Are We Headed for Stagnation? - Adviser Investments

Are We Headed for Stagnation?

August 4, 2022

We hear it a lot: What are the chances that we’ll see long-term stagnation—say, a decade of low or no returns for stocks or bonds? And how can investors plan for this scenario? Interim Director of Research Jeff DeMaso and Manager of Financial Planning Andrew Busa discussed some options in our recent webinar,* Bear Market Playbook.

Please enjoy the excerpt below and click here for the full webinar replay to hear more.


Jeff DeMaso:

I’ll start with the bond market, because frankly, bonds are a little bit easier when it comes to building expectations about future returns. And you can simply look at the yield on a bond or on a bond fund for a good idea of what you can expect it to return.

For example, the Vanguard Total Bond Market Index fund holds broad Treasurys, corporates, mortgage-backed securities and other high-quality U.S. bonds. It currently yields about 3.4% today.

If we’re talking about the next decade, you can reasonably expect bonds or Vanguard Total Bond Market Index to return around 3.4%, right? Give it some wiggle room, maybe call it 2.5% to 4,5% over the next decade, but you can be pretty confident in that. Again, it’s not going to be spot on, but that’ll give you a good idea of what you can expect from your bond or bond funds.

Stocks are much harder to predict as not only does growth relate to earnings and dividends (and those are unknowable moving forward) but also clearly sentiment and people’s willingness to pay up or not for stocks. That’s going to impact returns, even over a period like a decade.

Now, if we look back over the past decade, stocks, even with the current bear market, are up about 13% per year, which is above the long-term average. So, okay, maybe we say the next decade comes in a little bit below average, but then maybe foreign stocks can pick up the slack. Foreign stocks have had a pretty rough run the last decade and maybe it’s their turn to carry the load.

So stocks are tough, but for bonds, we need to adjust our expectations. We can’t expect 6% from bonds, it’s just not where we are today. We’re certainly in a better spot than we were 12 months ago when yields were even lower.

How do we plan for that scenario? Andrew, I’m curious for your thoughts here. I don’t have a, quote-unquote, “great answer.” There’s not a magic investment solution that’s necessarily going to deliver it for you that you can bank on.

I would go back to the basics again of save more, maybe spend a little less. Have that financial plan to lean on to know if you’re still on track, even if returns aren’t going gangbusters. Again, it’s not the easy answer of “just buy X, Y, Z, and close your eyes and you’ll be great,” but again, I don’t think that’s the way the markets or investing works.

Andrew Busa:

My mind goes to a couple of places here. One is a Monte Carlo analysis that we run as part of financial plans. Again, not a silver bullet and it’s not a predictor of what the market will do, but what a Monte Carlo will do within the context of a financial plan is run many, many different market scenarios, so very good and very bad over the course of your time horizon. That allows us to study what your plan looks like given worst-case market outcomes and best-case market outcomes. We weigh both sides of it.

That’s one thing that someone could do to give them peace of mind or the idea that maybe a course correction might be needed at some point down the line. Usually, it’s not going to tell us that someone’s going to run out of money tomorrow. It’s more so saying maybe in 10 or 15 years, we need to start thinking about some course corrections. It very much depends.

We also mention savings rate for the wealth accumulation part of a financial plan. For the retiree, the flip side of that is understanding what their withdrawal rate is. When you’re no longer accumulating, you’re no longer adding to your portfolio from income, it’s important to know what your expenses are, so you can figure out how much you’re withdrawing from your portfolio on an annual basis.

Understanding that if we are in a bear market and you’re not comfortable spending what you’ve been spending, it is possible to pull that back and that might help things a little bit too.

Click here for a replay of Bear Market Playbook. Please contact us at (800) 492-6868 to learn more about comprehensive wealth management solutions.


*Webinar recorded after the market closed on Wednesday, July 27, 2022.

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