With 2017 coming to a close, the forecast machine is working overtime predicting what will happen next year. “The wackier the better” is how the game works because it draws the biggest headlines.
Unfortunately, these people sound sincere, educated, and expert-y, so we’re more apt to believe them.
Don’t.
A magic eight ball is about as useful as the people spewing these predictions. So take it all with a heaping pile of salt. Like the magic eight ball, view it as purely entertainment.
The exception is the outlook reports looking beyond 2018 that take a long-term probabilistic approach. Vanguard – which does a better job than most – released their outlook this week.
The sky is not falling, but our market outlook has dimmed. Since the depths of the 2008–2009 Global Financial Crisis, Vanguard’s long-term outlook for the global stock and bond markets has gradually become more cautious — evolving from bullish in 2010 to constructive in 2012 to guarded in 2017 — as market returns have risen with (and even exceeded) improving fundamentals. Although we are hard-pressed to find compelling evidence of financial bubbles, risk premiums for many asset classes appear slim. The market’s efficient frontier of expected returns for a unit of portfolio risk now hovers in a lower orbit.
Based on our “fair-value” stock valuation metrics, the ten-year outlook for global equities has deteriorated a bit and is now centered in the 4.5%–6.5% range. Expected returns for the U.S. stock market are lower than those for international markets, underscoring the benefits of global equity strategies in the face of lower expected returns. The projected odds of a U.S. market correction are higher than they have been historically.
What the report doesn’t do is predict what will happen next year. Nobody knows. But the report does act as a rough guide to what might happen over the next 5 to 10 years.
Unfortunately, Vanguard’s views conflict with the latest Schroder’s Investor Survey.
So who’s right? Neither is a good bet.
The Schroder survey is largely based on investor’s hopes and fears (more hope than fears today). The unfortunate side effect of a series of good returns is that investors tend to expect the good times will keep rolling.
However, history shows that never happens. When investor sentiment becomes more optimistic, it’s a good sign to be more conservative. The party always ends, sometimes when we least expect it.
On the other hand, Vanguard is offering what they believe is the likely possibility out of a range of outcomes to an uncertain future. The uncertainty thing gets in the way of making this an exact science. So Vanguard is taking a mathematically educated guess.
As investors, we want to make the best decisions based on the best available information. So that eliminates hopes and fears. But it doesn’t necessarily make Vanguard the best information either.
The best way to use this info is to combine it with a few other respectable sources (I dug up links for J.P. Morgan, GMO, and Research Affiliates, feel free to add your own).
That should give you a good range of possible returns over the next decade, so you can reset your expectations.
Then you can put that information to work if you want.
For instance, if stock returns over the next 10 years are more likely to be below average than above average, spend less (for retirees) and/or save more (for retiree wannabes) might be the best option to still meet your goals without taking on extra risk.
Sources:
Vanguard: 2018 Economic and Market Outlook (pdf)
Schroder Global Investor Study 2017 (pdf)
Last Call
- Annie Duke Interview: The Resulting Fallacy Is Ruining Your Decisions – Nautilus
- Beyond All Expectations – Dollars and Data
- How To Read Financial News – M. Housel
- 5 Foolproof Ideas to Beat The Market (In the Long Run) – AAAMP Blog
- Countering the Narrative About Value – Fortune Financial
- Prosperity is a State of Mind – A Wealth of Common Sense
- Enron, 10 Years After – J. Zweig
- Short-Selling Hope-ium – J. Chanos
- BlackRock and Vanguard Less Than a Decade From Managing $20 Trillion – Bloomberg
- Amazon Changed How Economists Think About Inflation – Quartz
- How AI Will Invade Every Corner of Wall Street – Bloomberg
- 52 things I learned in 2017 – T. Whitwell
