Vanguard CIO: Beware Bond Bubble

The outlook for stocks appeared "reasonably optimistic" over the long-term, even when compared to bonds, Vanguard Chief Investment Officer Gus Sauter said Thursday on CNBC.

"We think they have reasonable return prospects over a 5- or 10-year time horizon," he said. "Quite honestly, we're more concerned about bonds. We do think there's a bubble in the bond market, not necessarily that it will burst in the next year or so, but at some point the bond market's going to experience some difficulty.

"We think the spread between the expected returns between stocks and bonds are historically wide. Stocks are, really, quite cheap relative to bonds at this point."

On "Fast Money," Sauter also said that volatility was expected ahead of a budget deal in Washington to avoid the so-called "fiscal cliff," the tax hikes and spending cuts that would be triggered if no agreement is reached.

Sauter also said that he has seen that "a lot of strength on the stock side is in index funds, and part of that being in ETFs."

Actively managed funds were seeing net outflows as investors sought lower-cost options, he added.

Sauter, who was scheduled to retire from his position at Vanguard, shared some advice for investors.

"I think it would be to really focus longer-term. There is so much noise going on all the time. Trying to predict what's going to happen in the future is impossible. Who knows what's going to happen with the 'fiscal cliff.' Nobody wants to try to predict Washington," he said.

"Focus longer-term and establish your asset allocation, your portfolio based on your needs, your own time horizon, your own risk aversion. Don't get caught up in the moment because invariably investors who do that get whipsawed."

Trader disclosure: On Dec. 20, 2012, the following stocks and commodities mentioned or intended to be mentioned on CNBC's "Fast Money" were owned by the "Fast Money" traders: Joe Terranova is long VRTS; Joe Terranova is long TJX; Joe Terranova is long AAPL; Joe Terranova is long GS; Joe Terranova is long SWN; Joe Terranova is long MS; Joe Terranova is long GLW; Joe Terranova is long DELL; Joe Terranova is long VZ; Joe Terranova is long XOM; Stephanie Link is long AAPL; Stephanie Link is long GS; Stephanie Link is long WFC; Stephanie Link is long SBUX; Stephanie Link is long YUM; Stephanie Link is long BBBY; Mike Murphy is long AAPL; Mike Murphy is short BAC; Mike Murphy is long C; Mike Murphy is long TGT; Mike Murphy is long YUM; Simon Baker is funds long CSTR; Simon Baker is funds long IWM; Simon Baker is funds long AAPL; Simon Baker is funds long AMAT; Simon Baker is funds long BAC; Simon Baker is funds long BBT; Simon Baker is funds long BBBY; Simon Baker is funds long BRCM; Simon Baker is funds long T; Simon Baker is funds long WFC.