Recently Vanguard released their 10 year equity forecast (see link below for reference) and their view of what the next 10 years returns could be are significantly different than what we have seen in the past 10 years.
While this is only a forecast and they may be completely wrong, as no one knows the future, it is interesting and worth noting that a company as vaulted and trustworthy would come out with a forecast like this.
Vanguard is forecasting U.S. equities returning 3.3% annually for the next 10 years, with U.S. growth flat and U.S. REITs at 2.9%. This compares to the overall market returning an average of 16.8% annually over the past 10 years.
As you can see, this type of return, if realized, will be a stark departure of what most investors have been accustomed to and much lower than the historical returns of the market. This lower expectation could be from overvaluation, lower economic activity, higher rates, or a host of other reasons.
So this got me thinking, what is an investor supposed to do when a growth oriented portfolio will in essence have a lost decade of no returns, and the overall market only going up 3.3% a year? Most long term modeling assumes 8-10% returns. Will the average investor be able to meet their goals in the timeline they are shooting for? I have been through periods of low returns in the past, actively participating in the last “lost decade” of 2001-2010. An entire decade of practically no returns will test even the most devoted investor.
It is times like this when expectations of capital appreciation are low that I am reminded why I chose to focus on dividend growth stocks.
Being a dividend growth investor, instead of a growth-oriented investor, can provide the following during a low-return time period:
- The ability to focus on the income dividends provide
- Reinvestment of the dividends will buy more shares when the prices remain low
- The compounding effect of adding shares through reinvestment will enhance future returns since you are accumulating shares while waiting for the price to rise
- Companies will continue to pay and raise their dividends even if the stock prices stay the same
- Achieve your income goals, which can be easier to plan for and predict than looking for a future dollar amount in your portfolio
Forecasts like this may not come to be, but it is important to consider the consensus view and set your expectations to the appropriate level. Flat markets are a win for dividend growth investors.