Investors, take your finger off the panic button.
The markets are not going over a cliff, according to Vanguard Group CEO Bill McNabb. There will be no repeat of 2008 in 2016.
But the CEO of the biggest fund company in the world said investors need to focus on a more fundamental issue — the fact that better-than-decent returns from a diversified portfolio of stocks and bonds can't be expected over the next decade.
Since 1929, the classic 60 percent stock and 40 percent bond portfolio has averaged 8 percent annually. McNabb said that long-term performance will look good compared to stock market returns he expects in the next decade: 5 percent to 7 percent, at best.
"Stocks are pretty highly valued, and bonds you can project clearly over a decade. ... So when you do the math, you end up 2 percent lower on an absolute basis," McNabb said, speaking with CNBC's Bob Pisani at the Inside ETFs conference in Hollywood, Florida. "The message there is to reset expectations, and that gets to savings rates for people still accumulating [assets] and how you draw down in retirement."
Stocks are pretty highly valued, and bonds you can project clearly over a decade. ... So when you do the math, you end up 2 percent lower on an absolute basis.
Despite higher volatility and lower returns, 2015 was another record year for ETF flows, with roughly $242 billion in net inflows, an increase of about 10 percent. By comparison, mutual funds had $125 billion in outflows. There are now north of 1,600 ETFs and more than 70 ETF providers.
But ETFs have seen net outflows of $7.87 billion so far in January, and assets have fallen by 8.2 percent, according to XTF ETF experts.
McNabb said investor behavior so far this year has been more rational than might be expected amid the market volatility. "In terms of flows, we're seeing people be very diversified, and we are continuing to see flows across the board in stocks and bonds, which is a good thing."
He added, "It's very important to stay diversified and keep a long-term perspective, and so far, behavior is reinforcing that."
"This volatility may be with us for a while," McNabb said.
The Vanguard CEO said while people are concerned with volatility, there's only one way to deal with it: "Bluntly ... we ignore it. All the short-term noise."
Instead, he said, "Focus on longer-term goals" in a lower-return world.