Constructing Return-Target Portfolios for Asset Allocation

This paper is a technical report that outlines a framework for constructing return-target portfolios using a time-varying, valuation-aware approach to asset allocation. It discusses the implications of fluctuating ten-year annualized returns for stock and bond markets, which can significantly impact investors' ability to meet their spending needs. The report presents a methodology that utilizes forecasts from the Vanguard Capital Markets Model® to optimize asset allocation, emphasizing the importance of periodic adjustments based on market outlook. The authors argue that a static portfolio may not meet investment objectives, while a return-target portfolio increases the likelihood of achieving specified return levels. Additionally, the report distinguishes this approach from tactical asset allocation by focusing on longer-term capital market forecasts rather than short-term market timing. The document also examines how evolving asset valuations affect future return expectations and the necessity for investors to accept model risk in pursuit of their financial goals.