Hi, my name is Rick Ferry and I'm the president of the John C. Bogle Center for Financial Literacy, a 501(c)(3) nonprofit organization that was created in 2012 by the founders of the Bogleheads organization with the assistance of Jack Bogle. The center's mission is to further financial education worldwide, promote low fees and financial well-being and to foster a sense of community amongst our all-volunteer membership.

And of course, your tax-deductible donation to the boglecenter.net is greatly appreciated. The idea for this online conference came about because of COVID-19. As many of you know, we normally do an annual conference outside of Philadelphia, but unfortunately we have not been able to do that in the last couple of years.

For your planning purposes, we plan to have a large conference in 2022. The location has yet to be identified, but please mark your calendars for the fall of 2022 for our first large and expanded Bogleheads conference. In the meantime, we have the speaker series. And I wish to thank a lot of the Boglehead members who have helped put this together, particularly Mike Nolan of Vanguard, who has tirelessly spent a lot of time with his committee putting together this event, and will also be working on the big event in 2022.

Today we're happy to have our guests from Vanguard, Joe Davis and Maria Bruno. Joe is the global chief economist and global head of Vanguard Investment Strategy Group. And Maria is the head of the U.S. Wealth Planning Research Group at Vanguard. Joe and Maria will discuss the 2021 Vanguard Economic and Market Outlook and Vanguard's views on global growth, inflation, the financial markets, and the implications for your portfolio.

We wish to thank all of you who submitted questions for Joe and Maria. We hope you enjoy this presentation and tell others about it. Today's event is being recorded. In a few days it will be available on boglecenter.net. And we will make a post on the bogleheads.org forum that it is available for viewing.

Thanks again for joining us. And over to you, Maria. Thank you, Rick. It's good to be here today. It's unfortunate we weren't able to be together in person in our fall conference, but it's tremendous how we're able to do this virtually. So kudos to the team for putting all this together.

So Joe, we're here together. As I was thinking, we've been working together on and off for about 15 years now. And this is the very first time the two of us have actually shared the stage together. It's a virtual stage, but nevertheless, the first time we're together. So I'm looking forward to it.

And no better audience to do this with than our bogleheads. So with that in mind, I think it's only right for us to talk a little bit about Mr. Bogle. So you and I both had the opportunity to work with him and know Mr. Bogle. Tell us a little bit how he influenced you and your approach to investing.

Sure, Maria. And again, thanks, everyone, to the bogleheads for making time. I hope this finds you healthy, you and your loved ones. And again, Maria, I can't believe it's 15 years we've never done this before. Shame on us. For those in the audience, Maria and I go way back.

I've known Maria since I've started here at Vanguard. And someone who touched me ever since day one at Vanguard was Jack Bogle. I do miss him considerably. I used to have the pleasure and the honor of having lunch with Jack probably about once every two or three months. We used to get together for lunch in the galley, which is our cafeteria.

We call it the galley at Vanguard. And I always recall him having a little cup of soup, whether it's minestrone or chicken noodle or whatever. And we would-- there's two things I take back from those conversations. One-- well, actually, three, Maria. One was that tremendous leader known in the industry, obviously leading Vanguard, yet he always found time to talk with individuals.

He was, in that sense, selfless with his time. So that was a wonderful attribute, number one. Second, what I always enjoyed talking about Jack was-- and was always impressed with his work-- he read widely. And so I was always a student of history, but he certainly knew more history than I did.

And so I think we hit it off in part because of that appreciation for history-- from naval warfare to early business cycles in the United States. So he was widely read, and I think that he was a tremendous asset for Jack, because you would see that he would draw upon that in his speeches.

He was one of the few individuals I've ever met in the world who could talk about Shakespeare and financial theory within the same conversation. And in fact, he would make it actually very relevant. So he would span those different disciplines, and it's something that I always admire. And I always tell that to my colleagues at Vanguard, to sort of aspire to.

And then the third something-- more I watched from a distance when Jack was on stage, but you would see it in his readings and so forth. But he did give me this coaching once, and that is that he said, when you do the strong research and you have a finding, particularly that's in the aid and support of investors, he says, do not be afraid to show conviction in that idea.

And so you would see that clearly from Jack. It led the industry for low-cost investing in terms of our investment philosophy. He would not apologize. It's the song he would come across in the industry as strident. But I always-- and that's a great-- that was-- he demonstrated leadership. He would not bend in his conviction of his ideas, particularly when they were well-grounded as they always were, and well-researched.

So those were the three things, Marie, I took back from Jack, continue to think about him on occasion. And again, when I pass through the statue-- I'm on campus today-- when I pass through Jack's statue, those images come back to me with regularity. I'm near spot on. I think the one thing I would add, too, is just really the focus on our clients.

And we're clients, right? We're shareholders as well. And being a research team and doing the work that we do, unless we have key takeaways in how do you make it actionable, there's very little relevance to what we do, right? So how do we take our learnings and how do we apply these to help investors improve their financial outcomes, improve their chance for investment success?

So I continue to take that through the years. Marie, we both, right? I mean, he's been an aspiration for both of us. I love what you just said. I mean, it's like rigorous work, rigorous but relevant research, right? Because it's got to be practical and applicable. If not, I mean, it's nice, but why should the shareholder help support the work that you and I do?

That was always Jack's more star and something I've always aspired to be and to follow. But he set a very strong path for all of us. And you and I both, as part of the research at Vanguard, in many ways, we're trying to carry his legacy in our small way.

So he continues to serve as inspiration for us and for our crew. Yes. So I think that segues really well into how we're going to spend the next hour or so, Joe. So let's talk about our economic outlook and what does Vanguard expect and then how do we take this and apply that into our own portfolios and key messages for investors.

So let's start first with, so Vanguard published our 2021 economic outlook and we think about the framework that we have for our near term prospects. But if we look at the recovery, highly contingent upon health outcomes and also consumer reluctance. So let's talk a little bit about that in terms of where we're heading as we're starting the year and as what we might expect throughout the year.

Sure, Maria. You know, so as soon, you know, going back through even replaying these, you know, very challenging and traumatic events, you know, ever since the beginning of 2020, I'm very proud of the team. You know, we very quickly realized how significant, didn't know exactly how the events of 2020 and even today would continue to unfold, but I'm proud of the team of really focusing on the framework that a healthy economy or an impaired economy would begin and end health.

And so we very quickly, first time in my career, I had to very seriously think about health outcomes driving the economy in such around the world. And so what we did is, you know, we applied, you know, the sort of, you know, what the sort of the concerns around health, fear of catching the disease, the supply impacts, the inability to either go to school or to conduct business.

And we and we applied a lot of data through that framework, say which sectors are going to be highly impaired because of social activity, so-called face-to-face activity. And that framework continues to serve us well. I mean, that told us that the global economy would suffer the deepest recession in world history.

It would be short in the sense of it would fall very profoundly, it would start to grow and that the pace of recovery would largely be dictated by the path of the virus. And that has generally held out to be the case. It gave us, I think, a great deal of accuracy, or at least as best you can have given the uncertainties of the virus.

So where do we stand today? It's an environment where, you know, we look at the percentage of the world that has yet to achieve immunity to the virus, which is considerable. And that once you can have an estimate of the immunity gap and how quickly that achieves herd immunity, so-called 70% or 80% of the world that becomes immune to the virus, the COVID-19, that will then dictate the pace of the recovery, particularly with respect to social-based activities.

So think about restaurants, hotels, travel, which has been, has suffered the vast majority of the slowdown, whether you're looking at China, Europe, or the United States. And so when we look at that, you know, we look at our immunity gap as a factor of two variables. One is how, how, how, how effective is any vaccine?

We've long thought a vaccine would likely be developed, but that was certainly as much of our hope as our forecast. And secondly, you know, what, what surprised us positively several months ago was that the efficacy of the vaccine, at least some of the two that are already approved for emergency use are well above the 60% threshold, which is deemed baseline.

In fact, it was well above even childhood efficacy rates. So it's roughly over, roughly 90%, somewhat higher. That plus the percentage of the population that actually takes the vaccine, you, you combine those two percentages, and then you get a timeline of when we will quote unquote get back to what normal or at least more normal activity.

And so that, when we apply that framework, it looks like certainly by the end of 2021, the largest economies in the world, the United States, China, Europe, will have achieved what's so-called herd immunity, which means such a large percentage of the society has effectively become immune that the spread of disease is much less rapid and it starts to dissipate.

And so that continues to be our framework. It means that growth for 2021, our theme was approaching the dawn. We're not quite there yet. There's going to be some unsettling next few weeks. We expected actually a retraction activity. I think we saw for the jobs report, the past, you know, Friday, we started to see lost jobs, some restaurants had to close.

But as we proceed through 2021, that we will see an acceleration activity. Part of that is getting just recovering the losses from 2020. But certainly 2021 should be a stronger year for the economy. And that was even before additional fiscal stimulus, which will be enacted. But it's a positive economic outlook, but still that also has to, I underscore that, you know, we continue, just our hearts are out to those that continue to be, you know, affected by this virus, both from the health side, as well as for those that operate businesses, which, you know, they're still struggling right now because there's still a decent amount of pain out there in certain sectors.

Okay. Joe, you had mentioned acceleration. Let's talk a little bit about trends. So you and your team have talked a lot throughout the pandemic about certain trends that we've seen accelerated, but then equally are important are trends that we've seen that haven't been impacted that we maybe would have expected from the pandemic.

Can we talk a little bit about that in terms of what we might have seen and what we might expect to see? Sure. I mean, you know, I think we can bucket into three, we have three broad buckets in terms of how the world may have been affected or we think will be affected by COVID-19.

Again, I think it's to underscore, I know COVID-19 has impacted me profoundly on a personal level, you know, and I would imagine others as well on the call today. You know, I think our study of history, as well as our own personal experience, this has been a traumatic global experience that is shared by billions around the world, but I think it is reasonable to expect some changes.

I think one bucket of changes are trends that were already on their way that have been accelerated. So the move, and much of this has been discussed by others in the media and so forth, things that we research as well, you know, the move to the increased digitization of the economy, you know, whether it's media, financial services, others, that was already well on their way.

That's only accelerated. We've seen this in the retail sector. Again, I think what, you know, the future has been, you know, fast forwarded to some extent. And so I think a five years worth of some call it disruption, others call it acceleration of certain business models, you know, that's been compressed into roughly a year's time.

But that trend was on their way already and it's something we've researched. I think, you know, one thing that I think, you know, we did a lot of work on the future of automation and what that may or may not mean to the labor market. The one thing that at least I didn't worry about in the past was the location of that work.

But looking at that framework, I think another bucket, something that, again, I think part, you could argue was a trend that was going to occur anyway, but this is clearly been a step function. That is the move towards a virtual work, as best we can estimate using all the data and our sense of the type of tasks that can be conducted remotely versus still the need for face-to-face interaction, Maria.

We this best I ask, we estimate roughly 15% of the occupations or the jobs in the United States, for example, will be are just as effective on a permanent basis, are just as effective being conducted remotely as they are in a, let me say, an office, but it's not all jobs are conducted in office.

Now, that may not seem like a lot, but that's equivalent to the number of jobs in the ten largest cities in the United States. So there's going to be real estate implications for that. You know, I think there are some things in some of the largest cities, or there'll be some, there'll be some disruption there, without doubt, in commercial real estate.

And then I think there's other trends that I think were, you know, I think in one sense, they weren't, I don't think they were completely changed or unaltered by the current crisis. One that clearly has, however, I think is the likelihood that we are going to see conditional stimulus.

There was a reluctance, I think, in some economies to provide additional fiscal stimulus. Clearly we saw central banks very aggressive, taking interest rates to zero, even in some countries negative, which they remain to this day. I think that has been a pivot from the past 20 or 30 years, and I don't think it'll stop.

That has some implications for the bond market, potentially for inflation, which I think we could get to. And then finally, some things that I think have been unaltered, believe it or not, with COVID-19. I think some trends with respect to innovation and productivity. I think we were going to see this sort of innovation, whether we were working virtually or in person.

And I think we could touch upon that with the vaccine, because I think that ties to the vaccine discovery. And then I think some of the tensions, quite frankly, between the United States and China. I think we were going to see continued tensions between two of the largest economies in the world with or without COVID-19.

So I have not seen anything that will decelerate, I think, some of those tensions. And so I think that's something that we'll have to continue to monitor in the years ahead. So I think there's been, again, acceleration in some trends. Secondly, pivots. Fiscal is particularly a pivot. And then finally, something I think would be unaltered, and that would be, you know, like COVID, you know, the China tensions, globalization is related to that as well.

And then things around innovation, what we call the idea of multiparty. Okay, good. All right. I do want to move over to monetary and fiscal, Joe, because I think that lends nicely into that. Although we got right into it, and I forgot to do my job as a moderator to stress that we are taking questions.

So we've got a few questions prior to the event. So we'll weave those in, Joe. But for those that are listening live, if you do have questions or want us to, you know, expand on anything, just let us know. Michael is at the helm there going through questions, and he'll be able to share any questions that we might be able to take live as well.

So please don't hesitate if you do. So Joe, as we think about monetary and fiscal policies, right, we've seen a lot of stimulus activity. You know, how much will it continue, what will be required to continue the road to recovery in your thoughts? Well, I mean, I think, you know, policy by and large, Maria, will continue to remain very accommodative.

I mean, again, and you take a step back, we have some of this in our annual outlook, as you mentioned and referred to. The combination of fiscal, monetary as well, but fiscal monetary support that we saw in many economies, the US in particular, in 2020, in part to address COVID, was among the most significant we have seen probably since World War Two.

You know, the CARES Act, which was well over $2 trillion, pieces of legislation which we even at Vanguard, I spent a lot of time, even before some of those were enacted, just to give our thoughts from a macro perspective, in a bipartisan way, that was significant policy response. And there are still areas that need to address, I think, the $900 billion of additional fiscal support, particularly for those that are unemployed, in part because of inability to work, particularly the restaurants and face-to-face intensive sectors, that that will be helpful.

They tend to skew lower income, which is really unfortunate. I think going forward, I think we will very likely see increased tendency for fiscal spending, and that may concern some, given our debt levels. I think, and we can talk more about that, I think, you know, fiscal policy should be split into two components.

One is, you know, really addressing the near-term economic weakness. And I think there's still some impairment. If our forecast is right, the need for those measures will dissipate as we proceed through the course of this year. I think monetary policy, regardless, will remain, interest rates, short-term interest rates by the Federal Reserve will remain near zero for the foreseeable future.

I think the earliest they would raise rates is the year 2023, a little bit earlier than the bond market expects, but not materially different. Inflation is the wild card there. And then, you know, the other component of fiscal, which is, I really relate to longer-term spending initiatives. Now, many will focus on Social Security and Medicare and Medicaid.

I think the one area that, regardless of your political leaning, I think you can make a very strong case, and I would make a very strong case for, is infrastructure. There is the need for certain infrastructure spending, certainly in the United States, particularly if you travel by plane, train, or automobile, you know, the infrastructure needs.

So, I think we will see some of that in the coming year. And I think part of that could help, but that will be a, so I think we will, you know, we will see, you know, additional fiscal stimulus at some point. I think the bond market will start to apply a little bit greater pressure through a little bit higher interest rates.

I think that process is just starting. And, again, I am not saying we're going to see a material rise in interest rates, but they are slightly higher than what they are currently today. I mean, there, you know, the 10-year Treasury, which is a benchmark interest rate, 10-year Treasury, the yield on the 10-year Treasury is roughly 1%.

I mean, it was 2% before COVID-19. So I think, you know, we will march over the course of 2021, maybe not quite get there, but perhaps close to it. And I think, hopefully, it does so in an orderly way. If it was unorderly, I think the Federal Reserve, I think, actually would step into the markets and actually purchase some Treasury bonds, because that would be counterintuitive.

The market dislocations, it would be counterintuitive to be counterproductive to their objectives to kind of stabilize the rise in interest rates. But as a bond investor, you know, longer term, I'm hopeful for somewhat higher interest rates. I mean, interest rates are negative after the rate of inflation. So I just hope that that rise is gradual and orderly and not unorderly.

Yeah, Joe, and I do want to talk about that a little bit more as we get into the market outlook, because as on the financial planning side, those are lots of the questions I get in terms of what do we think we're looking at in terms of market returns, but also yields and what does that mean for, you know, savers and spenders alike?

Okay, you had mentioned inflation earlier. Is that even a very real risk for us right now? Right. So if you think about who's with us today, many Bogleheads have seen different cycles. Inflation under the Volcker era, where we've seen record high, you know, inflation rates and what, you know, in modern history, in modern times.

But now we're seeing, you know, very low inflation. And there's other concerns that go along with that. How real is the risk of inflation or what do we need to think about inflation in the context of of our portfolios? Yeah, it's a great question. I mean, that's the one part, you know, as an investor, it's one of the risks you always always have on one's radar screen, right?

I mean, anyone who particularly remembers their calls in 1970, even for two or three years of rapid rise in inflation can be near term, you know, some pain on a balanced portfolio. So we all should take it seriously. I would say, you know, three things with respect to inflation.

One is just historical context. Inflation, believe it or not, is still fairly low. It doesn't feel like that when I go to the grocery store, it feels like everything is up like two X. But but in a broad basket of consumer prices, inflation is actually it's only roughly one, one and a half percent.

It's below where most central banks want it to be. That's one. So it's and it's that has been generally the case for the past 20 years. That's actually been a problem. Central banks have. And that was actually our hypothesis, Maria, right, that central banks would and and the economy in the digital world would struggle to generate consistently 2 percent inflation.

That's one of the primary reasons why interest rates are as low as they are. Not the only one, but it's one of the reasons that's one it's been actually lower, somewhat lower than what quote unquote is ideal. If you want to use the word. Secondly, is the forecast on a cyclical basis, it is very likely that we will see a rise in inflation.

Part of that is is is just anticipated recovery in the economy. Part of that is a little bit healthy. I mean, we will see a recovery and in the service sector if our forecast is right. And that means a little bit affirming and, you know, things for air travel, hotels and some social activity will return.

Right. There'll be some long term impairments and business travel and so forth. But domestic travel, if you look at China, is almost quote back to pre-COVID level restaurants again. And so we will see that and so we will see affirming in those areas and that will get us closer to the 2 percent.

And then third is the risk for the first time since I've been at Vanguard, other than perhaps early 2006, we saw that oil prices, as we recall, going to one hundred dollars a barrel for the first time. You know, our team, Maria, sees a modest risk towards the upside in inflation, not material, nowhere near the 70s.

This notion that we will return to a high inflation world, I think, underestimates some of the forces that have kept inflation at bay for a long period of time. Technology, globalization and the Federal Reserve. But that's not to say that even with those forces, you can't you can't have inflation a little bit higher than expected.

So I think fiscal policy is the wild card. This fiscal policy and increased fiscal spending, if it's consistently aggressive over the coming three or four years, does that start to raise everyone's expected inflation rate? Maybe not 2 percent, maybe two and a half, three percent. That's that's the wild card.

That's what we have started to model and what we think about. It would mean that interest rates would be a little bit the rise would be a little bit higher than we anticipate. But that's the risk. So it's but this is not a return, you know, believe me, it's not.

It's certainly in the next few years a return to, you know, the seven, the 1970s. And I am not complacent on it. I'm just telling you, when you do all the math and all you look at all the what drives inflation and it's a comp explain, you know, in understanding inflation is a very complex phenomenon.

But when you apply all all the all the variables that matter, you know, we have an impaired labor market and we have also pent up demand. And we do all that calculus. It does say we're going to have inflation start to rise. It should kind of crest roughly around 2 percent, maybe a little bit higher than and then kind of settle in around two.

But if there's a risk, it may go a little bit, you know, at the end of this year, may recover a little bit more quickly. And that can take that, you know, we don't get we have to stay in the course of our investment portfolios. But that's the one probably source of volatility this year.

If the market's temporarily down five or 10 percent, I would say more likely than not, probably because we're going to have a month or two where inflation perhaps comes a little bit higher than expected. We had that a few years ago. Eventually, things will calm down. But that's probably the sort of and we identify that in our risk report.

You know, that's the one sort of source of volatility this year that we should just be prepared for, you know, and just try to look for. OK. Good. OK. Another. Yeah. This is a common question. So 2020 was an election year. There's lots of uncertainty that goes along with that now that as we move into 2021 and we have more and it was just not the presidential election, but also with Congress, as we have more clarity as we're heading into this year.

What do you think about the policy changes that might be proposed and then what we might need to keep an eye out on or your thoughts around any potential policy changes and implications throughout the year? Well, you know, again, I mean, I think there's that that's actually among my biggest question marks as well.

I mean, right now we're going to, you know, much greater the focus is on, you know, aiding the recovery. And the biggest thing is, is is the quickest we can get to anything, any dollar spent for vaccine distribution is you will make the recovery that much more quickly and have revenue stabilized.

And as I said, I think longer term, we will see increased focus on on on tax rates to help fund some of the increased spending. Again, we had structural deficits under both parties, both political parties, you know, in the past, the past five or 10 years. And so that was that was an issue that if you look at the congressional budget office, which is nonpartisan agency projecting higher debt levels for the next 30 or 40 years, it's in large part because revenues fall short of expenditures by roughly three or four percent a year.

And so that gap is going to have to close. I think we will see a number of things on the table with respect to the revenue side, I think, particularly for higher income households. I think we will. I think it's reasonable to expect that we will see modestly higher, you know, tax rates.

But again, my personal view is, you know, there's a there's a whole cottage industry that tries to guess and you feel more than I do, Maria, right? Like how exactly should I should I anticipate the tax rates? I would personally rather kind of wait to see actually how they unfold rather than prognosticate on what form of tax rates we will see.

And then once I have that clarity, if that has some implications for my estate planning or my tax planning, I do it with one hundred percent more information rather than trying to guess. I do know that, you know, regardless of that, you know, Vanguard will continue to underscore and I think we'll we'll clearly endure the importance of retirement savings, the importance of savings.

And I think the last point, which is not so much a tax policy perspective, Maria, it was everything you mentioned with respect to the headlines and the fact that all Vanguard investors, particularly those on the call. I mean, I think everyone's long term orientation to continue to remain invested, balance, diversify, stay in the course.

You know, if there was ever going to be a year that was going to challenge that investment philosophy, 2020 and Covid was going to be it. And if one had seen the headlines, I think many in March and April, I remember seeing the media, many were saying run for the hills and and look at the returns that we've seen this year.

And I think it's just a vindication. And I think everyone is a long term investor should be pat on the back because the headlines were extremely troubling. It was, you know, something I felt because it was the headlines impacted one's not only professional life, it also impacted one's personal life and family and friends.

It was a lot of emotion to take into account. And I think everyone should really pat themselves on the back that that was not easy to do emotionally. Right. Kudos. And so, again, it was just another underscore moment for for the long term orientation. And that's always something I think that I know everyone on this call takes in mind.

That's something I think I continue to remind family and friends, even more so than the task, which are fair questions for you with respect to tax rates and so forth. Like first order principles, continuing to stay invested in the markets, can you continuing to stay diversified? OK, if that's yes, then I'm happy.

Tax rates are going. But let's make sure that we take care of business first. Yeah. No, last year was hard, Joe. Yes. Because, I mean, a lot of individuals are impacted by it, not just personally, but professionally as well, unanticipated furloughs and things like that. And while some of the provisions in the CARES Act could help, I mean, we have individuals who are really dealing with some significant financial challenges, both near term and long term.

So how do you actually unpack that and focus on the things that you need to now, you know, as opposed to just, you know, reacting and looking at this longer term? In terms of the taxes, you're spot on. I'm starting to get more questions around that now in terms of, you know, some of the Biden proposal has some structural changes in it, as well as with the state taxation.

But we don't know exactly it's a proposal. We don't know what or when or how and if individuals are thinking through things, you know, my suggestion there would be, you know, maybe hold off until we maybe we have some more clarity around this or some certainty, but never really let the tax situation drive the fundamental decisions of investing.

But there are, you know, certainly on our watch list this year. And as we get more clarity around that, we'll see more from Vanguard as well on that front too. OK. That's why it's good to know Maria Bruno at Vanguard, not only because for my own, for my other questions I have, I mean, Maria is my first call.

Help me out here. Well, the thing is, if I don't know the answer, I know where to go. Right. We've got strong teams with us. Right. All right. So, Josephine, let's think about the financial markets. So the market recovery that we had in 2020 was just as surprising as the decline was.

Given what, where we were, where we are now, do you think the markets are fairly valued? What are your thoughts there? Well, as everyone on the call, you know, it's, you know, Vanguard, you know, I'm really proud of our framework. We take, you know, we don't talk about short-term market, you know, ups and downs.

When we talk about our reasonable range of expected outcomes for whether it's stock returns or bond returns. We're talking about broad portfolios, say the total stock market, total bond market. And we look out for a long period of time, at least 10 years. And I'm proud of our forecast.

I think it's also reasonable to expect that those expected returns can vary through time. I mean, we all know that as bond investors, right? The expected return on the bond portfolio today is materially different from where it was in 1980. And so we just use that simple logic, but also recognize humility that this is the future we're talking about.

So it's all ranges of return, but it's really grounded in the latest academic research from finance, which we apply at Vanguard. So we're both humble, but also rigorous with respect to that. But that is context. I'd say, you know, our outlook, I've been fairly proud. I mean, even though the course of 2020, Maria, right?

We were actually, you know, remember March and April, the free fall in the stock market? I remember. Yeah. We're not market timing. We're just saying if anything, our market outlook had gotten more positive for the first time. It was a material upgrade in our long-term equity projections because we dropped below fair value as the market really sold off very aggressively.

And so we said we didn't know the timing of it. But again, close one's eyes next five or 10 years, expected returns on stocks are going to be higher than what we have in the historical average. So we got certainly the direction right. But certainly the magnitude surprised me.

I mean, it was a very aggressive rise, most of which can be explained by the drop in interest rates, but not all of it. So how do you read that? It means today that we're above these wide ranges of what we call fair value. Fair value for any asset is what is reasonably explained by, say, earning for the stock market earnings growth, the level of interest rates, because these are discounted cash flows in the futures for all for all, say, publicly traded U.S.

companies. And so you don't have a wide fair value range. And most of the time the stock market is in that range, which means historical like expected returns of eight or nine percent for planning purposes is reasonable, right? But every so often you deviate from those ranges. We deviated well above.

We were way expensive in the late 1990s, which led to, you know, had we had our capital market small, we would have had just expect lower expected returns in the next five or 10 years. Not sell one's investments, just for planning purposes, expect lower returns. We sit here today.

The outlook for the equity risk premium is still positive, somewhat lower than historical average. The biggest reason why we expect lower returns, Maria, is not because the stock market itself. We still expect in the vast majority of cases, high probability that the next 10 years stocks will outperform fixed income.

It's just that the fixed income and money market returns are materially lower. And that's because the level of interest rates in the Federal Reserve. Right. So that is the prime. So all the expected returns for all assets in one's portfolio are modestly lower. It's not because we're bearish on the financial markets.

It's because of just the level of interest rates in money market funds. It's not because of money markets, but it's because of Federal Reserve and Fed funds rate. That has implications for the bond premium. So why should I have expected returns higher for a bond fund than a money market or for a stock fund equity risk premium over bonds and money market?

That impression is more for everyone. So that's the primary implication. And we generally have shaped two or three, the model shaped two or three percentage points off the expected returns for all those portfolios on a five or 10 year basis. But it's not because the markets are grossly overvalued.

You know, they're at the high end of the range. I have some concerns about some of the aggressive, I'm starting to see some aggressive behavior, not by Vanguard investors, but the industry at large, the IPOs, some mega cap growth companies, you know, really concentrated returns. So I think there's definitely froth in parts of the market, things even, quite frankly, like Bitcoin, I see there's some froth, one could argue, but it doesn't mean the market is unsustainably high, it just means that we may see a little bit of a correction.

One thing I think that is missed by many in the market is that even if we have modestly expected returns, say for U.S. stock, let's say in the four or five percent range over the next 10 years, that's certainly lower than historical average of nine or 10, say roughly five percent.

If you own a broad basket of securities, that certainly could outperform a very concentrated one. You know, gross stocks have outperformed value companies by the largest in U.S. history ever recorded. And so if one is, you know, if one is taking a broadly diversified approach, I think that may mitigate some of the risks.

Some investors, I think, have become very concentrated. It has served them well in the past several years, but past is not necessarily prologue. And so some investors, you know, could see actually lower expected returns than our central tendency because of those concentrated conditions. So that is a broad brush, but it's not bearish.

Lower expected returns, but that's in part because of what is going on in interest rates in general, which I think is a natural expectation. OK. Joe, actually, I'm looking over here at my monitor because we're actually getting some questions in. As we go deeper into the financial markets, I think we've got a question in that is interesting and maybe just to briefly set the context, the underlying philosophy of a true bobblehead is really to tune out the noise, particularly with the near term.

Why? Why are these projections, when we think about either the near term or the 10 year, important? And when you think about it in longer term planning, the relevance of a, say, a one year or a 10 year outlook versus, you know, a longer term. Yeah. And one of the reasons that I appreciate the question, Marie, you know, that's one of the reasons why even our outlook, we focus on 10 year numbers.

I mean, most of the industry, including many of our competitors, in fact, we're not even in some media surveys because they're one year outlooks. So if you refuse to participate in them, that means we're not on TV as much, but so be it. Ten years is a, I think it's a relevant horizon, it's a very long horizon, but it's a relevant horizon, say, for planning.

Now, for some, some, if I'm 22 years old and saying for retirement, it's well beyond the planning cycle, I think the outlook is less, it's less relevant. But for many, they may have a 10 or 15 year planning horizon and the cornerstone of asset allocation, which is the cornerstone of Vanguard's investment philosophy, stay diversified, balanced long term.

But one of the things that that divides in a portfolio and asset allocation, say between stocks and bonds, that is predicated and the foundation of that is based upon the expected returns. If one, I mean, that's the foundation of Vanguard's philosophy. So you have to have a, what is a reasonable expected return?

And so if we don't have this sort of outlook, what does one assume for a bond portfolio to my previous comments, right, Maria, should I assume historically, it would actually be, could you share, it would not be responsible to say, you're going to get historical like six or seven returns in fixed income, if I'm saving for the next 10 years, that means that I'm not going to be successful, the odds of me, that would mean the probability of me being successful in whatever invested saving and spending strategy I have as a retiree, as a saver, it's going to be miscalibrated.

And so we have a responsibility to say, what are reasonable ranges of expected returns that one can then plug into the investment problem or the investment goal one is trying to achieve, right? It may not mean radical changes, but you know that, right, and even our advice units and our calculators on our website, how much do I need to save for retirement?

How can I, how much can I spend safely in my retirement? That requires the expected returns being somewhat reasonable, not perfectly accurate. No one has that. If you don't, no one has that, but certainly we have, and expected returns do vary through time. And so we have a responsibility to say, what is a reasonable range for that?

Sometimes a little bit higher than historical averages. Sometimes they're a little bit lower than historical averages. I think that's important to lay that information out there so that investors can make, you know, as intelligent, you know, decisions on their own certainty as possible in this world. And I, you know, we've done that for 10 years, I'm very proud of it because our first outlook 10 years ago, there was many investors, very concerned to invest at all, given the financial crisis, the low, this new normal, and actually we were, you know, our outlook was saying, actually, we're going to have historical like returns in the equity market, stay invested, stick to the plan, and that forecast was generally accurate.

We didn't get the ups and downs along the way, but we got the end point, and that's important for planning purposes and doing risk return trade-offs with one client. Yeah, no, I agree, Joe, I get these questions a lot, particularly for retirees, and we can talk more about that.

But when you're doing long-term projections, it's fine to use a Monte Carlo simulation where you're looking at different outcomes. But if you are looking at in the next, you know, one to three to five years, how much I should be spending for my portfolio, it would be imprudent not to think about what the initial conditions are.

It's risky to bank on higher-type return expectations when the portfolio isn't expected to produce that. Yeah, I sit on some investment committees, I imagine you have many clients or, you know, council clients. Right. Like, for example, what's, I'm a very conservative investor, but I'm trying to draw 4% for my portfolio over the next decade for spending.

Or some institutions I serve on, they have a fixed, they have a target of 4% spending. How should they allocate their portfolio now? It may be different. In fact, it is different. My council versus 25 years ago when they could have been 60/40 because of the bond return component.

This does not mean that bonds don't have value, it just means a lower expected return. It may mean they either cannot spend 4% from their portfolio, they have to save more, I mean, that's one certain viable path. Or they're going to have to, there's no magic bullet, they're going to have to take on more risk, which means more equity-like risk, perhaps 70/30, right?

And let's talk about those trails, it's not one better than the other, let's just, let's look at the comfort level with that, the pros and cons of that. And I think that's the sort of conversation that these sort of ranges of returns allow investors to have. Again, if one has a hundred year horizon or so, the initial conditions do not matter.

But for, again, for some investors that's appropriate, for many investors, anywhere from a horizon from five years to 15 or 20 years, then I think that's where our sort of planning projections, I think can be helpful. Right. Right. So, Joe, let's get a little deeper with our market outlook.

So US equity returns, we're looking at a projection, you know, not much unchanged from last year, right? Anywhere around 3.7% to 5.7%, I believe, in terms of the 10-year forecast for equities. Let's talk about that, I guess, in a couple of facets. One, we would be remiss at a BogleHeads event if we do not discuss US versus international.

So the projections are much more bullish than the national forecast. So let's talk a little bit about what's causing that, what to expect, what to think about that in terms of diversification and asset allocation. Yeah. And that's, you know, that's one of those rich topics, Maria, you know, Jack and I used to talk about.

You know, he was not as big of a fan, certainly, or supporter of having, you know, non-US equity exposure. He wrote about it. I mean, obviously, the US market has been the strongest performing equity market among the highest in the world in the past five or 10 years. It's steadily outperformed non-US markets.

But you know, past is not prologue. I mean, without doubt, the lowest volatility portfolio is a global portfolio. That does not mean, you know, that necessarily that US were out or underperformed depends upon where the fundamentals are. We are expecting or projecting, more likely than not, that non-US equity markets will have somewhat higher expected returns going forward.

It's not because of any sort of view on the US dollar, it's primarily because of where valuations are. And if you look at, particularly in the US growth arena, valuations are at pretty high levels. I mean, they're close to late 1990s. So if there, and there is, there's some, certainly some strong evidence historically that when you have these sort of, you know, dislocations or deviations, I should say, that over time they tend to, you know, conditionally they tend to converge.

And so that is the primary reason why we anticipate non-US markets to have higher equity returns in the US. It doesn't mean that US, you know, it's, it's not a negative view on the US economy. It's not a negative view on US earnings. It's the fact that the prices that investors are already paying for US fundamentals is markedly higher than they are for European companies, emerging market companies and Asian companies, and history shows that where we currently sit, you know, the risks are towards, it's one sense that the price is being paid for the rest of the world's growth is much cheaper today.

And so if you have a long-term orientation, and certainly I adhere to this, in our, in our, in many of our portfolios we provide clients, right, balance portfolios, have non-US exposure, right. And we can all debate what that, what that optimal one is. But certainly have some non-US exposure is going to help on our return perspective.

I think it's prudent to have it, even if one doesn't expect part of the world to outperform the other, because it's about modest volatility reduction on average, but, you know, that, that is a component of our outlook. In fact, most parts of the, of the equity market globally, if they're outside of US technology companies are projected to modestly outperform.

And we're not picking on that sector, it's just that those valuations are so extraordinary that it's, it's, it's, we've rarely, we have seen this before, but the times we've seen it before, you know, were the late 1920s and the late 1990s. I'm not saying, and that's the, that's the one thing about today's global equity market.

We've seen a fantastic performance of the past five or six months, but it has not been broad based. It isn't like every single company has, you know, has doubled in value. It's, it's, so that's, that's good news in the sense of being broadly diversified, could help, you know, smooth out some of the underperformances, some companies that may have been starless.

And I don't know what that time it is, I'm not picking on any one company, I'm just saying it's unlikely that all of them are going to continue to grow to the moon. And so having the broad basket, I think you'll see if our forecast is right, companies that are more value oriented, particularly some outside the US, will play some catch up over the next several years.

The timing, who knows, but over the course of the next five years, it's, it's highly likely. You know, you beat me to that one, because we got that question before, Joe, around the, what are we going to get out of this value coma? It's been debating the industry. It is, yes.

It's funny, I had the, I had the honor and the privilege to present to Vanguard's board of directors in December, it was on this topic, what's going on between growth and value. We have a lot of our active managers in our Vanguard active funds, you know, you know, whether it's like, you know, many of our active managers, some of us have a value sort of orientation, they tend to buy stocks that are, you know, lower in price to book, you know, so today, some of those value type companies are in the financial banking sector, energy companies, some tied to face to face services, some of them have gotten absolutely hammered on a price relative to some, you know, large technology companies and, and, but the perplexion is that actually, for the past 10 years, growth companies on average have drastically outperformed value.

So there's some in the industry actually questioning the value philosophy, which is actually a cornerstone of everything from Vanguard's generally active approach, and, and, and many academic research. So there's a big debate, but my research I presented to the Vanguard board of directors was that you can explain not all but but a lot of values on a performance in part because of the sector dropping in inflation and interest rates.

And so if we have a modest recovery is participating, value companies will generally, you know, come back a little bit, they may not completely, you know, recover all the relative on a performance. I mean, the US growth index is up by 40% over the US value index. And that's, that's like, that's astronomical.

I mean, that's like, five years worth of historical like, stock returns squished in the one year on a relative basis. And we've rarely ever seen that dichotomy and, but and then over and above the fundamentals, those stocks have continued to outperform you when you control for things like secular change and platform effects and all these technology buzzwords.

So I'm not saying that this is the, you know, the turning point when some of these value companies start to come back and contribute more quality to the equity market. It's just that, you know, continued outperformance is unlikely at least over a five year basis. But, you know, that that, again, there's there's a lot of active managers, in part have underperformed in part because of the value premium, not really manifesting themselves in the equity market.

Okay. All right, Joe, we've got a few minutes left. Time is flying. Let's um, let's just real quick talk about there's two things I want to touch upon. One is we've talked about the bond environment, low yields. What's the message to investors, particularly retirees who are looking to try to eke out extra yield either through, you know, credit or the yield curve?

What are your briefly your thoughts there? Well, I'd say, you know, I think, again, the more that one tries to eke out the returns, I just the more one just is going to have to weather, you know, a month or two or a quarter to potentially where the nav drops a little bit because you're just we're going to we have we have credit spreads that are approaching, you know, whether it's municipal spreads over treasuries or corporate bond spreads over treasuries that are approaching close to historical hikes.

Yeah, there's still an expected return on a corporate bond portfolio or municipal bond portfolio is certainly higher than treasuries because of the risk there. But that doesn't that's not a free launch. And so that doesn't mean don't lose a message just means that you have a very low income cushion as well.

Yield to maturity is fairly low, historically. And so I think we all hope for a somewhat higher return from our bond portfolio. That means that we're going to have to just look through, you know, period two where you have a slight drop in the nav. That's the natural reset.

Right. And you have less income cushion to absorb, you know, a modest rise in corporate spreads or municipal bond yields, right, particularly as the recovery continues. So, again, a healthy recovery means healthier bond returns for the five or 10 or 15 year period. Certainly that's what I'm hoping for.

I mean, if we're here five years from now with the same interest rates, Maria, something has gone terribly wrong. And so I don't think anyone wishes that. So the converse, though, is, OK, if I want higher expected returns, you know, no pain, no gain. And I'm not talking about a lot of pain.

I'm just talking about some nav fluctuations as we kind of have a gradual rise in interest rates over the next several years. So that's going to be a little bit different from, you know, the past. But I do know, particularly for conservative investors, that can be a little bit unnerving if they see the bond portfolio drop down in value for a little bit, right, because they're more conservative investments.

Hey, I expect that from equity bonds, but I don't expect that from fixed income. Well, the more they're going to try to reach for yield then, particularly dabbling into high yield or emerging market, yeah, there's a higher risk premium because of the greater volatility. But one, I just I hope they don't have the expectations for money market like returns without any volatility because we have a low income question.

And so we just have to, you know, just have to be mindful that I know I'm prepared for that. But we're going to have to talk to ourselves, I think, before they occur. And I think I'll generally be orderly. We won't have a massive spike in interest rates. We're not.

OK. All right. Good. Thank you for that. And then last thing. But we did get this question before. We get this question a lot. Bitcoin. Well, it's not a currency, I think the market's expecting it to be a future currency. I think it's debatable. I don't think, to be honest, I don't think many central governments will allow it to become legal tender.

I'm particularly skeptical that China or the United States would allow Bitcoin to usurp the U.S. dollar in Chinese renminbi. The Bitcoin market is spitting in my face on that, to be blunt. However, it could very well become a collectible. I used to collect baseball cards. If you collect the baseball cards or other, the Mickey Mantle baseball cards were worth, I think, over a million dollars in mint condition.

So it is not to say something that is very finite supply that is valued by a community. It cannot have utility value. And collectibles generally have that, where my brother would say, I could care less if I had that baseball card. That has utility for me. Others, it's Beanie Babe or something else.

I don't mean to be dismissive of Bitcoin. It could have value. But I think, you know, but I've been shocked by its astronomical rise. The one thing that's difficult with Bitcoin, Maria, is that it's very tough to argue what is its fundamental value. But I can tell you that the cost to mine the coin is lower than today's price, right?

And so that would suggest potentially it's overvalued. But again, I don't think it'll ever become legal tender. That does not mean, however, that could mean the price could go closer to zero. But it may mean it could still stay up well above zero because it becomes a sort of, when I say commodity, I think collectible is the more, the more, you know, there's value.

But at the end of the day, it's just a piece of fabric, right? But the Picasso painting has some incredible value. I just don't know. I mean, is it a Picasso? Is Bitcoin a Picasso? Or is it the thousands of paintings that are produced every day that have hardly any value?

Right, right. OK. That's the heart of the question. OK. OK, good. Thank you, Joe, for that. So, all right. So, of course, we run out of time. But I do want to have a little fun because I think our Boglehead friends are expecting a little fun, too. So, I want to start you with a quick lightning round of questions.

And I mean quick. OK. So, here we go, Joe. What's the first media source that you go to in the morning when you log on? Barry Reynolds. OK. What's the last book that you read? Life Fragility. OK. So, here's a good one. I came up with these this morning, in case you're wondering, Joe.

So, what would Joe, the senior economist that you are today, tell Joe, the more junior economist that I met 15 years ago? Be more patient in one's personal life. Is your wife watching? I'm a very impatient person that has positives and negatives to it. OK. All right. And lastly, sum up 2021 for us in one word.

Your days ahead. If I were to ask this question of myself, I'd say hope. Yeah. Yeah. All right. Thank you, Joe. It's been a pleasure sharing this virtual stage with you. And I thank the Bogleheads as well for their interest and their time. So, Rick, I'll turn it back over to you.

OK. Well, thank you, Maria and Joe, for that great discussion. It's always interesting to hear Vanguard's perspective on what's going on and particularly what might come forward. This presentation has been recorded and it will be available soon on boglecenter.net. And our next Boglehead speaker series live event will be next month.

And it will be a panel discussion from some of your favorite Boglehead experts. So thank you, everyone. And we hope you have a safe and happy new year and see you next time. Bye-bye. Bye-bye. Bye-bye. Bye-bye. Bye-bye. Bye-bye.