Will Future Returns Be Lower?
John Bogle, the founder of Vanguard Group Inc., said in a recent interview with Bloomberg Radio that he expects stock and bond returns to be significantly lower than they’ve been throughout his 87 year lifetime.
Historically, according to Bogle, the average annual return for stocks has been about 12%, and for bonds it’s been around 5%, but “that is not going to be true in the future.” He thinks stocks might return as little as 4% – 5%, while a bond portfolio consisting of corporate and government debt might be expected to yield only 2.5%. And he’s not alone. The vast majority of financial planners I talk to have similar viewpoints, although the numbers vary somewhat.
I am on record as having definitively asserted that no one can predict the future. To his credit, Bogle carefully used words like might when expressing his opinion. But is there value in attempting to set expectations regarding investment returns knowing that the future is unknowable?
I think there is. If the whole purpose of investing is to grow your savings enough to support your future goals (especially in retirement when you are no longer earning income), you have to make some guess as to how much return you should expect from a given set of investment choices. If the future reality turns out to be as good as or better than your expectations, then you can conclude that the approach you’ve been following is working and you will most likely continue to follow it. If not, then you have the opportunity either to modify your expectations (both for returns as well as for your future goals that are dependent on those returns), or to change your investment approach. Either way your assumptions should be an aid to you in making rational decisions for your future.
But Bogle cautions investors not to conclude that more risk should be taken in order to get the returns you may have become used to from past experience. “Accept the returns offered by the market, and don’t take risks to get higher returns, whether you’re talking about bonds or stocks,” he said. In other words, if achieving your retirement goals is based on the assumption that you’ll still be able to get an average 8 to 10 percent return from a combined stock/bond portfolio, you’d probably be better off resetting those expectations rather than overloading the portfolio with riskier assets in an attempt to boost those numbers.
What’s the reason for these lower expected returns? Partly it’s the fact that right now both stocks and bonds are highly valued, something that’s never occurred before. Some attribute this situation (at least for bonds) on the Fed’s artificial manipulation of interest rates going back to 2008. Before that time, when stock valuations were high, you could utilize bonds to balance the risk and still get a reasonable return. Or vice-versa. But that’s no longer the case.
Of course, we have no idea what actual returns will turn out to be at the end of 2016 and beyond. One thing we can be sure of is that there will always be surprises. As recently as the end of last January, the S&P 500 had lost 5% for the year so far, its worst January performance on record. Who predicted at that time that the benchmark would ultimately set new highs just a few months later?
The fact that Bogle and others are promoting the belief that future stock and bond returns will be low is in my opinion a positive thing. It’s always better to set expectations low and over-achieve them than to set them too high and be disappointed. Especially when it comes to your money!
Nice summary essay — thanks. I worry a bit that underlying potential low returns is global scarcity as population rises (ref: “The Race for What’s Left”). This is pessimistic, but helps me counter excessive optimism (like from Trump) that does not appear to be grounded in reality.