Vanguard says you're investing too aggressively?

[qwerty3656]

Below is a video talking about Vanguard saying the market is too expensive and you should pivot to dividend stocks and bonds. Any thoughts?

 

[Montecfo]

Interesting video. if true it would be ironic to be getting market timing ideas from Vanguard.

And of course we have heard these predictions about low future stock returns for quite a while, probably a decade. Anyone that heeded them and sold stocks probably has a lot less in assets than if they stayed the course. At some point it will become true, but when?

Going from 70/30 to 30/70 seems very extreme. Also tilting away from growth and US stocks at the same time seems more extreme.

Having said that, owning some international, some value and dividend stocks is I think a good idea. I own them. And having a plan for dealing with a long downturn (bond ladder, low beta stocks, cash, etc) is essential.

Presently stock market growth is being driven by earnings growth. This is very healthy. What could bring that to an end is a change in earnings trajectory, a clear change in interest rate direction or both.

The change in rate direction seems most worrisome and most likely and so I watch that most closely. A long cycle of increasing rates would be devastating to stocks and to bonds with duration risk. Cash and short term bonds would be the assets of choice.

 

[pb4uski]

I agree that the market seems too expensive, though to be honest I have thought the stocks were overvalued for a long time now and have need wrong so far, but I would think that reversion to the mean is inevitable and if so, then that means lower future equity returns.

If you look at the Bogle formula for 10-year equity return which is dividend yield + earnings growth +/- P/E reversion it would be ~1.3% dividend yield + 5-6% earnings growth - 2-3% P/E reversion or 3.3% -5.3% over the next decade. Many of the major brokerage houses think that equity returns for the next decade will be lower than average principally due to P/E reversion.

My investment hypothesis is that I agree that equity returns over the next decade will be low to mid single digits and if I can get ~5% total returns from a combination of corporate bonds and investment grade preferred stocks with less volatility then why would I invest in stocks? I might be wrong but a 5% total return is more than enough for us with a sub 2% WR. Worst case, the kids get less but they'll be getting plenty so it doesn't bother me.

 

[TripleLindy]

I agree that the market seems too expensive, though to be honest I have thought the stocks were overvalued for a long time now and have need wrong so far,

Same, and I’m glad I haven’t acted on my instincts. I’m holding course and if/when the market turns, I tell myself that my portfolio has been padded these past few years with gains that I otherwise would have missed out on.

 

[Qs Laptop]

Didn't watch the whole video, but don't these people take into account the earnings the stock market is throwing off and predicting for the future? Stocks follow earnings and earnings are looking strong. Anything else is mostly guesswork.

 

[Fermion]

I agree that the market seems too expensive, though to be honest I have thought the stocks were overvalued for a long time now and have need wrong so far, but I would think that reversion to the mean is inevitable and if so, then that means lower future equity returns.


My investment hypothesis is that I agree that equity returns over the next decade will be low to mid single digits and if I can get ~5% total returns from a combination of corporate bonds and investment grade preferred stocks with less volatility then why would I invest in stocks? I might be wrong but a 5% total return is more than enough for us with a sub 2% WR. Worst case, the kids get less but they'll be getting plenty so it doesn't bother me.

5% real or 5%? Cause you can get 5% right now for the next two decades in 20 year treasury. 5% real though....well...

 

[TripleLindy]

If you dig into the details of Vanguard’s analysis, you’ll find that their forecasted 10 year annualized return is 6% for both a 60/40 and 40/60 allocation. (I did not see where they recommended a 30/70 allocation.) Volatility is higher with the 60/40 but the risk of underperforming is 50/50 with 40/60.

All of that tells me it’s a coin flip, but one side having reduced risk.

 

[pb4uski]

5% real or 5%? Cause you can get 5% right now for the next two decades in 20 year treasury. 5% real though....well...

5% nominal. All percentages in that post were nominal.

 

[Fermion]

5% nominal. All percentages in that post were nominal.

Oh ok, nominal. Then no need for all of this corporate, preferred, etc, Place a order next time 20 year crosses 5% (it is close now) and then play golf for 20 years and get that nice nominal return even if dogs and cats marry and it starts raining donuts.

 

[audreyh1]

I have also thought the equity markets have been way overvalued for years, and they keep getting worse but have left things alone.

 

[pb4uski]

Didn't watch the whole video, but don't these people take into account the earnings the stock market is throwing off and predicting for the future? Stocks follow earnings and earnings are looking strong. Anything else is mostly guesswork.

But most of the reason for thinking that equity returns will be lower than average is a view that P/E metrics will eventually revert to the mean.

Based on the current trailing P/E of 27.9 compared to the 20-year average of ~18.5 and the forward P/E of 20.9 compared to the 20-year average of 15.7 the market is significantly overvalued. The forward measure would include earnings growth.

 

[MarieIG]

I do think equities are expensive - but have thought that before - and then watch them appreciate. Since I already own dividend paying stocks, bonds, (as well as a number of funds), and have been dollar cost averaging into SCHD for over a year now, I don't have plans to pivot. I don't plan to back up the truck vis-a-vis equities at this point either, but will keep some dry powder in case of a entry point which I prefer.

 

[Fermion]

I do think equities are expensive - but have thought that before - and then watch them appreciate. Since I already own dividend paying stocks, bonds, (as well as a number of funds), and have been dollar cost averaging into SCHD for over a year now, I don't have plans to pivot. I don't plan to back up the truck vis-a-vis equities at this point either, but will keep some dry powder in case of a entry point which I prefer.

There are some pocket areas that don't look expensive. Consumer staples are very cheap, some pharma is as well. Other areas, like anything relating to the data center buildout are quite expensive. That is a house of cards that has to pay off or it will crash down and cause a lot of damage on the way.

 

[MarieIG]

There are some pocket areas that don't look expensive. Consumer staples are very cheap, some pharma is as well. Other areas, like anything relating to the data center buildout are quite expensive. That is a house of cards that has to pay off or it will crash down and cause a lot of damage on the way.

I am probably a bit overweight in pharma and consumer staples already, so I have been trying to restrain myself (although once in a while I have slipped and accidentally pressed the buy button.)

 

[Montecfo]

But most of the reason for thinking that equity returns will be lower than average is a view that P/E metrics will eventually revert to the mean.

Based on the current trailing P/E of 27.9 compared to the 20-year average of ~18.5 and the forward P/E of 20.9 compared to the 20-year average of 15.7 the market is significantly overvalued. The forward measure would include earnings growth.

Over time our economy has moved from industrials to software and tech. These businesses have typically been characterized by higher margins, faster growth and less cyclicality than the industrial stalwarts of the past and have typically traded at higher PE multiples. This must be taken into account, I believe, when comparing PEs from different eras.

Also, PE's must be evaluated with reference to the interest rate environment. We remain in a low rate environment which makes growth more valuable.

This could all change tomorrow of course if earnings collapse, rates rise or some unforeseen risk emerges.

 

[marko]

I know of a couple who decided to wait for home prices to come back down. Twenty five years later, they're still waiting.

Buy high, sell higher. 75/25 for the past 40 years. Cant afford the turnover. Dividends pay the bills.

 

[Chuckanut]

I have an AA I am comfortable with keeping.

I have no interest in buying the elite membership in the information resources his company is selling for $10 a month. This group is far more informative and useful, IMO.

I reserve the right to change my AA as I age. So I might move towards 30/70 or maybe even 100% in guaranteed secure cash equivalents at some point. But not today.

Good luck predicting the future.

 

[Qs Laptop]

But most of the reason for thinking that equity returns will be lower than average is a view that P/E metrics will eventually revert to the mean.

Based on the current trailing P/E of 27.9 compared to the 20-year average of ~18.5 and the forward P/E of 20.9 compared to the 20-year average of 15.7 the market is significantly overvalued. The forward measure would include earnings growth.

Montecfo makes good points about how the market has changed.

We can also look at the data and see that the correlation between PE ratios and actual earnings is not as strong as it used to be.

Take a look at these two charts. They line up roughly with the year by year numbers.

Looks to me like earnings doesn't care what the trailing PE ratio is, esp. from 2022 and forward.

 

[RetiredHappy]

Over time our economy has moved from industrials to software and tech. These businesses have typically been characterized by higher margins, faster growth and less cyclicality than the industrial stalwarts of the past and have typically traded at higher PE multiples. This must be taken into account, I believe, when comparing PEs from different eras.

Also, PE's must be evaluated with reference to the interest rate environment. We remain in a low rate environment which makes growth more valuable.

This could all change tomorrow of course if earnings collapse, rates rise or some unforeseen risk emerges.

But is it really a tech problem? Walmart's P/E ratio is 48.37. Nvidia's P/E ratio is 40.73. I would rather own NVDA than WMT.

 

[pb4uski]

Over time our economy has moved from industrials to software and tech. These businesses have typically been characterized by higher margins, faster growth and less cyclicality than the industrial stalwarts of the past and have typically traded at higher PE multiples. This must be taken into account, I believe, when comparing PEs from different eras.

Also, PE's must be evaluated with reference to the interest rate environment. We remain in a low rate environment which makes growth more valuable.

This could all change tomorrow of course if earnings collapse, rates rise or some unforeseen risk emerges.

I can see your earnings growth argument and it would make sense if one could reasonably expect earnings growth to continue unabated BUT I'm skeptical that earning growth will continue for long, especially if the economy slows. If demand slows what will happen to earning growth?

 

[Montecfo]

But is it really a tech problem? Walmart's P/E ratio is 48.37. Nvidia's P/E ratio is 40.73. I would rather own NVDA than WMT.

Well I own one, I do not own the other. But Walmart is growing their online business dramatically which has created what the market seems to view as a new stage of durable growth.

 

[Qs Laptop]

I can see your earnings growth argument and it would make sense if one could reasonably expect earnings growth to continue unabated BUT I'm skeptical that earning growth will continue for long, especially if the economy slows. If demand slows what will happen to earning growth?

Earnings growth has been increasing since the Great Recession ended, with the Covid year as a temporary blip. It's predicted to grow over the next two years. That's essentially 18 years of earnings growth increasing, except for 2020.

 

[RetiredHappy]

Well I own one, I do not own the other. But Walmart is growing their online business dramatically which has created what the market seems to view as a new stage of durable growth.

I am sure I own both through various ETFs, and I don't own individual stocks.

 

[Montecfo]

I can see your earnings growth argument and it would make sense if one could reasonably expect earnings growth to continue unabated BUT I'm skeptical that earning growth will continue for long, especially if the economy slows. If demand slows what will happen to earning growth?

I do not think the market is pricing in perpetual earnings growth. But earnings have grown steadily and in the view of many, unexpectedly.

On the economy, a prolonged slowdown in the economy is hard to project when our fiscal policy is so stimulative. Secondly if we have an extended slowdown we have to consider that Wall St is not Main St. The public stock market consists of the most durable and best capitalized companies. They will suffer less in a downturn.

And perhaps above all we have all held stocks through recessions. They result in reduced market performance for a time but are not a reason to sell stocks, in my experience. Markets recover in relatively short order generally speaking.

I think changes in earnings growth trajectory could cause PE's to moderate. That's something to watch for. And just sheer concentration, where a stumble by a market stalwart causes Indexers to bail.

(I failed to mention indexing as a driver of higher PE's than the historical norm.)

 

[Fermion]

But is it really a tech problem? Walmart's P/E ratio is 48.37. Nvidia's P/E ratio is 40.73. I would rather own NVDA than WMT.

It is a numbers thing though. At some point the data center buildout will either saturate or collapse. Nvidia crossed the 5 trillion market cap this week. That is a significant portion of the entire GDP of the USA. Does it seem reasonable they could keep growing at this rate or more likely that the growth stagnates. It is very unlikely people will stop shopping at Wal-mart.