Add John Bogle to the growing list of respected investors — GMO, Research Affiliates, William Bernstein, Ray Dalio, Robert Shiller, Cliff Asness — who believe investors should temper their expectations for future market returns in the coming decade.
From a recent interview with Morningstar:
So, I think the best thing we can expect–and this is higher than I’m going to talk about tomorrow–is that 8%, [or 2% dividend yield and 6% earnings growth]. But in fact, I don’t think earnings growth is going to be that good, and so I think the P/E could easily get to a more normal long-term range of 15. So, that would be 3% from that number. So, you’d have an investment return of 2% and 5% for 7%, minus 3% for speculative return. That would be 4% for stocks, and that’s not a very good number.
These are pretty intelligent people. They can’t predict the future, but it would be unwise to completely ignore their warnings. As they say, trees don’t grow to the sky. The one thing investors tend to forget over and over again is that markets are cyclical.
But it’s worth noting that timing is everything on these types of forecasts. Plus or minus a couple of years and you can go from looking like a genius to looking like a fool. Some well-known commentators have been calling for low single-digit returns since 2012 or so. Since then stocks are up more than 70%. Stocks were up 9% last month alone. That would be roughly one-fifth of the total return in Bogle’s ten year scenario. Even in a potentially low-returning environment, markets never move in a straight path.
Bogle is only talking about U.S. stocks here as he is generally against investing internationally. All of these forecasts for low returns in the U.S. say nothing about what the diversified investor can earn around the globe in foreign markets. The U.S. has been the world-beating stock market for some time now and that leadership can’t last forever.
However things shake out over the next decade, I think investors have to ask themselves a few questions when playing the expectations game:
- Does a change in my expectations for market returns require a change in my overall strategy?
- If I do change my strategy, do I understand the potential risks involved?
- Will trying harder and doing more really improve my results?
- What if I’m wrong?
None of these are easy questions to answer, but at the very least investors should take some time to consider the ramifications from making wholesale changes to their portfolio strategy simply because they expect lower returns in the future. It’s much easier to change your expectations than your investing process, but investors seem to feel much more comfortable changing the latter than the former.
Read here for more on Bogle’s thoughts behind this forecast:
Bogle: Tough decade ahead for equity investors (Morningstar)
What’s the Biggest Risk Right Now?