The 2000s were rough for investors: two major bear markets and returns well below the previous 18-year bull-market run. Recently, measures of business sentiment in Europe slipped, and reports from purchasing managers at manufacturers around the world turned down.
Investors want to know what to expect over the next decade. Will the golden years of 14%+ annual returns of the 1980s and 1990s reappear? Or will we face another miserable decade of lousy returns punctuated by frightening downdrafts?
According to The Vanguard Group, investors who are looking for happy days to return may have to adjust their expectations a little. But on the whole, a balanced portfolio of stocks and bonds has at least a 70% chance of earning respectable profits.
Vanguard expects returns on a 50%-stock and 50%-bond portfolio to range from 4.5% to 6.5% per year. That is lower than the stock market’s long-term average but compares favorably to inflation. The basic principles of portfolio construction—balance, diversification and a risk-appropriate allocation based on long-term goals—continue to be a sound strategy during uncertain economic times.
Vanguard’s simulations suggest that the average return on a broad stock portfolio is likely to be higher than that for a broad bond portfolio given current equity valuations. Vanguard notes that stock-market valuations are at relative bargain levels, while bond-market valuations are extremely high due to unprecedented low interest rates.
However, that does not mean that investors should give up on bonds altogether and invest solely in stocks. Such a move might bring higher returns but also offers much greater downside risk. We agree with Vanguard that a balanced portfolio going forward is preferable to chasing higher yields on riskier bonds or trying to restructure a portfolio to avoid potential stock-market volatility. In our opinion, balanced diversification is preferable to concentrating your portfolio in elusive safe havens.
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