Bogle: Stocks Priced For 6% To 7% Returns

Legendary Vanguard Founder Jack Bogle says not to worry about short-term issues like the recent emerging market turmoil. Over the long haul, it’s the performance of companies that will drive stocks, he says, and he thinks corporate growth is indicating stocks should grow 6% to 7% annually.

“In the long-term … all value [is] created by corporations, which means, in an odd way, stocks are derivatives,” Bogle tells CNBC. “They’re derivatives of the value created by our corporations.” He said he expects corporate earnings to grow by 4% to 5% going forward. Adding in current dividend yields of about 2%, he says that makes for projected returns for stocks in the 6% to 7% range over the long term. Bogle also said that valuations are “high, but not extremely high.”

Bogle also said that strong growth in dividends was an overlooked part of last year’s market surge. In fact, he says investors in general “don’t pay nearly enough attention” to dividends. And he talks about why earnings don’t mean as much as they used to when it comes to valuing stocks.

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Bogle: Don’t Rebalance — If You Can Stand It

Rebalancing the assets in your portfolio back to a target weight is an often-cited common sense tenet of investing. But legendary Vanguard Founder Jack Bogle says you might want to think twice about doing so.

Boggle tells Money magazine that “If you can ignore market fluctuations along the way, it’s better not to rebalance, since you’re likely to get higher returns.” In a recent study, he looked at how a portfolio with 70% in stocks and 30% in bonds performed when rebalanced annually vs. when left alone. “Over the 187 25-year periods ending between 1826 and 2012, the rebalanced portfolio earned a sliver less on average,” Money reports.  “In 55% of the periods, rebalancing beat doing nothing, by an annualized 0.23%, adjusted for inflation. When rebalancing hurt returns, the penalty was larger — 0.43%.”

The problem, however, is that most investors don’t have the stomach to sit tight. So Bogle does support a modest rebalancing plan. “For behavioral reasons,” he says, “most investors are happier if they rebalance, and that’s worth something too.”

Simple Advice From An Investing Legend

Vanguard Founder Jack Bogle has some simple advice for investors: Invest — and don’t peek.

“Nothing,” Bogle tells Canada’s Globe and Mail when asked what keeps him awake at night. “Just invest, and don’t peek. Don’t open your retirement plan contribution statements every quarter. Put in money regularly, and when you retire 40 or 50 years later, and open the statement for the first time, you run the high risk of heart failure — you’ll be stunned at how much money you have accumulated.”

Bogle says investors should ignore the volatility of the stock market, which could be higher than usual in the coming years “given the mess that we have in our financial system.” He says the true value of stocks isn’t their price in the market, but the amount of earnings and dividends they produce. “The secret of making money is to own corporations that grow,” he says.

Bogle says he has all of his money invested in the U.S. markets, where he thinks stocks will significantly outperform bonds over the next decade. He also says he’s “very optimistic” on Canada, which has “many of the characteristics of the U.S. — strong capital markets and solid governments that are not going to be overthrown tomorrow.”


Favorite Charts from Bogle, Wien, and Others

Business Insider recently asked a number of strategists to discuss their “favorite charts of 2012,” and some of the gurus participating offered some very interesting data. 

Byron Wien of Blackstone Partners, for example, provided a chart that showed the pace at which the money supply has expanded vs. the rate at which gross domestic product has grown. “For a long time money supply and GDP grew at about the same rate,” he says. “Since the subprime crisis, however, money supply growth has exceeded the growth of the economy. It has taken more and more money to keep the economy moving forward. With the fiscal drag of increased taxes and reduced entitlements, we will have to be relying more on monetary expansion than ever. Is the Fed up to the task?”

Vanguard founder Jack Bogle, meanwhile, offered a simple chart of 12-month price/earnings ratios. “When P/E ratios are historically low, (say, below 12 times) they have been highly likely (84 percent probability) to rise over the subsequent decade,” he explained. When they are historically high, (say, above 20 times) they have been likely to decline (87 percent probability), though in neither case did we know when the change was coming.” He says P/E ratios are “useful as a basis for reasonable expectations for the future.” His chart shows that P/Es are now right around 15 or 16 — neither very high nor very low.

Bogle Talks Election, Dollar-Cost Averaging

Vanguard Founder Jack Bogle says the Presidential Election will ultimately have little impact on stocks. Bogle tells FOX Business Network that companies’ economic performance over the long run is what really drives stock returns, and “that’s not going to change [on Election night], it’s not going to change tomorrow.” Bogle also talks about why he thinks dollar-cost averaging is not a winning strategy over the long haul.

What Bogle Sees For Stocks & Bonds In The Next Decade

Vanguard Founder Jack Bogle says he expects stocks to earn real returns of about 4.5% per year for the next decade, and bonds to earn virtually no real return. Bogle divides returns into two categories: investment returns, which are determined by the market’s dividend yield and corporate earnings growth, and speculative returns. Today’s dividend yield is around 2%, and he sees earnings growing at about 5% per year over the coming decade, which would make for a 7% investment return over the next ten years. In terms of the speculative part of the equation, he says price/earnings ratios are around 16 right now, and he doesn’t see that rising or decreasing significantly over the next decade, leaving the total return he expects from stocks to be about 7% annually. Bogle is also expecting about 2.5% inflation over the next decade, which means those 7% or so nominal returns would translate to real returns of about 4.5%, he says. As for bonds, Bogle expects nominal returns of about 2.5%, which, after inflation, means 0% gains.


Bogle: Stop Gambling and Invest

In a recent interview, Vanguard founder Jack Bogle said investors should “get out of the casino”, and practice real investing — not speculative trading.

“Get out of the casino, own Corporate America and hold it forever,” Bogle, long a proponent of buy-and-hold index funds, said during ‘The Big Interview’ on MoneyLife with Chuck Jaffe, according to MarketWatch. “No trading, no nothing. You don’t need to trade; you don’t need to worry about the market. To protect yourself from the bumps the stock market will scare you with — even though it shouldn’t scare you because there have been bumps in the market since the beginning of time — have a bond position to go along with your stock position, and have your bond position [the proportion of your assets in bonds] … have something to do with your age.”

Bogle says that while the financial services industry perpetuates the myth that investors can outsmart the market, individual investors should take some of the blame for continuing to try to win a losing game. “The stock market is a mysterious and often misleading thing,” he says. “It creates no value, zero value, for investors. In fact … it shifts value from investors to participants in the system, brokers, investment bankers, money managers and things like that. Value is created not by stock prices, but by stock intrinsic values, by corporations that have staggering amounts of capital … they put that money to work, they earn a return on it in a competitive world. … That’s what investing is about, owning companies.”

Bonds Very Unlikely to Beat Stocks over Next Decade, Says Bogle

While bonds have performed very well in recent years, Vanguard Founder Jack Bogle says the odds are very high that stocks will outperform bonds over the next decade.

“I think the odds that stocks will give a higher return than bonds over the next decade are probably 85 to 90 percent,” Bogle said on CNBC’s Fast Money. “The fundamentals are that bonds are yielding maybe 2.5, 3 percent if you throw in some corporates, and stocks are yielding 2.2 percent in the S&P. Yet the S&P stocks are going to have earnings growth. There’s nothing extra the government can do or the bond issuer can do other than pay the agreed-upon coupon.”

Bogle expects earnings growth will be about 5% over the next decade, which makes for a 7% “fundamental return” on stocks over that period — that is, not including changes in valuations.

Bogle adds, however, that pension funds will have trouble hitting the 8% annual returns target some have cited. Such performance “would be off the charts from anything that is known in history on the assumption that all of these private equity fund manager will be above average,” he said.



Bogle: China “Sinking”, U.S. Best Developed Market

Vanguard founder Jack Bogle says the U.S. is faring better than the rest of the world, and that China’s economy is “sinking quite a bit” right now. “The fact of the matter is our economy, U.S. GDP, is the best performer in the developed world by a good margin and the rest of the world has not made this kind of recovery,” Bogle tells Fox Business Network. “China is of course much more rapidly growing, but seems to be sinking quite a bit.” Bogle also talks about the need for regulatory clarity. “We have to get some clarity as to what the future holds in terms of the government’s role, taxes, capital gains, dividends,” he says. “I think it’s less that we get the right rules than that we get some rules.”