A smart investor tunes out the noise, but doesn't ignore the signal
04 April 2017 | Topical insights
Commentary by Vanguard Chairman and CEO Bill McNabb.
In my 30-plus years at Vanguard, I've said it countless times: "Tune out the noise."
And it's not just me. Everybody from Jack Bogle to Warren Buffett will tell you that to be a successful investor, you have to focus on the long term and not get swept up in short-term market fluctuations.
But filtering out the noise doesn't mean disengaging altogether. In an increasingly complex and interconnected world, it's vital that investors hear the signal of meaningful information through the static of market chatter.
Investors do benefit from taking note of long-term trends that stand to influence our economies and markets in the years to come. Vanguard watches these trends closely, and we discussed our assessment in our recent 2017 global economic and market outlook.
Our outlook: Expect stabilisation, not stagnation
One trend in particular that we're watching is the low-growth, low-interest-rate environment that has marked the global economy since the 2008–09 financial crisis. We don't think this economic backdrop was simply the result of cyclically weak demand or long-term stagnation.
Instead, certain structural forces are contributing: Falling technology costs are limiting businesses' capital spending, an ageing population is weighing on growth in the developed world, and the free movement of capital and products across the globe is suppressing prices and wages. And – despite some of the enthusiasm we've seen in markets lately, particularly in the United States – these forces are likely to continue to dampen growth, inflation and interest rates.
I realise this all may sound gloomy, but that's not how we see it. We expect global growth to stabilise at more modest levels, not stagnate. The world isn't headed for Japanese-style deflation, in which a widespread sustained drop in prices puts economic activity into hibernation.
In fact, we believe that global growth could pick up modestly over time. Our expectation is based on a potential rebound in productivity as new digital technologies get used more effectively. We also anticipate a slight recovery in the labour force as the baby-boom generation finishes its transition to retirement, nudging up demand for workers.
Prepare for subdued returns
And what about prospects for the markets? Vanguard's outlook for global stocks and bonds remains the most guarded in ten years, given fairly high equity valuations and the current interest-rate environment.
This outlook isn't bearish but is actually fairly positive when you take into account interest rates that are still low by historical standards.
Making sense of uncertainty amid the future's shifting tides
Significant trends often unfold gradually. Like shifting tides, they're sometimes barely noticeable at first but ultimately can end up changing the landscape entirely. Other times, apparent trends recede before they have much of a long-term impact. That's what can make the future so hard to predict. It's also why you should be sceptical of definitive, pinpoint projections about what's going to happen.
I know that some investors, especially in the wake of a year marked by political surprises in the United Kingdom, United States and elsewhere, would prefer a little more certainty. But such certainty is bound to be just an illusion.
As Warren Buffett – whose recent shareholder letter featured kind words for Vanguard's founder – likes to say, "Uncertainty is the friend of the buyer of long-term values."
F. William McNabb III
Vanguard Chairman and Chief Executive Officer
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