Vanguard’s baseline forecast, which it gives a 50% probability of coming to fruition, includes a gradual, staggered return to work, local recurrences of the virus that can be suppressed, nervous consumers avoiding highly social activities and an effective vaccine widely available in late 2021.
“it always comes up, what shape is the recovery, a V, W, or U?” said Buckley. “Some people call it a swish. I would say that the recovery is gong too have the shape of the virus, it’s the only shape that matters. The virus is unpredictable, it can mutate and undermine our vaccine efforts, which would be a huge setback, but it can also weaken. With that type of uncertainty, it helps for people to stay diversified.”
Equities seem “fairly valued,” said Buckley, who added that over the near term Vanguard expects 4%-6% annual returns from U.S. equities and 7% to 9% returns from international equities, with fixed income also fairly valued but offering more muted returns.
Investors in well-diversified ETFs and mutual funds should fare well, said Buckley.
Lessons From Retail Customers
“What doesn’t make sense is the euphoria surrounding some individual compabies and the mentality you’re seeing from many new investors,” said Buckley. “Al of these free traading platforms… it reminds me so much of 1999, people think ‘I’ll find something that’s always going up,’ it’s like that dot-com bubble, and those kinds of lessons are hard to learn. This is a time for diversification and discipline, not figuring out the individual winners. There’s way too much uncertainty out there.”
Vanguard noted that trading among its retail investors had been elevated since U.S. markets reached record peaks on Feb. 19. In the first 22 trading days since that peak, 16 were among the highest U.S. household trading days since the company started tracking that information in 2011.
Still, only about 8% of Vanguard self-directed households made trades between Feb. 19 and March 20, and half of those only made one trade. Most of these trades—about 70%—were moving money into equity, but since Feb. 19, Vanguard has experienced “modestly positive” flows into fixed income.
Most of this trading is being conducted by affluent households with multiple types of accounts. Vanguard customers with only a defined contribution plan traded the least out of all segments.
“Our investors walk our talk, the whle idea of staying the course,” said Buckley. “From february to the end of May, about 20% of investors panicked, sold equites and went to all cash and bonds. At Vanguard, 90% of our clients didn’t do anything at all. Seven percent actually did what Tom said he needed encouragement to do: rebalance into the storm. Only 0.4% actually panicked and went to all-cash or all-bonds.”
During the first quarter of 2020, younger do-it-yourself investors and those with high allocations to equities suffered the worst losses.
Older investors, who were more likely to carry larger fixed income allocations or even adhere to the oft-maligned “balanced” 60/40 stock/bond portfolio, fared much better, which to Buckley proves the enduring value of balanced strategies.
“I’ve heard people question the 60-40 portfolio mso many times, and I think they get confused,” said Buckley. “Bonds are supposed to be there as the ballast, and equities act as the sail that drives you forward. So 60% drives growth, while 40% stabilizes you and provides balance. That rule hasn’t changed. 60-40 is alive and well.”