Vanguard: Stick To Allocation Strategies

February 02, 2012

Vanguard counsels investors to stick close to their knitting.


U.S. investors shouldn’t try to reinvent the wheel as they build their portfolios, but should instead stick with their strategic allocations, even as the U.S. faces below-average, uneven economic growth in the coming decade, Vanguard said.

In its latest Long-Term Economic and Investment Outlook released this week, the company argued that annual U.S. economic growth is likely to remain muted at a 2 to 3 percent inflation-adjusted pace in the next 10 years—mired by a sluggish housing market, hefty consumer debt and solvency concerns here and in Europe.

Still, while the outlook portends volatility as it projects uneven growth patterns and periods of economic slowdowns, the No. 3 ETF U.S. firm by assets also argued that the traditional risk/return trade-off between stocks and bonds should hold true, dispelling views “the next decade warrants a radically new investment strategy.”

“Vanguard remains concerned that the volatile environment may lead some investors to retreat from their strategic allocations,” Vanguard’s Chief Economist Joe Davis said in the report. “Vanguard believes that a balanced and diversified low-cost portfolio remains crucial for the decade ahead.”

Specifically, Davis said Valley Forge, Pa.-based Vanguard is concerned investors may be tempted these days to reach for yield, chase regions with higher economic growth and pursue alternative investments—all without taking full measure of the plethora of associated risks.

At its core, the company is looking for global equities to return anywhere from 6 to 9 percent in years ahead, and returns from U.S. fixed income should remain largely in line with those seen back in the 1950-1960s, the company said.

“Despite the modest secular bias toward rising U.S. interest rates, we caution investors against maintaining a secular short-duration bias in their fixed income portfolios,” Vanguard said in the report.

US Housing Market Stability To Take ‘Some Time’

Still, Vanguard expects emerging market economies, as well as Australia, to lead global economic growth in the next decade. But U.S. growth, while lagging, should outpace growth in both Europe and Japan, the report said.

“Despite its below-average trend growth rate, our secular U.S. economic outlook remains cautiously optimistic,” the company said in the report, arguing that much of the “uneven recovery scenario” has already been priced into financial markets. If true, that means any damage to investors’ portfolios has probably already been done.

“It’s important to note that U.S. profit margins and corporate balance sheets are strong and productivity is high, thereby providing a level of shock-resistance to the U.S. private sector going forward,” it added.

But stability in housing prices and in consumer debt levels will take “some time” to work through, with a bottoming in housing not likely coming until at least 2014, Vanguard said.

The U.S. housing market was at the center of the credit crisis that unleashed a global recession in 2008, and the real estate market has yet to stage a sustainable recovery that many say is key for the United States to definitively turn a page on its economic recession.



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