite strong growth
« Reply #2 on: September 24, 2017, 08:16:38 AM »
Where can I buy their crystal ball?

Indexer

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Re: Vanguard warns of decade of muted returns despite strong growth
« Reply #3 on: September 24, 2017, 08:48:09 AM »
I don't think they are saying anything out of the ordinary. Let's look at some of the basic facts logically, and let's start with interest rates. If bond's long term historic return is 5.5%, and most of that return came from income I don't see them averaging 5.5% over the coming decade when they are currently only yielding 2.5%. If stock's long term historic return is 10%, and part of that return came from dividends then they could have a hard time averaging 10% over the coming decade when dividends are averaging 2%.

Now let's look at valuations. PE, CAPE, and Marketcap/GDP are high, not tech bubble nosebleed high, but higher than average. That doesn't mean there will be a crash next year. It does 'imply' that returns over the next 5-10 years are more likely to be below average than they are to be above average. Another way to think about that; if stocks dividends are 2% then stocks would need to appreciate 8% per year to give us 10% total returns per year. We don't currently have the productivity or earnings growth to give us 8% appreciation right now. Much of the appreciation the past few years has been through valuation increases, not earnings growth. With valuations already on the higher end, 8% appreciation per year could put valuations in bubble territory which normally leads to a crash. After that bubble and crash would you still average 8% appreciation per year? Probably not. Now we could have a big technological revolution(or something else) that puts productivity growth & earnings growth into higher gear and gives us that growth without stretching valuations further. Possible? Yes. Probable? Unlikely.

I read Vanguard's economic outlook each year. I like that they don't make 1 year predictions, but they will show probabilities of returns over the coming decade. https://personal.vanguard.com/pdf/ISGVEMO.pdf 

Page 28 is likely my favorite page. Looking at the 75th and 95th percentiles, Vanguard shows that returns over the next decade 'could' be higher than average. However, looking at the 50th percentile, the average is coming in lower than what we have seen in the past. 60/40 has historically averaged 6% real returns. Vanguard is saying that during the next decade an average 3-5% real return is more likely. Given everything above, I don't disagree with them. I think it would be prudent to assume lower discount rates for the next 5-10 years. 

PizzaSteve

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Re: Vanguard warns of decade of muted returns despite strong growth
« Reply #4 on: September 24, 2017, 09:21:01 AM »
Consumers have been capturing an increasingly large share of economic growth, as american style efficient retail speads globally and prior protected local markets face increasing, global competition.  The fight to retain share and these forces are squeezing profit margins, and hence equity returns.

The next decade will be great for economic growth, consumer value, and companies with sustainable competitive advantages, but bad for local job and wage growth, bond returns and corporate profits overall (IMHO).

Assuming the global trade markets and social structures stay stable, Mustacians will do very well in this climate.  Just don't quit at 30 assuming 7%+ returns will fund you for life.  I think it is safe to assume that plenty of tech driven spending efficiencies will help us make up for the lower average 2-6% returns though.  For example, our solar deal rocks, our heater/windows are much more efficient, our Prius driving cost per mile is great, organic local produce never more plentiful and reasonable, etc.

YoungInvestor

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Re: Vanguard warns of decade of muted returns despite strong growth
« Reply #5 on: September 24, 2017, 09:35:22 AM »
With yields so low, bond returns cannot possibly be good on a long term basis. I think their 2-3% makes a lot of sense. I think cash is just as good right now, possibly better when taking advantage of high interest savings deals available here and there.

Equities are harder to assess, with fairly high multiples right now, you just don't buy a lot of profit for your money (which is what equities are all about in the end), but growth could mean good returns.

Hargrove

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Re: Vanguard warns of decade of muted returns despite strong growth
« Reply #6 on: September 24, 2017, 10:20:38 AM »
Hahaha seriously?

"I can't tell the future, and I missed this major thing, but in conclusion I predict the following..."

Vanguard reads like... well, most investment proclamations.

What even do they gain for pointing this out? If they're right, their business model, while remaining the best, looks temporarily less exciting. If they're wrong, they went out of their way to take the wrong position for no gain. It's not like I'm going to go "gee, Vanguard predicted the markets might be rough after one of the biggest bull runs in stock market history, they're obviously good at what they're doing and I will invest with them instead."

PizzaSteve

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Re: Vanguard warns of decade of muted returns despite strong growth
« Reply #7 on: September 24, 2017, 11:18:26 AM »
With yields so low, bond returns cannot possibly be good on a long term basis. I think their 2-3% makes a lot of sense. I think cash is just as good right now, possibly better when taking advantage of high interest savings deals available here and there.

Equities are harder to assess, with fairly high multiples right now, you just don't buy a lot of profit for your money (which is what equities are all about in the end), but growth could mean good returns.
Pretty much.  My view is that fairly stable trade and job oriented monitary policies have flooded capital markets with surplus capital.  Investors are competing hard, so good investments can play hard to get, whether through states issuing debt or corporations selling equities.  Here in tech land, a lot of maturing tech companies are sitting on a lot of cash in their ballance sheets, so stock buy backs are somewhat fueling higher CAPEs.

Telecaster

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Re: Vanguard warns of decade of muted returns despite strong growth
« Reply #8 on: September 26, 2017, 11:08:09 AM »
Vanguard didn't say anything controversial there.  Every year can't be above average.  It is completely reasonable to conclude that after a string of above average years, we'll have a string of below average years. 

boarder42

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Re: Vanguard warns of decade of muted returns despite strong growth
« Reply #9 on: September 26, 2017, 01:12:05 PM »
i hope they are correct.  i've got about 5-6 years left and have an interesting situation with the company i work for.  so muted returns for the market means it will be on sale when i retire and i'll have a pile to invest.  like retiring in 09 man that would just be fantastic.

Scandium

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Re: Vanguard warns of decade of muted returns despite strong growth
« Reply #10 on: September 26, 2017, 01:53:44 PM »
What even do they gain for pointing this out?

Only thing I can think of is that their investors are "prepared", and don't pull out their money after low returns? Having hard time why an index company cares about this market speculation BS..

SeattleCPA

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Re: Vanguard warns of decade of muted returns despite strong growth
« Reply #11 on: September 26, 2017, 02:06:52 PM »
I don't think they are saying anything out of the ordinary. Let's look at some of the basic facts logically, and let's start with interest rates. If bond's long term historic return is 5.5%, and most of that return came from income I don't see them averaging 5.5% over the coming decade when they are currently only yielding 2.5%. If stock's long term historic return is 10%, and part of that return came from dividends then they could have a hard time averaging 10% over the coming decade when dividends are averaging 2%.

Now let's look at valuations. PE, CAPE, and Marketcap/GDP are high, not tech bubble nosebleed high, but higher than average. That doesn't mean there will be a crash next year. It does 'imply' that returns over the next 5-10 years are more likely to be below average than they are to be above average. Another way to think about that; if stocks dividends are 2% then stocks would need to appreciate 8% per year to give us 10% total returns per year. We don't currently have the productivity or earnings growth to give us 8% appreciation right now. Much of the appreciation the past few years has been through valuation increases, not earnings growth. With valuations already on the higher end, 8% appreciation per year could put valuations in bubble territory which normally leads to a crash. After that bubble and crash would you still average 8% appreciation per year? Probably not. Now we could have a big technological revolution(or something else) that puts productivity growth & earnings growth into higher gear and gives us that growth without stretching valuations further. Possible? Yes. Probable? Unlikely.

I read Vanguard's economic outlook each year. I like that they don't make 1 year predictions, but they will show probabilities of returns over the coming decade. https://personal.vanguard.com/pdf/ISGVEMO.pdf 

Page 28 is likely my favorite page. Looking at the 75th and 95th percentiles, Vanguard shows that returns over the next decade 'could' be higher than average. However, looking at the 50th percentile, the average is coming in lower than what we have seen in the past. 60/40 has historically averaged 6% real returns. Vanguard is saying that during the next decade an average 3-5% real return is more likely. Given everything above, I don't disagree with them. I think it would be prudent to assume lower discount rates for the next 5-10 years.

+1

SeattleCPA

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Re: Vanguard warns of decade of muted returns despite strong growth
« Reply #12 on: September 26, 2017, 02:07:51 PM »
Vanguard didn't say anything controversial there.  Every year can't be above average.  It is completely reasonable to conclude that after a string of above average years, we'll have a string of below average years.

+1

Mighty-Dollar

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Re: Vanguard warns of decade of muted returns despite strong growth
« Reply #13 on: September 29, 2017, 01:30:38 PM »
Investors should brace for a decade of “muted returns,” said Nathan Zahm of Vanguard Group
So many of these predictions turn out to be COMPLETELY wrong.
https://www.youtube.com/watch?v=UMZn6t_jRlc
Bond yields are low. So take more stock market risk. Whether taking out 4% per year from your retirement savings or letting it grow, 100% stocks was the best allocation ratio from 1966 onward. This is a time that had rising interest rates.
https://youtu.be/ZOXu2cu7ZUw?t=3m4s