After a period of historic growth and relative calm, the markets have returned to a more expected up-and-down cycle. The Standard & Poor’s 500 Index finished 2018 down more than 4%—its first calendar-year decline in a decade. And the slump felt even worse because stocks had risen sharply at times, only to end the year 14% below their September peak.

Heading into 2019, clients were understandably nervous after the year-end drop. Ongoing conversations around Brexit, trade wars, and U.S. Federal Reserve policy only added to the uncertainty. But as of the end of February, the S&P 500 was up 11%, showing the difficulty of predicting short-term market movements.

If you’re looking for perspective about what the markets may have in store over the long term, take a look at what our economists say in Vanguard’s latest economic and market outlook. (You can also read our summary.) They note that we could see more modest returns and more volatility over the next decade than we’ve become used to.

If they’re right, adhering to best practices will be crucial to your investment success. For example, focusing on long-term goals instead of short-term market movements; rebalancing, even if it’s into an asset class that has performed poorly; and staying broadly diversified across and within asset classes.

A closer look at Vanguard’s outlook for the next decade

Predicting the future over the short term is at best, imprecise, and at worst, a fool’s errand. Vanguard economists agree that forecasts for the capital markets should be approached with modesty. Joe Davis, our global chief economist, is fond of saying we should all “treat the future with the humility it deserves.” That’s why he and his team don’t make pinpoint predictions about where the S&P 500 will be in 6 months’ time. Instead, they use their own statistical models and judgment to estimate the probabilities of a range of longer-term outcomes.

With year-end data in hand and with stock valuations still fairly high and interest rates low, Joe’s team is forecasting average annual returns over the next decade of:

  • 4%–6% for U.S. stocks.
  • 7%–9% for non-U.S. stocks.
  • 2%–4% for global bonds.

That would mean the return outlook for a broadly diversified portfolio comprising 60% stocks and 40% bonds would be about 4%–6%—decent but well below the 7.3% return since the beginning of 1990 for the same portfolio.

Whatever those future returns are, they’ll probably come with more volatility. Investors were lulled into a false sense of calm in 2017, with no trading day posting a rise or drop of more than 2%. In 2018, there were 20 trading days when that happened, leading some pundits to fret that that level of volatility could become the “new normal.” But that level is actually pretty close to the “normal normal”—the long-term average that investors should expect. The last decade was the exception thanks to extreme monetary policy. You should expect 20 days of plus or minus 2% in any given year for stocks.

Expect the markets to do less of the heavy lifting

Facing the prospect of a period with lower returns and more volatility, a client recently asked me whether there was a good place to hide. Yes, there is—in the low-cost, diversified, balanced portfolio she set up years ago. The whole reason for holding a balanced portfolio is times like these.

That client’s urge to do something is natural. But our research has shown that trying to “fix” your portfolio by abandoning a well-thought-out plan often hurts far more often than it helps. If, like this client, you need some reassurance—or if you lack the time, interest, or discipline to adhere to best practices—seeking advice from a financial advisor may help you stay on track to achieve your financial goals.

That said, if Vanguard’s outlook for more muted returns plays out, you may have to do more of the heavy lifting to reach your financial goals. Investing just a little bigger slice of your paycheck or working a year or 2 longer (even part-time) if you’re still saving for retirement can help. So can finding a few ways to cut back on your spending if you’re already retired. And if our estimates prove to be conservative, you’ll be more than ready for whatever the markets bring.

Focus on what you can do to increase your odds of investment success

Chart showing that factors you can control, like saving more and spending less, likely have a greater impact on your likelihood of investment success vs. overweighting certain asset classes.

Source: Vanguard

Notes:

All investing is subject to risk, including the possible loss of the money you invest.
Past performance is no guarantee of future returns.
Investments in bond funds are subject to interest rate, credit, and inflation risk.
Foreign investing involves additional risks, including currency fluctuations and political uncertainty.
Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.