October 28, 2021
The financial community usually recommends creating a financial plan and sticking to it. Don’t worry about what is termed “chatter or noise” meaning the headlines that can swing markets on a daily basis.
On the other hand, we don’t want to ignore fundamental changes that might alter the assumptions made as part of the financial plan and investment strategy in support of the plan.
For example, let’s take bonds. According to Morningstar, the historical return on intermediate-term government bonds since 1926 is 5.2%. In today’s low interest rate environment, the return is under 2% at the time of this writing.
It makes no sense to “assume” in a financial plan that bonds will return to 5.2%. So, we need to make adjustments given the world of today.
Aside from the low interest rate environment, U.S. stock valuations are high not only in historical terms but in absolute numbers.
Alternatively, international stock valuations are low compared to the U.S. Potentially, international could outperform U.S. stocks.
According to Vanguard, the expected returns over the next 10 years for a portfolio of 60% stock and 40% bond is between 3.2% – 6%.
If the range is accurate, low returns over the next decade require us to save more since our investments aren’t going to give us the boost in assets we’ve had in previous years.