What Jack Bogle Expects From the Market

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Rowan Oak
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What Jack Bogle Expects From the Market

Post by Rowan Oak » Mon Oct 15, 2018 10:44 am

Christine Benz interview with Jack Bogle posted today 10/15/2018 on Morningstar:

https://www.morningstar.com/videos/8857 ... arket.html
Benz: Thank you for having me here, and I'm here for the Bogleheads conference. This is an annual event that honors you and your many contributions to the financial services industry. We've been doing these video interviews for several years now. It's kind of a tradition.

One thing I often ask you to talk about, because I think you have a very intuitive way of approaching it, is what you're expecting in terms of market returns for the equity and bond markets in the next decade?

Bogle: It hasn't changed from what we talked about last year very much. But there's a reality to the stock market--let's take that first. The reality is that the fundamental return, the dividend yield plus the earnings growth of companies, drives the long term return of the stock market. The only thing that gets in the way in the short term is a speculative return; are people going to pay more for stocks? Are people going to pay less for a dollar of earnings, in essence?

For example, if the price/earnings multiple were to go from 10 to 20 over a decade, that would be a 100% increase and be 7% added to the return each year, so it can be very substantial. And it also can be negative. If the P/E goes from 20 to 10, minus 7% or roughly 7% a year.

So where are we now?

The dividend yield is about 1.8%, less than 2%. I'm looking for future earnings growth of around 5%. I don't think we can do much better than that; maybe a lot better this year with the tax cut. Maybe a little bit better next year, too. But maybe 5%. So let's call the dividend yield 2, and 5 is 7. By my numbers, that's the investment return, 2% dividend yield, 5% earnings growth. That's a 7% return.

If the price/earnings ratio is to go down a little bit, I think 1.5% off that 7% return, which would be a 5.5% return on stocks over that period. That's a little higher than I've been using--maybe right, maybe wrong. I've usually been using about 4. But that's a ballpark. It doesn't really matter what we guess in these areas. There's no precision in any of this. Let's say in the 4% to 5% range is just for the fun of it, for stocks.

Bonds are a different matter, because there's only one driving factor for bonds in the long run, and that is the current level of interest rates. We use a combination of the 30-year Treasury, which is a little over 3%, and then we use 50% of that and 50% of the corporate rate, which is around 4.25%, and that's going to give you about a 3.8% let's say, but I'd round it to 4 ...
Last edited by Rowan Oak on Mon Oct 15, 2018 11:38 am, edited 1 time in total.
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linenfort
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Re: What Jack Bogle Expects From the Market

Post by linenfort » Mon Oct 15, 2018 11:24 am

Thanks.
bogleheads, don't knock state lotteries. They helped defund the mafia.

Random Walker
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Re: What Jack Bogle Expects From the Market

Post by Random Walker » Mon Oct 15, 2018 12:36 pm

With stocks 4-5% and treasuries 3%, seems like a whole lot of extra risk without much extra expected return for equity heavy portfolios.

Dave

columbia
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Re: What Jack Bogle Expects From the Market

Post by columbia » Mon Oct 15, 2018 12:44 pm

Random Walker wrote:
Mon Oct 15, 2018 12:36 pm
With stocks 4-5% and treasuries 3%, seems like a whole lot of extra risk without much extra expected return for equity heavy portfolios.

Dave
Some historical info. on the premium:
https://www.investopedia.com/ask/answer ... remium.asp

Ron Scott
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Re: What Jack Bogle Expects From the Market

Post by Ron Scott » Mon Oct 15, 2018 1:54 pm

Bogle: It hasn't changed from what we talked about last year very much. But there's a reality to the stock market--let's take that first. The reality is that the fundamental return, the dividend yield plus the earnings growth of companies, drives the long term return of the stock market. The only thing that gets in the way in the short term is a speculative return; are people going to pay more for stocks? Are people going to pay less for a dollar of earnings, in essence?

For example, if the price/earnings multiple were to go from 10 to 20 over a decade, that would be a 100% increase and be 7% added to the return each year, so it can be very substantial. And it also can be negative. If the P/E goes from 20 to 10, minus 7% or roughly 7% a year.

So where are we now?

The dividend yield is about 1.8%, less than 2%. I'm looking for future earnings growth of around 5%. I don't think we can do much better than that; maybe a lot better this year with the tax cut. Maybe a little bit better next year, too. But maybe 5%. So let's call the dividend yield 2, and 5 is 7. By my numbers, that's the investment return, 2% dividend yield, 5% earnings growth. That's a 7% return.

If the price/earnings ratio is to go down a little bit, I think 1.5% off that 7% return, which would be a 5.5% return on stocks over that period. That's a little higher than I've been using--maybe right, maybe wrong. I've usually been using about 4. But that's a ballpark. It doesn't really matter what we guess in these areas. There's no precision in any of this. Let's say in the 4% to 5% range is just for the fun of it, for stocks.


I think Bogle is saying he expects relatively lower earnings growth and does not expect significant speculative returns.

So people who disagree with his projections are free to do the math: Dividend yield + Earnings growth + Speculative return. And if you think he's too low you should really step up and tell us where you think the growth is coming from in this formula.

Take your number (Bogle's is 4-5%) and subtract inflation to get real.

My feeling is anything above 0% real (stocks and bonds combined) is gravy.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

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JoMoney
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JoMoney is TOO optimistic :)

Post by JoMoney » Mon Oct 15, 2018 2:17 pm

Ron Scott wrote:
Mon Oct 15, 2018 1:54 pm
...
So people who disagree with his projections are free to do the math: Dividend yield + Earnings growth + Speculative return. And if you think he's too low you should really step up and tell us where you think the growth is coming from in this formula...
Despite the tumult, growth on tangible equity for U.S. stocks over the last 18 years has been 6% (and that's been the norm pretty much across the post-war period).
Book value went from
Dec 31, 1999 $290.68
to
Dec 31, 2017 $826.52

Add 2% cash dividend on to that projected forward for 8% nominal, subtract 2% inflation ... back to 6% real

We're seeing growth now that we haven't since 2014. Price multiples could move back into alignment with the average over that period without any net change from the (+)growth (-)multiple change.
Economy looking good, tax bill will improve corporate margins and consumer spendable income, repatriation of foreign cash could spike growth.

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Ron Scott
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Re: JoMoney is TOO optimistic :)

Post by Ron Scott » Mon Oct 15, 2018 2:23 pm

JoMoney wrote:
Mon Oct 15, 2018 2:17 pm
Ron Scott wrote:
Mon Oct 15, 2018 1:54 pm
...
So people who disagree with his projections are free to do the math: Dividend yield + Earnings growth + Speculative return. And if you think he's too low you should really step up and tell us where you think the growth is coming from in this formula...
Despite the tumult, growth on tangible equity for U.S. stocks over the last 18 years has been 6% (and that's been the norm pretty much across the post-war period).
Book value went from
Dec 31, 1999 $290.68
to
Dec 31, 2017 $826.52

Add 2% cash dividend on to that projected forward for 8% nominal, subtract 2% inflation ... back to 6% real

We're seeing growth now that we haven't since 2014. Price multiples could move back into alignment with the average over that period without any net change from the (+)growth (-)multiple change.
Economy looking good, tax bill will improve corporate margins and consumer spendable income, repatriation of foreign cash could spike growth.

Image
From your lips to god's ears!
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

columbia
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Re: What Jack Bogle Expects From the Market

Post by columbia » Mon Oct 15, 2018 7:46 pm

I have no idea what his long term (prediction) track record is, but I imagine that paying attention to Mr. Bogle’s assessment of fundamentals is a good idea.

2015
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Re: What Jack Bogle Expects From the Market

Post by 2015 » Mon Oct 15, 2018 8:20 pm

Why don't people leave that poor man alone? Like nervous poodles, "students of investing" are always jumping at Bogle's pants legs begging for a prediction, interpretation, or a preaching. He has to oblige because nervous poodles just don't know how to quit bouncing. And bloggers like Christine Benz pander to this fear of missing out because these writers have mortgages to pay, or kids to put through school, or have found some other reason to dance with the devil. Like Peter Brown sang, it's all heartaches and money and everyone's riding around the soul til midnight.

Any short-term prediction from Bogle stands in direct opposition to his timeless admonition of "don't peek". Too bad nervous poodles don't know how to stop at this quite sound advice.

AlohaJoe
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Re: What Jack Bogle Expects From the Market

Post by AlohaJoe » Mon Oct 15, 2018 9:47 pm

2015 wrote:
Mon Oct 15, 2018 8:20 pm
Why don't people leave that poor man alone?
I kinda agree with you but...He doesn't have to agree to the interviews. Or he could say "I'm happy to be interviewed but I won't answer questions about predictions because they are boring to me".

2015
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Re: What Jack Bogle Expects From the Market

Post by 2015 » Tue Oct 16, 2018 8:22 am

AlohaJoe wrote:
Mon Oct 15, 2018 9:47 pm
2015 wrote:
Mon Oct 15, 2018 8:20 pm
Why don't people leave that poor man alone?
I kinda agree with you but...He doesn't have to agree to the interviews. Or he could say "I'm happy to be interviewed but I won't answer questions about predictions because they are boring to me".
I would think Mr. Bogle, like Mr. Larimore, is entirely too gracious, too much of a leader of character, to tell anyone their questions are boring. OTOH, perhaps he still answers these types of silly prediction questions in order to continue to get his other, vastly more important messages across.

azanon
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Re: What Jack Bogle Expects From the Market

Post by azanon » Tue Oct 16, 2018 10:35 am

columbia wrote:
Mon Oct 15, 2018 12:44 pm
Random Walker wrote:
Mon Oct 15, 2018 12:36 pm
With stocks 4-5% and treasuries 3%, seems like a whole lot of extra risk without much extra expected return for equity heavy portfolios.

Dave
Some historical info. on the premium:
https://www.investopedia.com/ask/answer ... remium.asp
Yup. Depending on how it's calculated, there are some sites that are estimating lower ~ 10-yr return (or 7-8 yrs, i forget which) for (US) stocks than bonds, despite the much higher risk (e.g. Research Affiliates). Wanna buy some US stocks? ;)

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