Global economy. For the first time since the financial crisis, our leading indicators point to a slight pickup in near-term growth for the United States, parts of Europe, and other select developed markets. Continued progress in U.S. consumer deleveraging, strong corporate balance sheets, firmer global trade, and less fiscal drag indicate U.S. growth approaching 3%. That said, this cyclical assessment should be placed against a backdrop of high unemployment and government debt; ongoing structural reforms in Europe, China, and Japan; and extremely aggressive monetary policy with exit strategies that have yet to be tested.

Asset allocation strategies. Broadly speaking, the outlook for risk premiums is lower across a range of investments than was the case just two or three years ago. Our simulations indicate that balanced portfolio returns over the next decade are likely to be below long-run historical averages, with those for a 60% stock/40% bond portfolio tending to center in the 3%–5% range, adjusted for inflation. Even so, Vanguard still firmly believes that the expected risk-return trade-off among stocks and bonds leaves the principles of portfolio construction unchanged. Specifically, our simulated mean-variance frontier of expected returns is upward sloping—it anticipates higher strategic returns for more aggressive portfolios, accompanied by greater downside risk. We believe that a long-term, strategic approach with a balanced, diversified, low-cost portfolio can remain a high-value proposition in the decade ahead.