Exclusive: John Bogle Projects 'Nominal To Zero' Real Returns Over The Next Decade

Benzinga recently had the chance to speak with John Bogle, founder and former CEO of The Vanguard Group and author of best-selling book “Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor.”

Benzinga asked Mr. Bogle about what kind of returns investors can expect over the next decade and if he believes that stock investors should be fearful that the six-year-old bull market is nearing its peak.

Is The Stock Market Overpriced?

With the S&P 500 more than 30 percent higher than its pre-Financial Crisis peak, Bogle was asked if he believes the market is currently overvalued.

“I think it’s fully valued, but not overvalued in any material way,” Bogle explained.

What Kind Of Returns Can Investors Expect Over The Next Decade?

Bogle projects long-term stock market returns based on dividend yields and earnings growth. His math is elegantly simple: the current dividend yield of about 2.0 percent plus projected earnings growth of around 5.0 percent produces  a 7.0 percent return.

Related Link: Goldman Sachs: S&P Will Hit 2150 By August

Bogle sees potential for the market’s price to earnings ratio (P/E), which is currently around 20, to revert to as low as 15 in coming years. That 25 percent drop equates to about a 3.0 percent annual negative speculative return.

When this negative return is subtracted from the 7.0 percent dividend and earnings return, it yields a projected overall return of about 4.0 percent.

Bogle is also projecting 2.0-3.0 percent bond yields over the next decade as well. According to Bogle, a portfolio comprised of a 50/50 balance of stocks and bonds would likely yield around 3.5 percent returns over the next 10 years.

“When you factor in the costs associated with index funds, inflation, and taxes, you are actually looking at real returns of nominal to zero,” Bogle explained.

Market Crash Imminent?

Although Bogle believes that the stock market is currently fully valued, he assured that he does not feel that investors should be running for the hills.

“I don’t think we’re at the edge of some great cataclysmic crash, but anyone that invests should be prepared for a 25 to 30 percent decline because they do come along from time to time.”

Bogle added that corporate earnings always eventually overwhelm the swings in the speculative market.