Bogle: Stocks Should Outpace Bonds
VIDEO: The Vanguard founder says stocks could earn about 7% in the next decade versus 4%-5% for bonds, but there will be much turbulence along the way
In the fourth installment of a series of articles, Vanguard founder and former chairman Jack Bogle explains to Morningstar.com Editor Jason Stipp why he believes stocks will outpace bonds over the next decade. To watch the previous videos, click on the relevant title:
Bogle: Old Principles of Asset Allocation Hold
Bogle: I'm Nervous About the Fixed-Income Markets
Bogle: Don't Peek in Volatile Times
Jason Stipp: Mr. Bogle, we spoke to you last year at the Morningstar Conference about some of your return expectations for the stock market, and we have seen, since then even, continued run up in the market overall from year ago levels. And you at the time had pretty moderated expectations for the stock market.
What would you say investors should have on their radar as far as return expectations today versus a year ago?
John C. Bogle: Well, I'll first say, nobody knows, but there are sound bases for realistic expectations about future market returns.
Number one, the future returns in the bond market over a decade. Let's look at decade, because there's no point in looking any shorter than that. The future returns for bonds is very heavily shaped by the current interest rate. And if bonds are now yielding around four and a half percent, some package of Treasuries and corporates, that has a 90 percent correlation with the return you'll get in the next 10 years. That shouldn't be very surprising to anybody, because bond returns are generated not by capital appreciation, but by interest coupons. So if you look for say four and a half percent over the next decade as a realistic expectation, that would give you about a 60 percent profit, a 60 percent total increase in capital.
Now, let's go to the stock market. Well, here it's more complex, but the principles are the same. The dividend yield today is around two and a quarter percent.
From these levels of earnings--whatever they are, because there's a lot of cheating going on in corporate America about earnings, a lot of focus on operating earnings, which are of course higher than reported earnings, which have all those write ups in them--but whatever it is, I think earnings might be able to grow from these levels way above the long-term norm, which is around five percent to maybe six or seven percent.
Let's use seven and say the investment return, that's the dividend yield, plus the earnings growth might be as high as eight or nine percent. I look for price earnings multiples which are the source of speculative return, which can add or detract from that investment return. Nobody knows what those P/E's will do in the next decade, but I'd guess they'd come down a little bit, maybe taking that eight or nine percent return down to say seven percent.
So that would be my outlook for reasonable expectations for stocks in the next decade. So at seven percent, as you well know, that will mean you'll get a hundred percent increase in your capital. So stocks should get the nod, but only if you can afford to fight your way through the turbulence that you will see in this next coming decade, and if it's not today, it's gonna be tomorrow or a week from tomorrow or a month from tomorrow.
And so you want to keep your behavioural negatives out of your investment programme to the extent you can, and so while stocks I expect will do better, it's not guaranteed, and you need a little protection, a little anchor to windward, a little dry powder, to keep you from making foolish mistakes along the way.
