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Vanguard Founder Bogle: Stock Returns to Disappoint Over Next Decade

Vanguard Founder Bogle: Stock Returns to Disappoint Over Next Decade
Vanguard Founder Jack Bogle (AP)

By    |   Tuesday, 27 October 2015 06:37 AM

Vanguard founder Jack Bogle warns stock-market returns are likely to disappoint over the next decade.

“Investors might see stock returns as low as 4 percent before inflation, about half the level factored into many financial plans. That suggests it would take twice as long to build the nest egg that many are planning,” CBS MarketWatch reports.

“Bogle's conclusion is based on an analysis of price-to-earnings ratios, a common stock valuation metric, and dividend yields. Stock prices are based in large part on expectations of corporate earnings growth, which Bogle says won't be as strong in the future,” MarketWatch reported.

"I don't think there's any way around that conclusion," Bogle told Morningstar.

Bogle, however, argues against pulling out of the stock market entirely, saying other asset classes could leave investors in even worse financial shape.

"You really don't have a cash option because the return on a money-market fund is 0.1 percent or something like that, just barely above zero. The return on money that's in that mattress of yours is zero. So, invest we must," Bogle said.

“We've got a 4% return for stocks — maybe a little bearish, but we just don't know — and a 3% return for bonds. That's a 3.5% return on a balanced 50-50 portfolio,” Bogle said.

“You're talking about a really tough decade for equity investors. I don't think there's any way around that conclusion. My numbers may be wrong; but I think when investors are doing their financial planning and their IRAs or their 401(k)s, predicting a 7.5% or 8.5% return is just silly,” he said.

“Let me add: How can an individual investor, under these circumstances, be so dumb as to think that 7.5% might be possible? You probably figured out what I'm going to say next. That's what the smartest pension-fund managers — corporate, state, and local — are using for their assumed returns in their pension plans, 7.5%. It's just not going to happen," Bogle said.

"Another big concern is that I suppose it could reach — and maybe is likely to reach — crisis proportions, because these funds are around 65% funded. And as we go into the great future, what they're doing is that assuming a return far higher than they will get,” Bogle said.

“I won't say they'll get only 1.5% or 2% or 3%. But I will say they are not going to get anywhere near 7.5%. I just don't know how it can keep going on. The reason it does in corporate America is that the expenses for the corporations would go way up if they used, say, a 4% or 5% number. And in state and local government pension plans — a huge part of the pension-plan market — what we'd be looking at there is either reduced benefits or higher taxes,” Bogle said.

But he said investors don’t really have better options.

“Not investing will guarantee you will have no retirement plan. I don't think that's the aim of most families in America. You have to take the markets for what they are,” Bogle said.

Meanwhile, the market's rebound since the latest recession is not sustainable, said John Rekenthaler, Morningstar's vice president of research, who noted the market's post-recession surge has been one of the strongest in history.

He calls Bogle's prediction "realistic" and "better than it sounds" provided inflation stays in check, MarketWatch reported.

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Over the next 10 years, investors may see stock returns as low as 4% before inflation, well below the level assumed in many financial plans, says Vanguard founder Jack Bogle.
jack bogle, investors, stocks, vanguard
Tuesday, 27 October 2015 06:37 AM
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