Vanguard’s global chief economist offers ways to sharpen your investing strategy for the future

The next decade is going to be a grind.

In his new book, “Coming Into View: How AI and Other Megatrends Will Shape Your Investments,” Joseph Davis, Vanguard’s global chief economist and head of Vanguard’s Investment Strategy Group, lays out how the coming decade is likely to shape how investors and retirement savers prepare for a range of economic scenarios — declining population growth, increasing geopolitical and trade tensions, and mounting national debt.

“These megatrends are more like tectonic plates,” he writes, “grinding against each other rather than a seesaw balancing itself.”

Davis reaffirms the wisdom of Vanguard’s founder, Jack Bogle, and explains why it still resonates a half-century later.

Here are edited excerpts of our conversation:

Kerry Hannon: Can you tick off what you view as the megatrends?

Joe Davis: Technology and how it improves our work and raises growth. Deficits and debt levels of governments, which can affect the bond markets and economic growth and inflation. The third is globalization. That’s in the headlines for tariffs, but there are other aspects of globalization, such as where good ideas come from, an underrated part of globalization. The fourth is the two dimensions of demographics. It’s population growth, which includes immigration, as well as the aging of society.

Even if AI delivers extraordinary breakthroughs, there is still the real possibility that technology will not rescue us from the headwinds the economy faces.

How does someone build a resilient retirement portfolio taking all that into account?

There’s a lot of change (coming) in the years ahead from the economic perspective. Focus on the things that you can control.

Create clear, realistic investment goals for your portfolio, incorporating your time horizon and an honest assessment of your tolerance for risk. And stick with a research-­based investment plan through good times and bad. Investing evokes strong emotions that can lead to impulsive decisions.

Max out your savings and stay invested in the market. There’s going to be a lot of concern in terms of what interest rates may do and what the stock market may do. But in virtually all scenarios, everyone will heavily benefit from compounding and staying invested in the markets.

Maintain a diversified mix of broad investments across different kinds of investments to reduce a portfolio’s exposure to the risk common to an entire asset class, such as stocks and bonds.

Read more: Create a stock investing strategy in 3 steps

What about fees?

Minimizing cost and fees was perhaps Bogle’s greatest contribution to investors and the financial services industry, and it’s not going away. As Bogle often said, “in investing, you get what you don’t pay for.” Assume an annual return of 6%. With annual costs equal to 0.1% of assets, a $100,000 investment will grow to $557,383 after 30 years. If annual costs are 2.0%, the total will be just $317,081, some $240,000 less. When higher costs compound, the differences in your wealth can be staggering.

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How will Bogle’s mantra ‘stay the course’ hold up?

As someone who has spent over 20 years at Vanguard, I firmly believe in the power of “staying the course” when navigating economic and financial uncertainty, but it doesn’t mean that you never adjust your portfolio.

It has been misinterpreted as “I should ignore all headlines and not care about risks that may emerge.”

Staying the course by being continually invested in the markets is correct, but be prudent. There’s always risk in tilting your portfolio too far in one way or the other. Everything in moderation is good. Jack was clearly of that mind, and I try to channel that.

You write that an aging society can be productive. Could you elaborate?

Older consumers do not spend less as they age, although what they spend on changes — for instance, healthcare.

Academic research and our analysis both show that over the past 20 years, as we moved more jobs in the United States to service-based ones — finance, education, healthcare, business services, where there’s somewhat less of a physical demand — it opens the door to working longer for people. And that’s a positive. Experience matters a lot, what economists call human capital. It’s very valuable.

For those choosing to work longer, it’s a good thing for the economy. Economists are underestimating this aspect of the US labor force, which is its fastest growing segment at this very moment.

Should alternative investments be held in retirement plans over the next decade? There’s so much buzz with the president signing the executive order recently encouraging the use of these investments in our 401(k)s.

Costs will have to be reduced to improve the odds of success investing in them. And secondly, I cannot index all private investments. I don’t get the full pool. I can only buy individual strategies. Unlike the public markets, I can’t buy all of the investments and diversify my risk. I have to put my eggs in a few managers, and that’s going to be much like if I was just picking individual stocks.

“Minimizing cost and fees was perhaps Bogle’s greatest contribution to investors and the financial services industry, and it’s not going away,” said Joseph Davis, Vanguard’s global chief economist. (Photo courtesy of Joseph Davis)

So these types of investments are not a great idea for the typical retirement saver?

I’m not saying you shouldn’t do it. What does this mean for investors? Eyes wide open. It’s who you pick as the manager that determines your success along the way. Investors have to understand that.

These can clearly add value, but not all boats rise in the ocean. If you select a manager that’s not among the best, your investments are going to trail the public markets.

Manager selection is really critical, and why we view these kinds of investments as an extension of active management. The good news is some private investments, based upon skill of the managers, can do exceptionally well in outperforming the broad public markets.

That has been true for 20 years. It’ll be true in the next 20 years.

Read more: Retirement planning: A step-by-step guide

Have a question about retirement? Personal finances? Anything career-related? Click here to drop Kerry Hannon a note.

When you consider that the top 20 stocks make up half of the market cap of the S&P 500 Index, what should investors like me be thinking? Should I be diversifying out of this index fund?

If someone has only been invested in the S&P 500 in their retirement account, congratulations. It has done exceptionally well.

I would not urge anyone to do drastic selling. This is where I say “stay the course,” but start thinking about diversifying. It could be smaller-cap companies in the United States, which have trailed over the past 10 or 15 years, as well as non-US investments. Every market has trailed the United States almost without exception.

Some of the next great companies may be small today, or may be located outside the US. That has not been the case in the past 10 or 15 years, but I don’t think investing should be looked at through the rearview mirror.

Parting thoughts?

My goal is to demystify these trends and how they relate to investing, not sugarcoat it.

Kerry Hannon is a Senior Columnist at Yahoo Finance. She is a career and retirement strategist and the author of 14 books, including the forthcoming “Retirement Bites: A Gen X Guide to Securing Your Financial Future,” “In Control at 50+: How to Succeed in the New World of Work,” and “Never Too Old to Get Rich.” Follow her on Bluesky.

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