Bogle's 10-Year Forecast

[misanman]

Saw this Jack Bogle interview this morning and thought it would be of interest to those who are planning for retirement in the short term.

Bogle: Tough Decade Ahead for Equity Investors

So, 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. 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.

 

[BBQ-Nut]

And bonds aren't predicted to do much better as well.


What's a couch potato investor supposed to do?

 

[Fermion]

Pretty negative view, but at least a 4% SWR survives a 1% real return for 29 years before hitting zero.

Considering there would be bankrupt cities and states all over the place in this scenario by year 15, I think it is a minimal concern.

 

[steelyman]

Another interesting interview with and viewpoint from John Bogle. Thanks for posting. I thought his comments about realities surrounding interpreting expense ratios were especially insightful to hear.

 

[GrayHare]

"It's tough to make predictions, especially about the future."

Few correctly saw the previous downturns and upturns coming. It's no different this time.

 

[FUEGO]

Pretty negative view, but at least a 4% SWR survives a 1% real return for 29 years before hitting zero.

My thoughts are along the same lines. A 4% nominal return against 1.5% inflation* wouldn't be horrible for the next ten years. Starting in year 11, we would be back to a pretty average PE ratio (using Bogle's forecast) so back to solid long term equity returns that exceed 4%.

Though I'm a little skeptical of the -3% speculative return Bogle forecasts. Yes, there might be mean reversion, but we might also stay at the same PE ratio as now.



* about what the markets think inflation will be based on 10 yr treasury yield minus 10 year TIPS real yield)

 

[pb4uski]

My thoughts are along the same lines. A 4% nominal return against 1.5% inflation* wouldn't be horrible for the next ten years. ...

+1 My deterministic plan is based on a 2.5% real return.... but 5.5% investment returns less 3% inflation over a long time horizon.

 

[target2019]

The video that follows is short. Very clear that he is not a fan of int'l for investing.

"Why Bogle Doesn't 'Do' International Investing"

 

[CaliforniaMan]

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.

 

[Fermion]

Nicely put CaliforniaMan.

It does seem funny that the hero who says you can't market time is making 10 year predictions that verge on market timing.

 

[NW-Bound]

I do not follow Bogle nor think he is a saint, but have seen him in the media for the last few years predicting low returns for stocks AND bonds. It's not the first time Bogle says this. Why do people act surprised now?

It's not market timing as much as having an opinion on the market valuation and the trend of the world and the US economy. If the outlook for all asset classes is equally lousy, where do you hide, and what can you do other than staying diversified? Bogle is not the only one of this opinion. Shiller and some other economists are of the same thinking that stock return will be lousy, and they don't agree much in other areas.

 

[Fermion]

It kind of is market timing if you are going to call people foolish for thinking they can get 7% returns (well below historical average for the stock market) over the next decade.

He is essentially saying you could feel comfortable writing one year out of the money covered calls on your index funds because the market is not going to moving up much at all over the next decade.

 

[CaliforniaMan]

I do not follow Bogle nor think he is a saint, but have seen him in the media for the last few years predicting low returns for stocks AND bonds. It's not the first time Bogle says this. Why do people act surprised now?

It's not market timing as much as having an opinion on the market valuation and the trend of the world and the US economy. If the outlook for all asset classes is equally lousy, where do you hide, and what can you do other than staying diversified? Bogle is not the only one of this opinion. Shiller and some other economists are of the same thinking that stock return will be lousy, and they don't agree much in other areas.

I agree that many, maybe most are talking about lower returns going forward. Seems to me that it might have now even become the "conventional wisdom."

 

[jebmke]

And bonds aren't predicted to do much better as well.


What's a couch potato investor supposed to do?

Real rate on 10 year bonds is in the 50-75bp range. That is probably not a bad starting point for expected returns on bonds. I use zero because it simplifies my forecasting for RMDs and my average duration is low.

Looking on the bright side, inflation is very low and that is good for my non-COLA pension which doesn't start for another 2 years.

 

[REWahoo]

Yep, this isn't the first time Bogle has made predictions of limited future returns. From three years ago: http://www.early-retirement.org/forums/f28/bogle-on-future-returns-63470.html

 

[purplesky]

As investors looking forward 10 years what do you see?

There is no real true growth in our economy. Its all about flat wages and wages are actually moving backwards now.

Bogle knows the economy overall is at a standstill and so does the Fed.

So a 4% return in a diversified portfolio sounds about right for the next decade.
But if you get aggressive(25%of your portfolio) with ETFs and individual stocks you could do better with momentum and swing trading solid large cap high volume stocks like AAPL and Sbux. BUT IT DOES REQUIRE WORK.

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. The quarter that is sink or swim for many retailers.



Financial engineering and the market makers are manipulating earnings. Its not true consumer spending as it should be.

I think Bogle and Buffet and Yellen are all seeing the same picture. Expect the worst and hope for the best.

Its crazy. The stock market really is like a casino. Its almost comical.

 

[ejman]

Well, Bogle has certainly made a compelling argument based on the "known unknowns" that can be guessed at but I'm pretty sure there will be "unknown unknowns" to completely upset the apple cart one way or another...

 

[Fermion]

As investors looking forward 10 years what do you see?

There is no real true growth in our economy. Its all about flat wages and wages are actually moving backwards now.

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.

 

[mickeyd]

Nobody knows nothin.

 

[youbet]

Pretty negative view, but at least a 4% SWR survives a 1% real return for 29 years before hitting zero.

I think there's a better way to phrase that.......

At least a 4% WR survives a 1% real return for 29 years before hitting zero all the time and for additional years most of the time.

 

[purplesky]

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.

Actually you can see 10 years ahead. Or fun to try.

Will Tesla be able to build and deliver enough cars to make big profits and survive low oil prices? Will Uncle Sam continue to give money to Elon Musk? Tesla will probably be purchased?

Will we be buying the iPhone 16 in 10 years?

Uber drivers will be classified as employees and that fantasy hipster millennial business model will be exposed as the independent contractor scam it is. Just like FDX ground. After insurance and vehicle depreciation they will realize they are just employees.

Bogle is a smart guy. Its all about growth. Without wage growth and a strong middle-class you can only financial engineer the markets so much.

This latest stock rally is a great example of the disconnect between main street and Wall street.

People get mad and defensive when they hear the American Dream is dead.
Bogle knows it is. So do Buffet and Yellen.

So 4% is a safe bet Bogle return looking at main street.

 

[purplesky]

Nobody knows nothin.

Just like a Casino.

 

[NW-Bound]

It kind of is market timing if you are going to call people foolish for thinking they can get 7% returns (well below historical average for the stock market) over the next decade.

He is essentially saying you could feel comfortable writing one year out of the money covered calls on your index funds because the market is not going to moving up much at all over the next decade.

I am seriously thinking about doing that, starting with a portion of it.

I agree that many, maybe most are talking about lower returns going forward. Seems to me that it might have now even become the "conventional wisdom."

Well, Bogle has certainly made a compelling argument based on the "known unknowns" that can be guessed at but I'm pretty sure there will be "unknown unknowns" to completely upset the apple cart one way or another...

It is true that just because all experts agree, they cannot be all wrong.

That's my only hope.

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.

Some individual companies prosper and some go bankrupt. That's hard to predict. Good stock pickers can always do well. But the overall US economy and that of the world have more constraints and some boundaries can be expected.

The historical market performance is great because it includes the bull years of 1980-2000. We had an unprecedented P/E expansion. This P/E expansion cannot be repeated.

If the currently high P/E stays, the market performance is already going to be lower than the past, but still OK. I can live with that. Perhaps the P/E has reached a "permanently high plateau", to borrow from Irving Fisher.

In a past interview, Bogle talked of possible P/E contraction. Now that's going to hurt. Shiller also had the same apprehension when he talked of PE10 reversion to the mean. I surely hope that will not happen.

 

[UnrealizedPotential]

I think in order to predict market returns going into the future one thing one must be able to predict is World events and the impact that will have on earnings and the World itself. It is just too hard to do IMO.

 

[mathjak107]

I think there's a better way to phrase that.......

At least a 4% WR survives a 1% real return for 29 years before hitting zero all the time and for additional years most of the time.

not according to michael ,kitces work it doesn't. it takes a 2% real return average over the first 15 years of a 30 year time frame to support a 4% withdrawal rate inflation adjusted .

https://www.kitces.com/blog/What-Returns-Are-Safe-Withdrawal-Rates-REALLY-Based-Upon/