Bogle's 10-Year Forecast

[petershk]

Right. And that's where I think Bogle (and Buffett) make sense. Bogle paints a pessimistic picture, admits he could be totally wrong and then says if you think you can stay out and get back in when it's good again you're statistically going to do even worse. So maybe you change your allocation a little.

Buffett is permanently optimistic on the US economy. He says all the time that in 10-20 years the market will be much, much higher. How and when and what along the way. No idea.

He then proceeds to invest in a small number if companies (compared to VTI) with great conviction.

Neither of then does what guys like hussman do. Have compelling theories about why what they think will happen is almost certain and make investment decisions around it. That's what most of us (including me) naturally tend to do. When I look at my results compared to just simple indexing... I kinda suck at it

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[walkinwood]

.... How and when and what along the way. No idea.

....

And imho, that's the most important aspect for most people here. Given any 10 year projection, people in accumulation mode will hope that the market dips now and comes roaring back just in time for them to retire. Those in the decumulation phase are hoping that the market soars now and if it has to come down, it does so in the waning years of their life.

I think Bogle's 'predictions' are good for some back of the envelope planning for what to expect your current stash to do in 10 years, but doesn't say anything about the performance you can expect for moneys you add to your portfolio in the intervening years, or the performance of your current portfolio if you're withdrawing from it.

 

[razztazz]

Quite frankly I think what they're all suggesting, just like Grantham, Hussman etc., is that the SP500 should trade around 1400 or thereabouts. They expect reversion to come about by way of a major correction.

This is hardly a gloom & doom scenario. I don't now what Bogle really means because he won't, as someone else posted, actually get specific.

If the "real" SP500 value is 1400 that's less than a 30% correction from current levels and there's no reason to think "when" it does that it will stay there for an indefinite period of time

 

[bclover]

Have no idea whether he is right or wrong but what strikes me is how we are always searching for the oracle, the wizard, the old wise one with the answers. Even though he has built his company on the premise that no one can predict the future, which company, which sector, etc. will do best, we still ask him to predict the future. Just seems a little strange to me.

Now there is no argument from me that we should prepare expecting the worst, and maybe be pleasantly surprised when things turn out better than expected. His arguments make sense, but one could equally make the argument with so much of the world exiting poverty and becoming consumers, and with unprecedented productivity potential (think robotic cars, manufacturing automation) and with all the potential of new discoveries (Recombinant DNA, medical advances, etc.) that we equally have the potential for profound growth.

I have great respect for Bogel and what he has done almost single-handedly to improve the investment options for normal people, but sometimes I think, we expect a little too much from our heroes.

Well said.

 

[bclover]

Ok, I will play. Let us step back 10 years instead. It is 2005. Who saw Tesla becoming worth nearly half the market cap of Ford? Who thought Nokia would be a 2 bit rubber boot company and Apple would be nearing a trillion dollar market cap? Radio Shack bankrupt? (Ok, I give you that one...everyone saw that coming). Uber taking over taxi cab driving? Netflix being worth twice the value of CBS?

Yeah, if you can see 10 years ahead, you are much better than I am.

lol

"ain't it the truth" said in her best "Cowardly lion" voice

 

[NW-Bound]

Suppose Tesla grows to take over all market shares from Detroit. How big can it be? Can it grow even larger and become an even bigger portion of US GDP? How long can a company grow at a rate faster than the GDP? Should we leave some room in the GDP for other hot sectors like biotech and smartphone makers too?

I would not mind if Bogle turns out to be too pessimistic. But do you think it is prudent to plan your retirement, particularly for young ER's in the 40s or early 50s, to use outsized projection of the pre-2000 return?

S&P Return from 1/1/1983 to 1/1/2000: 12.51% nominal, 7.67% real (after inflation), dividend reinvested.

S&P Return from 1/1/2000 to 12/31/2014: 4.20%/yr nominal, 1.91% real, dividend reinvested.

What's for the next 10 years? I side with Bogle and other economists, and say that it is going to be somewhere between the above 2 numbers. Remember that the 1983-2000 return number benefited from P/E expansion which added around 3%/yr. This P/E expansion can happen only once, and we are now hoping that it will not reverse.

By the way, the difference in nominal and real returns of the stock market in the bull years of 1983-2000 was huge, and corresponds to an inflation rate of 4.84%/yr!

So, I checked another Web site, and indeed although inflation kept on dropping from 1/1/1983 to 1/1/2000, the cumulative inflation still ran 121% (or 4.8%/yr annualized over the 17 years), and the dollar lost 55% of its purchasing power over that period.

 

[purplesky]

Yellen and Buffet have both expressed concerns about the falling(ok flat) wages for the shrinking middle-class.

Interest rates will remain very low and consumers without income cannot buy enough Coke and DQ Blizzards to keep old Warren happy.

Bogle is cautious because he knows the markets on many levels are being manipulated and the market makers are driving earnings. Its sure not real consumer spending.

 

[Markola]

My takeaway from this good debate is that some respected investors, including Mr. Bogle, confine their analysis to U.S. markets, which is limiting. I understand his reasons but am not convinced to do that when there is good news to capitalize on in how poverty is declining as consumption increases globally as emerging economies, well, emerge. Yet, global population will continue to grow in my lifetime, meaning lots more customers despite mature economies' anemic population growth. I'm not smart enough to predict which countries will benefit the most so I hedge the risk by buying the global economy in a single fund of index funds, i.e. a risk-appropriate Vanguard Life Strategy Fund. My macro strategy to by the whole casino could well prove wrong but of course "You places your money and you takes your chances."


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[Sonic]

As investors looking forward 10 years what do you see?
This economy is changing fast. We now have a millennial generation who are delaying marriage,delaying having kids, and they are not able to buy a home.
Not to mention the 7 year car loans.
Think about how this broke generation has and will change the Xmas shopping season for retailers.

This is touches on one my concerns. With lower returns, many boomers will be forced to sell off assets. Who is going to buy those assets? Millennials? Certainly not at current prices. Priorities have shifted for upcoming generations for whom the American Dream looks different than in generations past. As you mentioned, a large number of them are struggling, and having the money to invest and support our retirement like many of us have done for our parents generation is not their reality. Of course this won't be of major concern immediately but it will be a factor in the coming years.

 

[petershk]

Re: international.
I think the point he makes (and others) is that the country of origin of a company is no longer a good indicator of international exposure and many of the biggest US companies derive much if their growth and revenue from those growth markets. So by investing in Apple, coke, yum, Pepsi, Disney you are very well exposed to developed and developing markets while avoiding the risks associated with local companies. I agree it's a subset but its totally possible that over the next 50 years Starbucks and coke benefit more from the rise of consumers in developing countries than their local brands... But who knows .

In any case... If you invest in large us multinationals you have pretty decent international exposure.

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[Christine]

Most of the employment population ratio decline is behind us, and it appears the boomer demographic impact is also tapering off. Going forward, the US labor force will once again begin to increase, albeit at a low rate. Still, this points to a period of renewed growth in internal aggregate demand and a positive outlook for the US economy. It should probably also lead to real increases in the median wage.

Some of this both in the US and Europe has been caused by outsourcing production to cheaper countries like China and India. Now I'm reading about production costs in China going up quite a bit thanks to higher wages and other issues. And an old colleague of mine spoke of increasing cost of outsourcing to India.

So what would it take for companies to start moving factories back home? How far are we from this scenario? It would create an increased demand for labourers in US and Europe. Eventually wages would go up and then interest rates?

But like many of you say - nobody knows.

 

[Totoro]

So what would it take for companies to start moving factories back home? How far are we from this scenario?

It's already happening in niche manufacturing and high-tech.

Since the wage gap is getting smaller the value of doing everything in house with short supply chains is increasing, especially for innovative companies. An extreme example is SpaceX.

On the bottom end of the value scale manual labor is first jumping to other countries. Think China outsourcing to Vietnam.

In other areas there is no coming back though. The manufacturing regions in China have such a large installed base that there are enormous eco-system and scale benefits of producing there.

Talking about large scale consumer products (Foxconn). Those won't move back, but they will automate to lights-out factories in short order. Foxconn specifically is automating large parts of their factories already.

 

[ripper1]

Harry Dent has been making the "demographic cliff" argument for years.

He is actually quite convincing... much of what he describes makes a lot of sense. But from my experience... you can't expect or predict market reactions to make sense.

If you want to really depress yourself read his predictions. He is calling for the DOW to hit 6000 in the next 20 months.

If not then...then the next 20 months. Or maybe in the next five years or....

 

[audreyh1]

Some of this both in the US and Europe has been caused by outsourcing production to cheaper countries like China and India. Now I'm reading about production costs in China going up quite a bit thanks to higher wages and other issues. And an old colleague of mine spoke of increasing cost of outsourcing to India.

So what would it take for companies to start moving factories back home? How far are we from this scenario? It would create an increased demand for labourers in US and Europe. Eventually wages would go up and then interest rates?

But like many of you say - nobody knows.

Already has been happening for a few years now.

 

[audreyh1]

3.5% nominal return for a 50/50 portfolio, under the conservative assumptions that the P/E ratio drops to 15 and bond rates remain low.

But I don't think you can turn around use an average inflation of 2% in the same scenario. 1% would be more reasonable.

So maybe 2 to 2.5% real depending on your fees.

 

[Fermion]

I am of the mind that the real dumb person is the one who is making a 10 year forecast. A bit ashamed of Bogle here. Maybe early onset something?

 

[NW-Bound]

To make a precise and detailed prediction, yes, one would be foolish to do so. But to state what is most likely among the realm of possibility, no.

For example, people have been saying SS will run into trouble and will need more tax and/or less benefits. Are they crazy for saying so?

 

[samclem]

I am of the mind that the real dumb person is the one who is making a 10 year forecast. A bit ashamed of Bogle here. Maybe early onset something?

Don't we all make forecasts? How else set expectations and decide pn a target AA? And, in fairness, he hedged plenty when he gave his opinion. A 10 year forecast is a lot more defensible than a one year forecast.

 

[Fermion]

To make a precise and detailed prediction, yes, one would be foolish to do so. But to state what is most likely among the realm of possibility, no.

For example, people have been saying SS will run into trouble and will need more tax and/or less benefits. Are they crazy for saying so?

If they go so far as to call people dumb or stupid for expecting SS to be there in the future when it has been there in the past for 50+ years, then yes, they are a bit crazy.

He didn't just say he thinks the market will be lower for the next 10 years. He actually called people dumb to think otherwise.

 

[NW-Bound]

I will have to read the interviews again. I thought Bogle said that return would likely be below the historical average, not that it would be negative.

Anyway, though I think Bogle is likely to be right, I will not mind that he turns out to be pessimistic. I want to set my expectation low, and reduce the risk of getting disappointed.

 

[Fermion]

I think we place too much faith in these larger than life investors. They can be wrong, sometimes very wrong.

Remember that guy Bill something? He called for much higher interest rates in 2011 and arranged a pretty big bond fund to profit from his predictions. He ended up being a bit wrong.

 

[tmm99]

I think we place too much faith in these larger than life investors. They can be wrong, sometimes very wrong.

I wonder if Bogle has been wrong a lot of times in the past? Just curious...

 

[NW-Bound]

Gross was making a very specific bet on the timing of the interest move, and yes, he lost big time.

But if one says that interest rate will be higher in the next 10 years compared to what it is now, will you say that it is likely?

 

[Fermion]

Gross was making a very specific bet on the timing of the interest move, and yes, he lost big time.

But if one says that interest rate will be higher in the next 10 years compared to what it is now, will you say that it is likely?

Yes, I would say it is likely. I would not call you dumb for arguing differently though. We have examples where interest rates have stayed low for long periods after all.

 

[NW-Bound]

It is true that things don't always work out the way we think. Heck, I would be rich otherwise.

But while it is not prudent to make plans according to a precise course of events, we all think about what is likely to happen and act accordingly, but after hedging in case it works out differently.