Jack Bogle, Vanguard’s founder, is on record stating that future returns in the financial markets will be below average. In his book and in recent interviews, Bogle has said expected returns for stocks and bonds should both be muted for the coming decade or so.
Based on current dividend, valuation and yield levels, Bogle predicts annual returns for U.S. stocks of about 4%, and of 3% for high-quality U.S. bonds over the next 10 years. On a typical balanced 60/40 stock/bond portfolio, that would mean an annual return of just 3.6%. He admits that there are a host of factors that go into these types of forecasts so they are simply educated guesses.
Bogle’s expected returns may be spot on, but they could be too high or too low. Valuations can always go higher or the music could end on this bull market tomorrow. Either way, investors in risk assets need to understand that low returns are a feature of the financial markets, not a bug.
Using data on the S&P 500 and 10-year Treasuries as proxies for stocks and bonds, I looked at the historical 10-year annual returns for a 60/40 portfolio from 1928 to 2016. Here’s a list of the 10 worst 10-year returns for this balanced portfolio:
Financial historians will notice that each of these instances included periods of enormous market stress. These include the Great Depression, the 1970s bear market, the bursting of the dot-com bubble or the recent financial crisis or their aftermath.
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Annual returns came in below 4% in 12.5% of all rolling 10-year periods in this time frame. That means investors experienced returns that were similar to Bogle’s prediction in one out of every eight years. So you need to prepare yourself for below-average returns at some point as a long-term investor. It’s not “if” but “when” for below-average returns in risk assets.
No one can nail the timing of when below-average returns will hit, but there are a number of factors investors need to be aware of when this occurs.