It’s never fun for a new investor to hear that prospective returns moving forward are bound to be modest. Whether it’s due to extended valuations, higher risks, or something else, that’s just not what someone wants to hear as they seek to put new money into the financial markets after what’s been a strong multi-year bull run. It hurts to be sidelined after the S&P 500 has risen 50% in two years or 85% in the last five years.
And while a 10% per-year return has pretty much been the expectation, past results, as I’m sure you’ve heard by now, are no guarantee of what to expect for the next decade. With Goldman Sachs and Vanguard, two respected names in the investment world, both setting a fairly low bar for returns over the next decade, I think investors must consider the scenarios that could play out for the decade ahead.
Goldman Sachs and Vanguard see milder gains on the horizon for the S&P
Of course, it’s quite sobering to hear that returns could average 6.5% (what Goldman expects) or even less (Vanguard sees the S&P gaining close to 3-5%) for the next 10 years, especially since the AI revolution holds so much promise for increased productivity and earnings growth potential.
If Vanguard ends up right (I really hope they’re not!), perhaps bonds will give equities a good run for their money from here. Either way, that has to be a bit troubling for retirees subscribed to the 4% rule.
With growing doubts about whether the technology can deliver a decent return, perhaps the market’s high valuation could be what drags on returns from here. As usual, though, one can increase the risk to increase the potential rewards. But in a market that some would describe as “bubbly” due to frothy valuations in the AI trade, should one actively seek to take on more risk so that their prospective returns are higher? It’s hard to say.
Fix #1: Seeking not to overpay for AI and tech exposure
Perhaps the tables turn, and tech, which has been a source of strength, could be what ultimately drags the S&P. The S&P is arguably heavily weighted in tech, with its hefty exposure to the Mag Seven companies. And if we are dealt a bursting of the AI bubble that leaves technology stocks in a wreck, perhaps there will be more opportunity to buy the dip at some point later on.
In any case, maybe a more value-conscious approach, international diversification, and smart stock-picking are keys to doing better than the 6.5% or less that some firms think we’ll be in for in the next decade. And, of course, there’s always a chance that Goldman and Vanguard are wrong and stocks keep climbing at a pace that entails a gain of more than 10% a year! As an investor, I think it’s wise to be prepared for any kind of return, whether it’s milder or hotter than expected.
Additionally, not all AI and tech plays are destined to sink. There are sure to be some big winners from the AI boom, including Alphabet (NASDAQ:GOOG | GOOG Price Prediction), which I think will outperform the S&P over the next decade, perhaps by a wide margin as it seeks to form an economic moat around the most lucrative parts of AI (think models and chips) while also focusing on what’s next (quantum).
Fix #2: International ETFs might be key to better results
Many pundits think the international ETFs might be poised to do better than the S&P. So far this year, they have already left the S&P behind. Now, it’s been a good year for the S&P 500, which is up over 16% year to date. However, when you consider how other nations are doing, it’s clear that domestically overexposed investors are missing out. Many nations are having an easy time outperforming the U.S. markets this year.
Take iShares MSCI Austria ETF (NYSEARCA:EWO), which is up close to 63% so far this year. The U.S. markets are doing well, but many other developed markets are doing much, much better. Can the trend continue? It might. Either way, it’s worth seeing what else is out there for those unwilling to settle for lackluster results.
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