There are countless forecasts of future investment returns. Most are focused on the next year and often are based on predictions that the past will continue. I consider them worse than worthless. But there is one forecast I pay attention to – Vanguard’s 10-year outlook for financial markets. Rather than make a short-term forecast with a specific numerical return, this is a probabilistic model making long-term forecasts.
I’ll first summarize their projections and note what I think are some shockers. Then I’ll take a look at how accurate their past forecasts have been. Finally, I’ll conclude with what I’m changing in my own portfolio based on this forecast and describe how I use this forecast with clients.
Vanguard’s 10-Year Outlook
Below are the asset class forecasts based on 10,000 simulations from the Vanguard Capital Markets Model (VCMM).
There are a few significant themes I take from these numbers.
- International stocks to trounce U.S. stocks. As in years past, Vanguard is projecting international stocks will outperform U.S. stocks. The 7.9% midpoint 10-year annual return of international stocks more than doubles that of the 3.8% return of U.S. stocks. In spite of the large difference, Vanguard notes there is a 30% chance the U.S. could again outperform.
- U.S. growth stocks to earn virtually nothing. The midpoint return of growth stocks is forecast to only earn 0.60% annually. In reality, Vanguard is projecting a negative real return since they are projecting inflation to be 2.4% annually.
- Bonds to earn their current yield. The midpoint return of U.S. aggregate bonds is 4.8%, just a tad over the 4.6% seven-day yield of the Vanguard Total Bond Index ETF (BND) as of February 3, 2025.
- Real yields are predicted to decline. U.S. TIPS are projected to yield 3.9% with inflation projected at 2.4%. That implies a real yield of 1.5%, a significant decline from the 2.3% as of February 4, 2025 across the TIPS yield curve.
- Commodity prices to surge. The midpoint 7.2% annual increase in commodities implies a 100.4% increase or, after inflation, a real 58.1% increase.
- For U.S. stocks, the equity risk premium is now an equity risk discount. Arguably, the risk-free rate is that of U.S. Treasury bonds. The 3.8% midpoint return of U.S. equities is 0.8 percentage points lower than the 4.6% return of U.S. Treasury bonds.
No forecast will be precise, but if this model proves relatively accurate, a portfolio overweighted in international stocks, commodities, and bonds and underweighted in U.S. stocks, possibly even avoiding U.S. growth stocks would be the optimum allocation.
Vanguard Comments
I spoke to Kevin Khang, a senior international economist and head of a global economic research team that develops Vanguard’s long-term and cyclical economic outlook. He told me that valuations of U.S. growth companies are stretched, and we are likely to return to a secular market rather than relatively short-term swings. Khang also told me U.S. growth stocks are priced to perfection, but there is a scenario where AI is truly transformational.
When asked if one should abandon U.S. growth stocks and overweight international, Khang replied that the model is not meant to encourage market timing, though one could make small shifts based on this forecast. When questioned if Vanguard would change its position on weighting stocks at 40% international, he responded “no.”
In a recent Vanguard webinar titled The Look Ahead: 2025, Greg Davis, Vanguard’s president and chief investment officer, noted that a 40/60 portfolio could have similar returns to a 60/40 portfolio, with less risk over the next decade. Salim Ramji, Vanguard’s CEO, quoted Margaret Thatcher, stating, “Inflation is … the unseen robber of those who have saved.” He stated that everyone watching this webinar were savers.
Past Vanguard Forecasts
I’ve been looking at forecasts from the VCMM for over a decade. Fortunately, I saved a few. Below is the forecast of the broad markets from December 2013, along with the actual results over the next 10 years, measured from December 31, 2013 to December 31, 2023.
U.S. equites actually gained 11.4% annually as measured by the Vanguard Total Stock Index ETF (VTI ). That bested the midpoint estimate of 7.7% by 3.7 percentage points but was within the range between the 25th and 75th percentile. International stocks as measured by the Vanguard Total International Stock ETF (VXUS ) gained only 4.1% annually or 4.4 percentage points short of the midpoint estimate of 8.5%. That was also within the 25th and 75th percentile.
Bonds, however, earned only 1.8% annually, as measured by the Vanguard Total Bond ETF (BND ) versus the 2.5% midpoint and below the 25th percentile estimate. The 10-year period included the year 2022 which was the worst year in the history of the stock market.
I also found a forecast from June 2018 that had midpoint forecasts of 3.7% annual gains for U.S. stocks and 6.9% for international stocks. In actuality, U.S. stocks far outperformed. Reversion to the mean has so far not occurred, as technology stocks led the surge, which was heavily U.S.-centric.
My View
I look forward to these VCMM forecasts, but as Kevin Khang states, I don’t use them to time the market. I think the Vanguard estimate that there is a 70% chance international will outperform the U.S. is about right. But it’s compensation for taking on more risk along with a powerful force called “reversion to the mean.” I think the midpoint estimate that international stocks will outperform the U.S. by 4.1 percentage points annually is far below a 50% probability, though I’m wrong a lot.
Regarding U.S. stocks, I find it hard to accept the likelihood that the U.S. market risk premium is now negative and bonds will outperform stocks. But the very same thing happened in the first decade of this century, sometimes referred to as the lost decade. While I’m happy I’ve never been a “smart beta” investor, I do think reversion to the mean is likely and value will best growth. That said, I wouldn’t bet a lot on this – there’s maybe a 60% to 70% chance.
Though I hope Vanguard is wrong that the prices of commodities will outpace inflation by more than 58% in the next decade, I’m maintaining my commodity exposure at zero, other than some gold I bought decades ago. Other than precious metals, I actually can’t invest in commodities. I don’t have storage facilities in my home for the likes of oil, industrial metals, gains, livestock, or bulk quantities of coffee beans. Commodity funds typically own derivatives such as commodity futures, where, before costs, not a penny has ever been made in the aggregate.
In the end, I think the most valuable insight of this forecast is to show that investing is risky. The differences between the forecasted returns between the 5th and 95th percentiles are huge. Vanguard is saying that, over the next decade, there is a 90% chance U.S. stocks will see returns fall within a range from a loss of 27.8% to a gain of 176.4%. There is a 10% chance it could fall outside that range.
Kevin Khang told me the VCMM forecast uses fat tails rather than normalized distributions. I concur, as the 2022 bond market would be a one in 50 million probability if we actually lived in such a normalized world. In the real world, the unexpected should be expected.
No one knows the future. Market returns and inflation are the two largest risks. In the Vanguard webinar, Salim Ramji referred to a problem that I and most of my clients have: We are not spending enough because we are worried and anxious about the future. Indeed, in a stagflation scenario where U.S. stocks lose 3.2% annually and inflation runs at 4.6% a year, 54% of today’s spending power is wiped out in only a decade. Thanks to current high real yields, a TIPS ladder reduces that anxiety and helps to solve both issues and creates a license to spend.
So the bottom line is that I will change nothing in my portfolio. Yet this forecast provides value in helping me to convince clients to stay the course and diversify. Don’t give up on international stocks, value stocks, or bonds. I tell clients to understand just how risky markets are and discuss the consequences of a negative fat tail being realized.
Continue to own the world in a total U.S. and total international stock index fund. Whatever allocation you pick, stick to it. High-quality bonds are the ballast of a portfolio and now provide returns above inflation.
When it comes to picking asset classes, I used to say, “If you can’t be right, at least be consistent.” I’ve updated that statement to now say, “consistency is even more important than getting it right.” Once you pick the asset allocation or allocation glide path, stick with it. Otherwise, you are more likely to change it based on past performance.
Allan Roth is the founder of Wealth Logic, LLC, a Colorado-based fee-only registered investment advisory firm. He has been working in the investment world of corporate finance for over 25 years. Allan has served as corporate finance officer of two multibillion-dollar companies and has consulted with many others while at McKinsey & Company.
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