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Weathering a low-growth investment environment

17 March 2017 | Markets and Economy

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Vanguard's latest forecast for global equities and bonds is our most cautious for a decade. What does it mean for investors? Saving more, spending wisely, being broadly diversified and focusing on the long term are ever more important, as the fundamentals of investing endure.

Considering the prevailing uncertainty and diminished expectations, what should investors consider as they manage their portfolios and financial plans? Vanguard Global Chief Economist Joseph Davis, PhD, and Maria Bruno, a senior strategist in Vanguard Investment Strategy Group, tackle this question in the following interview.

What's different about this investing environment?

Joe Davis

Joe Davis: It's different from history in certain respects. Two or three decades ago, we had higher interest rates that came with a higher level of inflation. The price differences between higher-risk and lower-risk investments, as well as the valuations in the corporate bond and equity markets, were at more reasonable levels. Today, the expected return is the lowest we've seen in years.

Maria Bruno: That sounds discouraging, of course. But we believe strongly that investors continue to have the tools available to address this environment. It's just that they may not have the tailwinds that they've had when returns were more robust.

What can investors do in such a challenging climate?

Joe Davis: Being forward-thinking is crucial. Despite the lower-return outlook, the fundamentals of investing haven't changed. In fact, saving more, staying broadly diversified and maintaining a long-term perspective have become even more important.

A standard practice is to put more assets into the very investments that are underperforming, in order to stay close to your target asset mix. Rebalancing is a contrarian strategy, and it adds value over long periods of time precisely because many investors don't stick with it.

Maria Bruno

Maria Bruno: I'd add that after any major market move down, the temptation is to head to the sidelines. Going to cash, or holding more cash than you need to while waiting for the market to rebound, comes with trade-offs. Because you don't know when or how the market will turn around, you're exposed to the cost of missed opportunities.

Also, investors should be aware of the need to balance market risk and inflation risk. For example, if you sit on the sidelines, you may be avoiding market risk, but you're overexposed to inflation risk, or shortfall risk.

With so much economic news and analysis from experts, how can we put this glut of information in perspective?

Joe Davis: Vanguard's philosophy is to try to minimise the focus on day-to-day events. However, what shouldn't be lost for retirees, investors and advisers is the need to appreciate some longer-term forces and trends that are at play in the financial markets and the economy. These forces and trends can have a fundamental, important and long-lasting impact on return expectations for our portfolios, as well as on how they may help guide our investment decisions.

Maria Bruno: The challenge that many investors face is in resisting the urge to react. By the time events hit the news, the market has already reacted. The question is, what do you do after that?

Vanguard believes that both investors and advisers can prepare portfolios to weather different investing environments by staying broadly diversified. We can't control what will happen with the markets or the economy. But we can control our reaction. Going to the sidelines after the market has reacted is counterproductive. It exposes investors to trying to figure out the next move correctly. That's much trickier than it sounds.

What long-term trends do we need to be aware of?

Joe Davis: We've thought for some time that this low-growth world is going to persist. We're still of the strong opinion that this low-rate environment is secular, which means it's very long-term in nature.
Why that matters is that Vanguard's forecast for returns on portfolios – equity, fixed income or some balance in between – is the lowest that we've had since 2006. We're not bearish, but we're being guarded.

Maria Bruno: Investors who pursue additional returns need to know there's an additional cost – that extra yield or return comes with a risk. It may not manifest itself today, but risk surfaces at unexpected times; for instance, during the financial crisis that we endured in 2008.

The long-term trends of slower growth and lower return prospects mean that saving and putting more money to work investing is going to play a larger role in reaching your long-term financial goals.

Important information:

This article is directed at professional investors and should not be distributed to, or relied upon by, retail investors. It is designed for use by, and is directed only at, persons resident in the UK.

This article was produced by The Vanguard Group, Inc. It is for educational purposes only and is not a recommendation or solicitation to buy or sell investments.

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. Any projections should be regarded as hypothetical in nature and do not reflect or guarantee future results.

The opinions expressed in this article are those of the individual authors and may not be representative of The Vanguard Group, Inc.

Issued by Vanguard Asset Management, Ltd, which is authorised and regulated in the UK by the Financial Conduct Authority.

VAM-2017-03-10-4438

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