In this video, James Norton summarises our economic and market outlook for 2024 and what it means for investors.
He explains why our economists think interest rates will remain higher for longer, why bonds are back and what higher rates mean for markets. He also shares how investors can stay the course and why it’s always key to stay focused on our four simple investment principles: think about your goals, stay balanced, keep costs low and be disciplined.
So, we've reached the end of another year. We've seen interest rates go up. We've seen the cost-of-living crisis continue. And there's been geopolitical tension across the globe. But different events happen when you invest. They shake markets regularly. It's what you do - or don't do - that really matters.
Question: What could be the most important development for investors in 2024?
Higher rates are here to stay, even though we expect them to start falling towards the middle of next year, we think they're going to be at higher levels than we’ve been used to since the end of the global financial crisis in 2008. But a return to more normal levels is good news for long-term investors.
Question: Why did interest rates rise and why are they staying put?
We've all seen prices go up in the last couple of years. Central banks have tried to reduce inflation by putting interest rates up. The idea behind that is to make money more expensive, meaning that people would rein in their spending. However, the economy has not slowed as much as economists would expect, resulting in the fact that we expect interest rates to stay higher for a little longer.
Question: What might this mean for my investments?
This could mean that the outlook for markets is a bit bumpy. Sometimes when you have markets like that, investors take rash decisions. However, we would urge investors to keep calm and take the long-term view.
Question: What’s in store for shares?
Higher interest rates can squeeze company profits because it makes it more expensive for companies to borrow money. It can also make valuations look more expensive.
That doesn't mean you need to take any action because timing markets is incredibly difficult. It's hard to make decisions about which regions, countries or sectors that are going to perform best. That's why Vanguard products and services are built around balanced portfolios of shares and bonds around the world. And this really helps investors offset risks.
Question: And what about bonds?
So firstly, a quick reminder that bonds are a loan to a company or a government, and our view is that the outlook is improving despite a number of bad years.
Our estimate is that the returns over the next decade are going to be in the region of 4% to 5% a year for high quality bonds, rather than the 1% to 2% that we've been used to for the last few years. Now, there could be more volatility for the next few years, but a rise in interest rates is the best development in the last 20 years for long-term holders of bonds.
This increases our long-term return expectations. Put simply, bonds are back.
Question: So how do I stay the course
It's a good time to keep our four investment principles in mind. First, ensure you've got appropriate goals for you. Second, make sure you've got a diversified portfolio of bonds and shares. Third, keep costs down. Keep a close eye on fees and taxes. And finally, ensure you're investing for the long term. By long term, we generally mean five years or more.
So, there could be some short-term bumps in the road, but the outlook for long-term investors has improved. This shows the importance of staying the course after the challenging market conditions of the last few years.
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