Vanguard President Defies Consensus Expectations, Says US Equities Primed To Underperform Over the Long-Term: Report

The president and chief investment officer of the financial giant Vanguard isn’t particularly bullish on US stocks over the next decade.

Gregory Davis tells Fortune in a new interview that US equities aren’t primed to continue raking in double-digit gains year after year.

“Our investment strategy group’s projection is that US equity market returns are going to be much more muted in the future. Over the past ten years, the S&P returned an average of 12.4% annually. We’re predicting the figure to drop to between 3.8% and 5.8% (midpoint of 4.8%) over the next decade.”

The Vanguard president also argues that corporate profits have been abnormally high and aren’t likely to continue at that pace.

Davis says the classic portfolio makeup of 60% stocks and 40% bonds has fallen out of whack for investors who haven’t rebalanced their holdings amid the longstanding equities bull market.

“In the past 10 years, interest rates have mainly been very low, so bonds returned only around 2% a year, or 10% less than stocks. So the stock portion kept compounding at a high rate and getting bigger, and the bond portion kept shrinking as a share of the total. As a result, what started as a 60-40 mix is now 80-20 in favor of stocks.”

He also notes that US stocks have beaten international equities by 6% a year over the past decade, further unbalancing investor portfolios.

“So 10 years ago, if you started with the standard split 70% U.S. and 30% foreign, you’d now be at 80% U.S. and 20% foreign.”

Davis suggests investors should put 60% of their portfolios in bonds, 20% in foreign stocks and only 20% in US stocks over the next 10 years.

“If you look at the bond market today and the way yields have risen, we’re projecting that you’re going to pick up very similar returns in a mix of US and foreign bonds as you’ll get in US equities, or also 4% to 5%. So the expectations are comparable, but you’ll have much less volatility on the bond side… What’s the big advantage to betting on risky stocks when you can get 4.3% on three-month Treasuries?”

The Vanguard president also doesn’t suggest investing in Bitcoin ( BTC ), which he considers “speculation.”

“It’s not investing in a cash flow generating business, it’s not investing in bonds where you have a commitment to getting a coupon payment every six months, then principal at maturity.

It’s basically looking to sell to someone willing to pay more than you did. And the whole idea that a limited supply of Bitcoin will drive up its value is questionable when you consider that there’s an unlimited supply of new types of crypto that could be created. So I personally don’t get it. Vanguard won’t launch a Bitcoin fund. We just don’t see it as a core part of an investment portfolio.”

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