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"Over the next 10 years, investors may see stock returns as low as 4% before inflation, well below the level assumed in many financial plans, says Vanguard founder Jack Bogle."
His calculation is a rougher version of GMO's. Investment gains are dividends plus earnings growth. An optimist would say 2% and 6%, respectively. Bogle thinks the 6% is too optimistic and pencils-in 5%. You then inflate or deflate the investment returns by changes in valuations. He notes that a p/e of 15 is about normal, so if you buy when the p/e is below 15 you get a boost. If you buy when the p/e is above 15, you get a penalty. By his calculations, the market p/e is about 20.
So you start with a 7% investment return (2% + 5%) and begin making deductions:
p/e contraction would cost 3% then inflation might easily cost 2%, and of course fund fees and expenses cost 1%, after which stupid investor behavior eats 1.5%.
That leaves you with a "real" return of about zero, which at least cuts into your tax bill. Not far from Research Affiliates, GMO, or Henry Blodget.
That assumes, of course, a portfolio that captures the broad domestic equity market. He's willing to give you 3% from a bond portfolio, though he's got virtually no defense for that estimate. In Bogle's world there is, of course, no need to fret about the 50% of the equity market domiciled outside the US.
Well, I guess the situation is even less optimistic, if one trusts this scenario. If one gets dividends and capital gains distribution, one pays taxes, which can lead to yet another loss at least -1% or -2% (last few years have demonstrated that this is not a joke). Moreover, these calculations give the expected return but not its dispersion. For example, if one trusts GMO, the best asset class is Emerging Markets. Research Affiliates agree (http://www.researchaffiliates.com/assetallocation/Pages/core-overview.aspx?_cldee=YW5kcmVpbGluZGVAeWFob28uY29t). They note that the best expected return for the next 10 years is from investment in Russia, 14% per year. But... it comes with 40% volatility. 1% expected return from US market comes with 15% volatility. Zero (or near zero) from cash comes with near zero volatility and near zero taxes.
So if I want to make sure that 10 years from now my investments do not go down (safety first), I may as well go 100% to cash, because having 0% growth (when taxes are considered) with 15% risk is not safe. I doubt that I am going to stop investing because it is such an interesting game, and each of us wants to be better than average. But I convinced myself not to buy lottery tickets, so shall we stop investing?
I am not trying to say that this makes much sense, but if one follows Bogle, I wonder why does he say that one should not go all in cash (safety and no taxes). Something does not add up here.
Comments
So you start with a 7% investment return (2% + 5%) and begin making deductions:
p/e contraction would cost 3% then
inflation might easily cost 2%, and of course
fund fees and expenses cost 1%, after which
stupid investor behavior eats 1.5%.
That leaves you with a "real" return of about zero, which at least cuts into your tax bill. Not far from Research Affiliates, GMO, or Henry Blodget.
That assumes, of course, a portfolio that captures the broad domestic equity market. He's willing to give you 3% from a bond portfolio, though he's got virtually no defense for that estimate. In Bogle's world there is, of course, no need to fret about the 50% of the equity market domiciled outside the US.
David
So if I want to make sure that 10 years from now my investments do not go down (safety first), I may as well go 100% to cash, because having 0% growth (when taxes are considered) with 15% risk is not safe. I doubt that I am going to stop investing because it is such an interesting game, and each of us wants to be better than average. But I convinced myself not to buy lottery tickets, so shall we stop investing?
I am not trying to say that this makes much sense, but if one follows Bogle, I wonder why does he say that one should not go all in cash (safety and no taxes). Something does not add up here.