Vanguard recently published a paper called “A Return to Sound Money”. I have saved you some time by listing key points below.. A link to the entire 24 page paper is found below.
Vanguard writes in its intro paragraph:
“The transition to a higher interest rate environment no doubt has challenged investors, who have endured historical losses in bonds and high volatility in stocks.”
Vanguard:
“But make no mistake: This structural shift, which will endure beyond the next business cycle, is the single best economic and financial development in the last 20 years.”
What is Sound Money?
Sound Money is bonds paying reasonable dividends (>4 %) that are higher than inflation, making bonds more beneficial, and encouraging saving.
Vanguard speaks to their appreciation of this return to sound money producing “balanced returns” meaning that bonds are doing a better job with returns under a more normal interest rate environment.
Vanguard’s economists believe that “higher interest rates are here to stay.” How will this impact us?
It will make borrowing more expensive and people/businesses will return to saving more and less borrowing.
Vanguard writes: “For governments, higher rates will force a reassessment of fiscal outlooks. The vicious circle of rising deficits and higher interest rates will accelerate concerns about fiscal sustainability.”
Stocks 10 year returns to be slightly muted than average, according to Vanguard, because of the higher interest rate environment.
Rate cuts will happen in 2024 but will settle at a higher rate than they were before this cycle began. A more normal, healthy level.
Want to dig in more ? 24 pages await you here.
We think Vanguard’s economists are not only sound and scholarly, they may be the best global economist team in today’s financial services world. However, any attempt to invest based on a perception of how the future economy and markets will unfold is perilous. Diversification into stocks and bonds, and a high level of diversification within stocks and bonds, while taking advantage of long term statistically proven premiums, and occasional rebalancing is the best way to invest. Vanguard’s paper does not change this, and they would agree with our statement as well.