As we outlined in the Vanguard Economic and Market Outlook for 2021: Approaching the dawn, we expect equity markets outside the United States to outperform U.S. equities and expect value stocks to outperform growth. Our December 2020 research A Tale of Two Decades for U.S. and Non-U.S. Equity: Past Is Rarely Prologue underscores our beliefs, as does our forthcoming assessment of growth and value stocks.
Performance variation between investing styles and sectors is among the reasons Vanguard believes that investors should hold broadly diversified portfolios, as highlighted in Vanguard’s Principles for Investing Success (PDF). Those who do so benefit from a natural rebalancing that occurs over time as market segments outperform and underperform.
However, investors with conviction in their assessment of the markets, the time horizon to be patient, and the discipline to hold firm amid volatility may benefit from an overweight allocation to value stocks commensurate with their risk tolerance. Such a tilt could help offset the lower broad-market returns we expect in the decade ahead compared with the decade past.
We appreciate that fast-rising assets may grow richer still. But, at some point, the markets will be faced with a question related to our definition of asset bubbles: What plausible future income scenario justifies an asset’s price? We expect that valuations eventually will reflect companies’ true probability of profitability, especially in the most-stretched corners of the market.
I’d like to thank Ian Kresnak, CFA, and my colleagues in Vanguard Quantitative Equity Group for their invaluable contributions to this commentary.