In a recent interview with Morningstar’s Christine Benz, Jack Bogle outlined his views of return possibilities for stocks and fixed income over the next decade. Here’s what he had to say about equities:
My reasonable expectations for the coming decade–as in my new book, The Little Book of Common Sense Investing, 10th anniversary edition just coming out–I’m pretty conservative. I look at the sources of returns, that’s all I do, and the fact that other people don’t do it that way doesn’t bother me in the slightest. I look at investment return and that’s today’s dividend yield, which is less than 2% for the S&P 500, and I look future earnings growth. While future earnings growth has averaged 5% or 6%, I’m looking for a lower future earnings growth, say 4%. I got my 2% dividend yield, there’s no arguing about that, and I’m guessing the earnings growth will be slower. So, that gives me a 6% investment return from the fundamentals of the marketplace.
Now the other part of it is not investment return, but what I call speculative return. That is valuations. If a valuation goes from 10 times earnings to 20, that adds 7% a year over a decade. It’s kind of amazing. We’re not in anywhere near that extreme territory, but I think valuations will probably take 2 percentage points a year off that 6, getting to 4.
Where does that come from? Well, we’re looking at a price/earnings multiple on the S&P. By my standards, past reported earnings, not by Wall Street’s standards, future operating earnings–there’s a big difference between the two–so, I have the P/E at about 25 right now. If it goes down to 18, we’ll lose a couple of points in valuation, which will take that 6 down to 4.
Read more of the interview here.