Shari Reiches and I recently hosted a virtual Town Hall, answering your top questions. It was a lot of fun, and you can watch a replay here. But as Shari often reminds me, my answers often can be, well, long-winded. Now, I don't think I am sesquipedalian or that my speech suffers from pleonasm, but nonetheless, I am going to share our answers in brief, lightning round form. Here goes...
What's the investment outlook for a Biden Administration?
While we don't make short-term market predictions, investors have many positives to look forward to with the Biden Administration—a gridlocked Congress (which investors tend to favor), low interest rates, a recovering economy, and vaccine distributions not too far off. The flipside—stocks are already expensive, having priced this good news in.
The bottom line: whether you lean left or right, don't make investing decisions based on politics. Think long-term. Markets have done well under both Republicans and Democrats, with a 10% average return for 4 year presidential terms going back to 1929.
Why own bonds when interest rates are so low?
Even with bond yields just off of historic lows, high-quality bonds still provide a powerful diversification effect, cushioning your portfolio from the inevitable downturns of the stock market. Cash yields may remain near zero for quite so time, so investors may pay a price for holding cash instead of bonds.
Will the big tech stocks continue to dominate?
They might for some time, but they are very expensive. You are paying a big premium today as future growth expectations are already built into these stock prices. Over longer stretches of time, cheaper "value" stocks have done better than more expensive "growth" stocks, and it's likely that we will see value come back. Don't forget, we own both growth and value stocks, we just have a little more weight in value stocks than traditional index funds.
Does diversifying with international stocks still make sense?
Yes. While U.S. stocks have beaten international and emerging markets stocks over the last decade, we don't have too look to far back to find a decade in which the opposite happened—the "lost decade" beginning January 2000. Stocks outside the U.S. are trading at much cheaper valuations than U.S. stocks, and that may lead to higher returns going forward. Stay diversified. Own both U.S and non-U.S. stocks.
What kind of returns can I expect going forward?
Investment returns over the next 10 years may be lower than the last 10. Vanguard1 projects U.S stock returns in the range of 3.9% to 5.9%, with value stocks doing better than growth stocks. Non-U.S. stocks are expected to have somewhat higher returns, in the range of 7.4% to 9.4%. Bond returns are projected to be low, less than 2%. As such, we have been proactive with clients, using conservative expected returns in our clients' financial plans.
David Rappaport, CFP®
David is the Co-Founder of Rappaport Reiches Capital Management. He acts as personal CFO to entrepreneurs and corporate executives, providing organization and clarity in their finances. Please connect with David below. He loves to talk about investing, financial planning, and Aspiritech, a non-profit hiring individuals on the autism spectrum.
1. Source: Vanguard Investment Strategy Group Market Perspectives October 2020. The projections or other information generated by the Vanguard Capital Markets Model® regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for each modeled asset class. Simulations are as of June 30, 2020. Results from the model may vary with each use and over time. These probabilistic return assumptions depend on current market conditions and, as such, may change over time. The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based. All investing is subject to risk, including possible loss of principal.
The author does not intend to provide investment, legal or tax advice as these materials are for general educational purposes only. Please consult your legal, tax or investment professional for advice on your particular situation. This material is derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. It is not intended to be a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction. Investing involves risk including the possible loss of principal. Past performance does not guarantee future results. Please refer to RRCM’s Form ADV Part 2 for additional disclosures regarding RRCM and its practices.