April 27, 2021 | Vanguard Perspective
Help your clients make sense of economic and market developments with our behavioral coaching framework video at the end of this article.
Our 10-year, annualized, nominal return projections, as of December 31, 2020, are shown below. Please note that the figures are based on a 1.0-point range around the rounded 50th percentile of the distribution of return outcomes for equities and a 0.5-point range around the rounded 50th percentile for fixed income.
|Equities||Return projection||Median volatility|
|U.S. real estate investment trusts||3.0%–5.0%||19.6%|
Global equities ex-U.S. (unhedged)
|Fixed income||Return projection||Median volatility|
|U.S. aggregate bonds||0.8%–1.8%||4.2%|
|U.S. Treasury bonds||0.5%–1.5%||4.4%|
|U.S. credit bonds||1.2%–2.2%||5.7%|
|U.S. high-yield corporate bonds||1.9%–2.9%||10.1%|
|U.S. Treasury Inflation-Protected Securities||0.5%–1.5%||6.7%|
|Global bonds ex-U.S. (hedged)||0.6%–1.6%||2.5%|
|Emerging markets sovereign||1.5%–2.5%||10.5%|
These probabilistic return assumptions depend on current market conditions and, as such, may change over time.
IMPORTANT: 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 December 31, 2020. Results from the model may vary with each use and over time. For more information, see the Notes section.
Source: Vanguard Investment Strategy Group.
High-frequency data suggest the economy in the United States gained considerable traction in the last half of March, a period that coincided with the start of stimulus payment disbursements under the $1.9 trillion American Rescue Plan Act of 2021.
An increase in COVID-19 case numbers in France, Germany, and Italy in March has led governments to tighten restrictions, including a third national lockdown in France.
High-frequency data suggest that recent COVID-19 outbreaks and related restrictions in China weren't as disruptive as initially feared.
Greater optimism around vaccination efforts and the pass-through effects of a strengthening U.S. economy support our view that emerging markets, on aggregate, will grow by more than the 6% outlook we communicated at the end of 2020.
We expect job gains to average more than 500,000 per month for the remainder of the year, with gains front-loaded in this quarter and the next.
Chairman Jerome Powell has emphasized that the Fed would communicate potential changes to its $120 billion-per-month bond-buying program well in advance of any tapering of purchases.
Vanguard expects core U.S. inflation above 2% in the second quarter, given base effects, or comparisons to weak year-earlier numbers. We expect some volatility on a sector-by-sector basis; some sectors could see temporary mismatches between supply and demand as consumers reengage with the economy.
Want to keep your clients focused on their long-term investment plan? This video offers a sensible approach for engaging with them in all types of market conditions.
Michael DiJoseph: Even as it seems the economy might be looking up, it's still a good time to prepare your clients for whatever may come. As we've seen over the past couple years, you just never know.
And whether the macro conditions appear upbeat or not, your clients always want to know a few things: What does all this mean for my financial future, and what should I do? Or not do?
When those questions inevitably arise, you want to be ready for them, not reacting to them in the moment. To start, you want to make sure you're incorporating behavioral coaching into your client conversations, all the time. To help with those conversations, Vanguard has developed an easy-to-follow framework for advisors—we call it the Three A's. You can use it to give your clients confidence in the plan you've prepared together, no matter what's going on in the markets.
The first "A" stands for "assess."
This simply means getting yourself up to speed and working through the ways it might affect your clients. Whether it's a significant market downturn, a big rate move by the Fed, or some other event, you can let history and experience be your guide on how it will affect client plans.
At this point, you can start to confidently formulate a plan that's both proactive and reactive.
From here, you can move on to our second A—"address."
You're addressing the situation and sharing your recommendations with clients. If you remember one thing, it's this: Your clients may be feeling confused, frightened, or vulnerable. After all, it's often their life savings on the line. So it is absolutely crucial that you come from a place of empathy and understanding.
You want to make your communication equal parts emotional understanding and your own informed perspective—it's what we like to refer to as an "EQ-plus-IQ" approach.
Once you've defused the emotions by showing that you understand and care, then you can drill down to specific strategies you think will be appropriate. Things like:
Remember—staying the course doesn't just mean standing still and these are just some of the more common actions you might consider.
Lastly, you want to measure the results. This is the "audit" step of our Three-A framework.
It's not only a way to show clients the benefits of working with you, but it also helps you hold yourself accountable, by noting which actions influenced which outcomes.
We can sum this last one up as:
Record what actions you took (or didn't take) with your client—what strategies did you implement? After some time to watch those actions play out, evaluate how well you implemented them and how well they performed. And most importantly, articulate to your clients the value of those actions.
Show them clear examples—show them what was gained, or model what could have been lost were it not for your informed advice.
Of course, the process doesn't end there. You'll want to use your audit-step findings to inform your thinking and planning the next time around.
We all know that money and financial goals are emotional topics. As an advisor, you can really connect with clients by letting them know you understand both their hopes and anxieties related to their investments. Advisors are, as we like to say, the "emotional circuit breaker." And this framework enables that, by helping you help clients make decisions from informed analysis, not impulse.