As the company that pioneered the concept of index fund investing and currently has a whopping $11 trillion in assets under management, Vanguard is the ultimate heavyweight in the American stock market. (1)
So when the company puts out a report about the future of the stock market it’s worth closer attention. In July, the company published a 10-year forecast for a wide range of asset classes, ranging from municipal bonds to mortgage-backed securities. (2)
But it’s the forecast about stocks that should raise alarm bells for many U.S. retirees. Here’s a closer look at what the report suggests seniors can expect in the years ahead.
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Lackluster U.S. stock performance
According to Vanguard, the U.S. stock market is expected to deliver an annualized return of between 3.3% to 5.3% over the next 10 years. That is considerably lower than the previous 10 years. Since 2015, the S&P 500 has delivered an annualized return of 15.26%. (3)
In other words, Vanguard’s analysts believe future performance won’t be nearly as impressive as investors have experienced in recent years.
The team’s forecast about so-called ‘growth stocks’ is even worse. Vanguard expects an annualized return between 1.9% and 3.9% over the next 10 years. That’s uncomfortably close to the 4% withdrawal rate many retirees depend on to meet living expenses.
If you’re already retired or approaching retirement and your portfolio is overweight U.S. stocks, these forecasts should cause some concern. Fortunately, the report also highlights other asset classes that could perform better in the years ahead.
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Better alternatives
Not all asset classes are facing a bleak decade. In fact, some could outperform. Vanguard’s forecast suggests that U.S. treasury bonds could deliver annualized returns ranging from 3.8% to 4.8% over the next 10 years. That’s better returns than growth stocks with far less volatility and risk.
The firm also expects to see stock markets in developed countries outside the U.S. outperforming. Developed market equities excluding American stocks are expected to deliver 5.7% to 7.7% annualized by 2035.
There are already signs of this trend playing out. Canada’s benchmark stock index, the S&P/TSX Composite, has delivered a 23.9% return this year through mid-October. That’s higher than the S&P 500’s 13.8% return over the same period.
Similarly, UBS Group expects €1.2 trillion ($1.4 trillion) of capital to rotate from U.S. to European equities in the next five years. (4)
What should you do?
It’s worth taking any future prediction of the stock market, even the ones from trillion-dollar fund managers, with a grain of salt. It’s impossible to say if U.S. stocks will overshoot or undershoot Vanguard’s forecast.
Nevertheless, diversifying your portfolio to be less reliant on domestic stocks could be a good idea. According to Alliance Bernstein’s analysis of Morningstar, U.S. investors hold just 15% of their portfolios in international stocks which puts them at risk of ‘home bias.’ (5) If your portfolio is too domestic, consider adding some international stocks and bonds.
Similarly, financial advisors often recommend being more conservative as you get older and closer to retirement. If you’re already retired and worried about the stock market, adding more stable fixed income alternatives — such as U.S. government bonds — to your portfolio could be a good idea.
A well-diversified portfolio could help you stabilize your retirement regardless of the shifting dynamics of individual asset classes.
Article sources
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
Vanguard (1, 2, 3); Yahoo! Finance (4); Alliance Bernstein (5)
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Vishesh Raisinghani is a financial journalist covering personal finance, investing and the global economy. He's also the founder of Sharpe Ascension Inc., a content marketing agency focused on investment firms. His work has appeared in Moneywise, Yahoo Finance!, Motley Fool, Seeking Alpha, Mergers & Acquisitions Magazine and Piggybank.
