The year ahead will see higher levels of volatility, rises in inflation and lower returns – and investors should readjust their return expectations appropriately, according to Vanguard.
Vanguard’s 2018 economic and market outlook, titled Rising risks to the status quo, has cautioned investors against setting their expectations too high for the year ahead.
“The secular forces of globalisation, demographics and technology have for years served as the foundation for Vanguard’s long-term outlook of modest growth and tepid inflation,” said Vanguard global chief economist and head of Vanguard Investment Strategy Group Joseph Davis.
“Instead, we anticipate a bit more volatility and an uptick in inflation in the year ahead, accompanied by more muted equity returns.”
However, the outlook report warned investors against “suggestions that an environment of low rates and credit-risk premia warrants some radically new investment strategy”.
“The diversification benefits of global fixed income and global equity are particularly compelling, given the simulated ranges of portfolio returns and volatility,” the report said.
It pointed out that decisions within one’s control, such as saving more, spending less and controlling investment costs, would “far outweigh the less reliable benefits of ad hoc asset-return-seeking tilts”.
“While our global market outlook suggests a somewhat more challenging and volatile environment ahead, investors can continue to find potential for long-term success by lowering their return expectations and maintaining a balanced and globally diversified portfolio,” Mr Davis said.
“Saving more and keeping an eye toward costs are even more crucial elements of a successful investment strategy.”
Investors should stick to the investment principles of “long-term focus, disciplined asset allocation and periodic portfolio rebalancing”, the report concluded.