Jack Bogle: Greatly diminished stock returns ahead

Vanguard founder Jack Bogle warns stock-market returns are likely to disappoint over the next decade.

The veteran investment master says investors might see stock returns as low as 4 percent before inflation, about half the level factored into many financial plans. That suggests it would take twice as long to build the nest egg that many are planning.

Jack Bogle (Mark Lennihan/AP, file)
Jack Bogle
Mark Lennihan/AP, file

Bogle's conclusion is based on an analysis of price-to-earnings ratios, a common stock valuation metric, and dividend yields. Stock prices are based in large part on expectations of corporate earnings growth, which Bogle says won't be as strong in the future.

"I don't think there's any way around that conclusion," he told Morningstar in a recent interview.

The market's rebound since the latest recession is not sustainable, said John Rekenthaler, Morningstar's vice president of research, who noted the market's post-recession surge has been one of the strongest in history. He calls Bogle's prediction "realistic" and "better than it sounds" provided inflation stays in check.

Concerns about the slowing Chinese economy and the timing of interest rate hikes by the Federal Reserve kept a lid on equities in recent weeks. On Friday, the S&P 500 (SPX) regained its positive stance for the year as investors embraced better-than-expected earnings from the technology sector.

Bogle, however, argues against pulling out of the stock market entirely, saying other asset classes could leave investors in even worse financial shape. "You really don't have a cash option because the return on a money market fund is 0.1 percent or something like that, just barely above zero. The return on money that's in that mattress of yours is zero. So, invest we must."

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    Jonathan Berr is an award-winning journalist and podcaster based in New Jersey whose main focus is on business and economic issues.