The past eight years have been great for stocks. However, Jack Bogle, the founder and former CEO of passive-funds pioneer Vanguard Group, thinks that investors should brace themselves for lower returns in the next decade – at least in nominal (before inflation) terms.
He notes that returns are dictated by both fundamentals and valuation, and both suggest that investors can expect lower returns in the future than the historical average. While earnings growth is currently running at around 6%, he’s “looking for a lower future earnings growth, say 4%”. Add to this the current dividend yield of 2%, and that “gives me a 6% investment return from the fundamentals of the marketplace”.
Meanwhile, the surge in sentiment means stocks have become far more expensive. While it’s probably unfair to say that they are in “extreme territory”, he notes that the price/earnings ratio for the market, at around 25, is above the historic average. If this ”goes down to 18, we’ll lose a couple of points in valuation, which will take that 6% down to 4%”. The only silver lining is that lower inflation means that “your real return will not have dropped as much as your nominal return”.
Despite this, Bogle still thinks that investors should stick with passive indexing. Indeed, he is very angry about Intercontinental Exchange’s “crazy” decision to launch a futures contract based around FAANG (Facebook, Apple, Amazon, Netflix and Google) stocks, as well as those in five other top technology companies. This “appeals to the trading instincts in investors” and “anything that gets investors into trading is a negative”, he argues. Overall, “trading is a loser’s game” where “the odds are very bad”.