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In this episode of The Long-Term Investor, I’m joined by Kevin DiCiurcio from Vanguard’s Investment Strategy Group. Kevin leads the capital markets research behind Vanguard’s long-range return forecasts, the numbers that show up in advisor toolkits, financial plans, and annual investor conversations.
We talk through what the Vanguard Capital Markets Model (VCMM) does, how Vanguard builds and governs the assumptions behind it, and how to read the percentiles that many investors treat like a scoreboard.
The conversation then moves into portfolio implications: why high-quality bonds look more competitive than they have in years, why U.S. value and developed international markets look more attractive than U.S. growth inside Vanguard’s framework, and how AI can boost the economy while leaving stock returns uneven across today’s winners. We close with Vanguard’s approach to geopolitics and the signposts that could shift conviction in 2026.
Here are the notes from my conversation…
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What the Vanguard Capital Markets Model (VCMM) Is—and Why Return Assumptions Matter (02:16)
Kevin describes VCMM as a global simulation engine that produces return distributions across asset classes. That framing matters because investing rarely plays out like an average. Real life shows up as sequences of outcomes, and the path can shape decisions just as much as the endpoint.
Capital market assumptions sit behind a lot of planning work. They drive retirement projections, Monte Carlo analyses, and long-term decisions about saving, spending, and portfolio risk. Even for investors who never open a spreadsheet, the assumptions still influence the story a plan tells about what’s plausible over time. Kevin’s emphasis stays consistent throughout the episode: investors benefit most when they treat the forecast as a range of outcomes that planning decisions can be built around.
How Vanguard Wants Investors to Use VCMM: Expectations, Risk Trade-Offs, and Smarter Allocation Decisions (04:04)
Kevin outlines how Vanguard expects VCMM to be used in practice. One role is setting return expectations for goals like retirement or college savings, where today’s starting conditions help shape what “reasonable” looks like. He uses a seasonal temperature analogy to make the point in plain English: daily outcomes vary, yet the broader pattern still shows up over time.
VCMM also functions as a portfolio analysis tool. It allows investors to compare how the range of outcomes changes as they adjust allocations, and it makes downside risk easier to see alongside upside potential. That kind of comparison can surface a practical definition of risk tolerance: how wide a range someone can sit with when the market behaves badly.
A third use is in allocation frameworks that adapt over time. Vanguard uses VCMM in valuation-conscious approaches that adjust portfolio mixes as conditions shift, with the goal of keeping risk and return profiles more consistent. Across all three, the model shows up as a decision aid for long-horizon planning.
How Vanguard Builds the Forecasts—and the Capital Market Assumption Approaches They Didn’t Rely on Alone (09:27)
Kevin breaks the model’s credibility down to process and governance, then walks through both. On process, Vanguard re-estimates the model quarterly as data becomes final and runs forecasts monthly based on prevailing market conditions. The operating goal is consistency. Methodology changes go through a separate research and change-management effort rather than being handled as one-off adjustments.
He also maps out common ways institutions build capital market assumptions. One approach leans on valuation-based predictability, including CAPE-style regressions that relate starting valuations to long-run returns. Another uses building blocks, decomposing expected equity returns into dividend yield, valuation change, and growth. A third route defaults to historical averages. Kevin explains Vanguard’s preference for a systematic, holistic process that draws on the predictability literature without turning the forecast into a collection of disconnected assumptions.
How to Read Percentiles, 10-Year vs 30-Year Forecasts, and What Vanguard Likes Most Right Now (15:08)
This part of the episode connects the model to the forecast tables investors see published. Vanguard presents return forecasts across percentiles such as the 5th, 25th, 50th, 75th, and 95th. Kevin describes them as summaries of a probability distribution that planning decisions can be built around, especially for investors who anchor too tightly to a single “expected return” number.
Time horizon changes how those distributions should be read. Over shorter windows, outcomes spread out and the distribution looks much flatter. Over longer horizons, starting conditions have more time to work through the system, which supports using the long-horizon median as an anchor for expectations.
Kevin’s 2022 example illustrates what the model is trying to capture. Stocks and bonds sold off together, correlations spiked, and diversified portfolios suffered a drawdown that felt unusual. Vanguard reviewed whether that magnitude showed up in the model’s tail, and the experience landed deep in the distribution rather than outside it. For long-term investors, that’s a practical reminder: planning assumptions need to accommodate ugly periods as a normal part of market history.
From there, Kevin discusses portfolio implications. Vanguard continues to see more value in high-quality fixed income, especially in an environment where the expected equity risk premium looks compressed relative to history. He also explains why credit looks less compelling when spreads are tight and the compensation for taking additional risk is thinner. On equities, he sees a stronger case for U.S. value than U.S. growth, and a stronger case for developed international than many investors have been willing to acknowledge after a decade of U.S. leadership.
He also adds a useful modeling nuance: medians alone can hide the joint probability picture. Vanguard still sees a meaningful probability of continued U.S. outperformance. The distribution suggests a different story about magnitude, with fewer paths that resemble the last decade’s gap.
The Performance-Chasing Problem: When Investors Suddenly Want More International Again (29:21)
I share a client interaction that felt like a sentiment shift. After years of hearing questions about why international stocks belong in a portfolio, I had a conversation in 2025 where a client wanted to rotate away from U.S. stocks and toward international. It’s a reminder that performance chasing can flip directions as soon as the narrative changes.
That’s where a process-driven approach earns its keep. A diversified portfolio is built for a future that no one can map in advance, and investors still need an allocation they can hold when leadership changes, headlines get loud, and regret shows up.
AI, Mega Trends, and Three Scenarios: Why Economic Upside Doesn’t Guarantee Stock Market Upside (30:05)
Kevin then describes Vanguard’s AI framing through a mega-trends lens. The conversation separates economic transformation from market outcomes, which is where many investors get tripped up. A technology can raise productivity across the economy while profits spread across competitors, customers, and new entrants.
He outlines three AI scenarios. In a bull case, AI’s transformation exceeds expectations and equity returns remain strong. In a base case, AI diffuses broadly and boosts productivity, while competition and creative disruption reduce the staying power of excess profitability. In a bear case, AI disappoints, earnings growth cools toward trend, and valuations compress after being priced for near-perfect outcomes.
The scenarios are presented as probabilities, and Kevin ties them back to why Vanguard’s 10-year U.S. equity expectations land where they do. The framework gives investors a way to think about the range of paths without turning AI into a single, all-purpose conclusion for returns.
Geopolitics and Markets: Why It’s Not a Direct Forecast Input, But Still Shapes Long-Term Premia (34:31)
Geopolitics comes up often in market commentary, and Kevin addresses it directly. Vanguard does not model a stand-alone geopolitical factor that drives a deterministic 10-year forecast. Short-term pricing responds to headlines, yet building a stable long-run distribution around geopolitical events is difficult to do in a consistent way.
Geopolitics still informs how long-run assumptions are interpreted, especially when looking at historical country return differences. Kevin uses an example comparing long-run averages across regions and notes how major historical events can distort what looks like a persistent advantage. That perspective feeds into how Vanguard thinks about long-term risk premia and steady-state assumptions.
The 2026 Signposts: What Would Actually Change Vanguard’s Conviction and Move the Outlook (37:48)
When I ask what could shift conviction in 2026, Kevin points back to the same driver that runs through the episode: how the mega-trend scenario weights evolve. AI’s trajectory matters, along with the broader tug-of-war between productivity gains, demographics, and fiscal pressures.
He also acknowledges the coexistence of short-term momentum and lower long-term expected returns. Investors can see continued strength in markets while a long-horizon forecast remains restrained. The discipline challenge is holding both ideas at the same time without turning either into a trade.
What Vanguard’s Capital Markets Research Team Is Focused on Next—and Why Ranges Beat False Precision (39:32)
We close with Kevin’s view into Vanguard’s research agenda. Part of it involves expanding model coverage and supporting multi-asset decision-making, along with keeping forecast methodologies aligned with the economics team’s evolving views on policy, inflation, and macro regimes.
A theme that stands out is ambassadorship. Vanguard spends time helping clients and advisors use the model in a way that matches its purpose. Publishing distributions supports that goal, because it makes uncertainty visible and gives investors a planning framework that can hold up through a wider set of market environments.
Resources:
- Learn more about Vanguard Capital Markets Model forecasts
The Long Term Investor audio is edited by the team at The Podcast Consultant
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