http://news.morningstar.com/articlenet/article.aspx?id=718910&SR=Yahoo
...6-8% doesn't sound bad to me, in light of August's abysmal behavior...from the founder of Vanguard and oracle of Bogleheads:
Tough Decade Ahead for Stocks, Says John Bogle
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.
By Morningstar.com | 10-23-15
Morningstar director of personal finance Christine Benz recently sat down with John Bogle at the annual Bogleheads Conference. During the interview, Bogle shared his return expectations for the market. Below is an excerpt from the conversation.
Christine Benz: One of the topics we always cover at this conference is your expected return forecast for various asset classes. Let's start with U.S. equities.
John Bogle: For U.S. equities, I have a simple formula. I divide returns up into two segments: One is investment return and the other is speculative return. Investment return is the present dividend yield--a little over 2%--and the earnings growth that follows. And I think it's going to be a little bit of a push for that earnings growth to get to 6%--but I'm going to use 6% anyway. That would be an 8% investment return on stocks.
Speculative return depends on whether the market's P/E ratio goes up and pumps up that return or goes down and deflates it. The P/E from the perspective of past reported earnings--GAAP earnings, as we say--is at about 20 times. Wall Street looks at it through forward earnings, but forward expected earnings. They're using about a 17 P/E, and I'm using about a 20. I'm going to stick to my guns. To go from 20 to 17, that would be about a 2% annual loss. I think the best we can expect is 8%, which is 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. In that case, you'd have an investment return of 2% dividend yield and 5% earnings growth for 7%, minus 3% for speculative return. That would be a 4% return for stocks, and that's not a very good number.
With bonds, the mathematics is a little bit different. If you look at the current yield, you can probably put a pretty good bond portfolio together. I bet you almost have to do better than the 2% or 2.2% on the 10-year Treasury. That's a high-quality, relatively short, intermediate-term bond. But if you went a little bit longer--maybe instead of 10 years, you went out to 12 years--and had a bigger corporate position, which I think most people should have, you might be able to get a 3% yield out of the bonds. So, 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.
An important caveat: That's a nominal return.
Benz: So, not inflation-adjusted.
Bogle: I think you can probably pretty accurately use a 2% inflation number for the next 10 years. So, all of a sudden, a 3.5% return becomes a 1.5% return.
Then, of course, we have mutual fund expenses. People think expenses are accurately measured by the fund's expense ratio. But there are also portfolio transaction costs. Funds turn over at a very rapid rate--over 100% a year. That's going to cost maybe another 80 basis points in return. We also have a cash drag. Funds have a cash position, and in 10 years that's going to be a drag on returns, in all likelihood. So, we're now up to another 1% reduction.
Read more: Fund Expenses: What Are You Paying For?
And then there are sales charges and RIA fees--I'll just use a little number there, like 0.5%. We can easily add 1.5% to an expense ratio of 1%. That's unweighted, in fairness. So, that's 2.5% that comes out of what you had left--which was, I guess, 3.5% minus 2%, so 1.5%. Now we're down to minus 1%. I have left out taxes, which is another consideration outside of tax-deferred retirement plans. But on those kinds of returns, they're probably going to be maybe 100 basis points.
You're probably getting worn down, Christine, but I've got one more thing to mention, and that is investor behavior. Morningstar data show that the gap between the returns that funds report and the returns investors realize is around 1.5%, because investors tend to buy hot funds and switch at the wrong time, or get out of the market at the wrong time and back into the market at the wrong time.
Read more: Mind the Gap 2015
All in all, you're talking about a really tough decade for investors.
Benz: Given your fairly pessimistic forecasts for equity and bond returns, as well as the way costs can chip away returns, why bother investing? Is not investing the answer?
Bogle: Well, 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. You really don't have a cash option because the return on a money market fund is 0.1% or something like that, just barely above zero. The return on money that's in that mattress of yours is zero. We will have some inflation, too. So, invest we must. The returns will be, I believe, above zero--well above zero. And I could be wrong, by the way.
The one thing I like about my system is if you think I'm wrong, don't argue with me; put your numbers in. You start with a 2% yield--you can't change that. You can say Bogle is crazy; earnings are going to grow at 10%. I can't say that's wrong. It's beyond historical precedent in most ways, but you can put it in. Then, you're at 12%. You say that you think the P/E is going from 20 to 30. That may seem absurd to us. But that's probably 3.5% a year more. All of a sudden, we're at a 15.5% market return. If you want to be bullish, use that.
But if I'm wrong, if I'm too low, if I'm too conservative--and I've always taken the conservative line--that means you're going to save too much and you're going to have too much (if there is such a thing) in your retirement plan when you get to age 65 or 70 ... or 86.
Posted by: elchang_48@yahoo.com
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