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Investing Specialists

Spooked About a Low-Return Environment? Don't Make These Mistakes

Low return forecasts aren't a reason to skip investing, but they do have an impact on saving and withdrawal rates and asset allocation.

Few responsible market watchers are predicting that Armageddon is nigh for the stock and bond markets. Instead, a more common viewpoint, from everyone from Vanguard founder Jack Bogle to the folks at Research Affiliates to the researchers at Charles Schwab, is that U.S. investors are apt to experience muted returns from the stock and bond markets for the next decade.

In a recent interview, Bogle pointed to simple mathematics to explain his forecasts. For stocks, he combines dividend yield (currently about 2% for the S&P 500) with projected earnings growth, which he expects to be about 5% over the next decade. He then gives that 7% return a haircut of 3 percentage points, to account for the fact that he expects price/earnings multiples--currently at rich levels relative to historic norms--to contract over the next decade, bringing his equity return forecast to just 4%. For bonds, Bogle uses current yields, which have historically been a good predictor of bond returns, for his forecasts; right now, high-quality corporate bond yields are about 2.5%. That translates into a roughly 3.5% return on a 60% equity/40% bond portfolio, and even lower for more conservative portfolio mixes.