Bogle: Little Wiggle Room for Investment Returns
Given slim expected returns after expenses and inflation, buying low-cost funds and avoiding behavioral mistakes are critical, says the Vanguard founder and former chairman.
Given slim expected returns after expenses and inflation, buying low-cost funds and avoiding behavioral mistakes are critical, says the Vanguard founder and former chairman.
Benz: In the past, Jack, I've asked you to take a look at asset class return expectations. I was looking back to 2013; you were forecasting roughly 7% equity market returns.
Let's talk about your time horizon for the forecasts, how you arrive at them, and where you're ending up today.
Bogle: Well, first of all, I never forecast anything less than 10 years, because markets are driven, as I mentioned before, not only by investment return but by speculative return. In the long run, speculative return accounts for nothing. It goes like this on the line, but it ends up just where it was, at zero, just where it was 100 years ago.
Return is generated by earnings and dividends and more particularly, the dividend yield you buy … into today and the subsequent earnings growth.
So let's now look over the next 10 years. The dividend yield today is around 2%. Earnings growth could be 5%--that may be a little generous for the next 10 years--but that would give you a 7%, what I call, investment return or fundamental return. That forecast for the fundamental return, or investment return, [would be] reduced or increased by what happens to the speculative return. I can't see speculative return adding anything to that. I don't think we'll see higher multiples out there. We could see lower. But let's say that maybe in the next 10 years somewhere between 6% and 7% is a reasonable expectation. That's not a forecast--I don't really like to do forecasts--but you've got to start somewhere, and I like to start with the facts.
Benz: So you then haircut that by whatever your inflation rate is, your tax rate…
Bogle: You would have to do that.
Benz: …and your investment costs. And that means not a great return necessarily.
Bogle: No, absolutely not. Let's assume it's 7%; that's on the generous side. First, let's take inflation out. Inflation could be as low as 1.5% or 2%. So that 7% becomes … a 5% real return. And we don't know about inflation. That's why I start always with the current numbers and nominal returns. But inflation would take it down to 5%.
Mutual fund all-in expenses--I wrote this up in an article in the Financial Analyst Journal earlier in the year--are not just expense ratios, but transaction costs, marketing costs, all those other things that aren't usually counted. They look to me like about 2.25% a year, let's call that 2%. So now we're at 3% [returns adjusted for inflation and fund costs].
If you've got a financial advisor, you may be paying him 1% a year. That gets us down to 2%. And then we know that investors, because they jump back and forth based on performance, usually lag the returns of their funds by about 2% a year. I think Morningstar says 2.5% actually. So you're down to zero.
So what can an investor do? Well you can't change the cost of living CPI. You can hope it doesn't go up too much. (Well, if it went up, maybe the earnings would grow faster. It's kind of two-sided coin there.)
You can avoid all the foolish ins and outs chasing winners, and at least get your bad investment behavior, if you will, out of the picture, and buy low cost funds. If an actively managed fund can bring you in around 2%, index funds are now … Vanguard index funds I guess are the lowest, but there are many other inexpensive index funds that charge 0.04%-0.05%. So, instead of taking 2 basis points out of that 5% real return, you pay … 0.05%, and so you're going to get a 4.95% return on the 5% market.
So you can do those things and you can also have your own time horizon be 10 years, and don't look at the market for that entire period. Don't look it for the rest of your life when you get retirement plan statements.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals
and individual investors. These products and services are usually sold through
license agreements or subscriptions. Our investment management business generates
asset-based fees, which are calculated as a percentage of assets under management.
We also sell both admissions and sponsorship packages for our investment conferences
and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.