60/40 Portfolio Future Returns

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scarson
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60/40 Portfolio Future Returns

Post by scarson » Thu May 30, 2019 12:01 pm

Just read an article https://www.morningstar.com/articles/93 ... -deca.html on morningstar projecting future annualized returns on VBIAX Vanguard Balanced Fund around 3.8%. If this is true, are we better off investing all our portfolio in CD's thus eliminating not only equity/bond risk but also sequence of returns risk for imminent retirees. Opinions please?

Thanks

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ruralavalon
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Re: 60/40 Portfolio Future Returns

Post by ruralavalon » Thu May 30, 2019 12:22 pm

scarson wrote:
Thu May 30, 2019 12:01 pm
Just read an article https://www.morningstar.com/articles/93 ... -deca.html on morningstar projecting future annualized returns on VBIAX Vanguard Balanced Fund around 3.8%. If this is true, are we better off investing all our portfolio in CD's thus eliminating not only equity/bond risk but also sequence of returns risk for imminent retirees. Opinions please?

Thanks
Morningstar wrote:The Vanguard Capital Markets Model projects U.S stocks to return between 3% and 5% annualized and U.S. bonds to return between 3% and 4% annualized. If the median range of those forecasts is correct, that would translate to annualized returns of about 3.8% for the fund going forward
A projection of future events or conditions (even from Vanguard) is an opinion, not a statement of fact. Projections of returns are notoriously inaccurate.

Even if the opinion turns out to be true, that doesn't make CDs a better choice for anyone nearing retirement. Five year CDs can be had at 3%, enough below 3.8% to be important. Also the sequence of returns risk exists for longer than 5 years. You might wind up rolling over your CD to a new CD at a bad time for CD rates.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

dru808
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Re: 60/40 Portfolio Future Returns

Post by dru808 » Thu May 30, 2019 12:25 pm

Wouldn’t that be considered market timing? I don’t know much bout investing, but I’m sure the bogleheads here are going to say that’s a “negatory”.

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whodidntante
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Re: 60/40 Portfolio Future Returns

Post by whodidntante » Thu May 30, 2019 12:29 pm

scarson wrote:
Thu May 30, 2019 12:01 pm
Just read an article https://www.morningstar.com/articles/93 ... -deca.html on morningstar projecting future annualized returns on VBIAX Vanguard Balanced Fund around 3.8%. If this is true, are we better off investing all our portfolio in CD's thus eliminating not only equity/bond risk but also sequence of returns risk for imminent retirees. Opinions please?

Thanks
3.8% nominal or 3.8% real?

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Wiggums
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Re: 60/40 Portfolio Future Returns

Post by Wiggums » Thu May 30, 2019 12:32 pm

whodidntante wrote:
Thu May 30, 2019 12:29 pm
scarson wrote:
Thu May 30, 2019 12:01 pm
Just read an article https://www.morningstar.com/articles/93 ... -deca.html on morningstar projecting future annualized returns on VBIAX Vanguard Balanced Fund around 3.8%. If this is true, are we better off investing all our portfolio in CD's thus eliminating not only equity/bond risk but also sequence of returns risk for imminent retirees. Opinions please?

Thanks
3.8% nominal or 3.8% real?
The article just says, “If the median range of those forecasts is correct, that would translate to annualized returns of about 3.8% for the fund going forward.”

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jakehefty17
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Re: 60/40 Portfolio Future Returns

Post by jakehefty17 » Thu May 30, 2019 12:38 pm

To cherry pick quotes straight from the Morningstar article:

"Of course, these are just educated estimates and no one, not even Vanguard, expects to hit their 10-year estimates on the nose."

"Keeping moderated expectations in mind should help investors stick to the strategy over the long term as it is still one of the best passive allocation funds, in our view. After all, the higher volatility and lower returns in U.S. equities and bonds aren't a unique headwind for this fund compared with its peers, which also invest in the same asset classes. Its low costs and thoughtfully designed portfolio of U.S stocks and high-quality bonds should keep it ahead of most rivals, even with more-difficult markets going forward."

"The fund remains a standout option in its category, but investors looking for an alternative may find an intriguing option in the more globally diversified Vanguard LifeStrategy Moderate Growth."
scarson wrote:
Thu May 30, 2019 12:01 pm
...are we better off investing all our portfolio in CD's thus eliminating not only equity/bond risk but also sequence of returns risk for imminent retirees. Opinions please?
I read no suggestions for swapping entire portfolios to CDs, just a nudge to add some global diversification. If anything it should make you feel better to be invested in such a successful fund, I read nothing but praise for it. I enjoyed the article and it's food for thought, but I certainly wouldn't make any drastic portfolio swings based on an article predicting the future. Stay the course.
"The problem with the world is that the intelligent people are full of doubts, while the stupid ones are full of confidence." -Charles Bukowski

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peterinjapan
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Re: 60/40 Portfolio Future Returns

Post by peterinjapan » Thu May 30, 2019 12:46 pm

I've heard a million times that "bonds are overpriced compared to stocks, don't expect any return from bonds going forward, stocks are all that are worth owning. From everyone from Buffet to Jane Commentator on Bloomberg Surveillance.

Not a very Boglehead concept. I'd also love feedback on why this sentiment would be such a common thing to encounter.

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Wiggums
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Re: 60/40 Portfolio Future Returns

Post by Wiggums » Thu May 30, 2019 12:51 pm

The reason for bonds is basically to help manage risk. In times of a healthy stock market it can be easy to forget what a bear market feels like and the emotional reaction you may have to it.

CommitmentDevice
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Re: 60/40 Portfolio Future Returns

Post by CommitmentDevice » Thu May 30, 2019 12:57 pm

jakehefty17 wrote:
Thu May 30, 2019 12:38 pm
I certainly wouldn't make any drastic portfolio swings based on an article predicting the future. Stay the course.
+1

mptfan
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Re: 60/40 Portfolio Future Returns

Post by mptfan » Thu May 30, 2019 1:00 pm

jakehefty17 wrote:
Thu May 30, 2019 12:38 pm
I enjoyed the article and it's food for thought, but I certainly wouldn't make any drastic portfolio swings based on an article predicting the future. Stay the course.
I agree, but I would take it one step further...I would not make any portfolio swings based on an article predicting the future.

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tennisplyr
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Re: 60/40 Portfolio Future Returns

Post by tennisplyr » Thu May 30, 2019 2:38 pm

...Or not
Those who move forward with a happy spirit will find that things always work out.

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willthrill81
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Re: 60/40 Portfolio Future Returns

Post by willthrill81 » Thu May 30, 2019 2:56 pm

scarson wrote:
Thu May 30, 2019 12:01 pm
Just read an article https://www.morningstar.com/articles/93 ... -deca.html on morningstar projecting future annualized returns on VBIAX Vanguard Balanced Fund around 3.8%. If this is true, are we better off investing all our portfolio in CD's thus eliminating not only equity/bond risk but also sequence of returns risk for imminent retirees. Opinions please?

Thanks
The real return of bonds over the next decade will probably be no more than 1%. Many believe that stocks will return around 4% real over the next decade. So for a 60/40 portfolio, that would work out to be a real portfolio return of 2.8%. But if inflation comes in at 2%, a 3% CD will only have a real return of 1%, so you would be nearly tripling your real return with a 60/40 portfolio if the above numbers are accurate.

YMMV.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

mptfan
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Re: 60/40 Portfolio Future Returns

Post by mptfan » Thu May 30, 2019 3:07 pm

willthrill81 wrote:
Thu May 30, 2019 2:56 pm
The real return of bonds over the next decade will probably be no more than 1%.
I think you should be more specific about what category of bonds you are referring to. Here are the current yields for various bond categories:

Intermediate Investment Grade Bonds 2.81% Real .8%
Long Term Investment Grade Bonds 3.77% Real 1.8%
Long Term Corporate Investment Grade Bonds 4.31% Real 2.3%
High Yield Corporate Bonds 5.62% Real 3.6%

The current inflation rate is 2%, so I provided the current real yields. As you can see, the yields of different bond classes varies quite a bit, and the expected return of each category varies as well.

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willthrill81
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Re: 60/40 Portfolio Future Returns

Post by willthrill81 » Thu May 30, 2019 3:09 pm

mptfan wrote:
Thu May 30, 2019 3:07 pm
willthrill81 wrote:
Thu May 30, 2019 2:56 pm
The real return of bonds over the next decade will probably be no more than 1%.
I think you should be more specific about what category of bonds you are referring to. Here are the current yields for various bond categories:

Intermediate Investment Grade Bonds 2.81% Real .8%
Long Term Investment Grade Bonds 3.77% Real 1.8%
Long Term Corporate Investment Grade Bonds 4.31% Real 2.3%
High Yield Corporate Bonds 5.62% Real 3.6%

The current inflation rate is 2%, so I provided the current real yields. As you can see, the yields of different bond classes varies quite a bit, and the expected return varies as well.
I was referring to TBM. And as I stated, 1% is probably on the high end. .5% seems more likely to me.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

mptfan
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Re: 60/40 Portfolio Future Returns

Post by mptfan » Thu May 30, 2019 3:19 pm

willthrill81 wrote:
Thu May 30, 2019 3:09 pm
I was referring to TBM.
Fair enough, but I wanted the readers of this thread to understand that there is more to "bonds" that TBM.

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