By Brett Arends
Investing in U.S. stocks had few bigger fans than the late, great Jack Bogle.
“If you hold the stock market, you will grow with America,” the legendary Vanguard founder told CNBC in 2018, less than a year before his death.
He famously suggested keeping things simple. Invest through low-cost index funds (such as Vanguard’s), he said. Don’t get too clever by trying to “time” the market, hoping to beat the big swings, he warned. And just stick to U.S. stocks, he advised. He saw no particular reason to invest internationally .
So what would he make of today’s highflying stock market, where the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.77% , the S&P 500 index, the Nasdaq Composite /zigman2/quotes/210598365/realtime COMP -1.96% and the Russell 2000 /zigman2/quotes/210598147/delayed RUT -1.35% small-cap stock indexes have all skyrocketed to fresh highs.
I’d hazard to say: He wouldn’t be a big fan.
I’d bet he’d be warning investors to take a second or third look at the risks they’re taking in their retirement accounts—where, according to Vanguard’s own data, about two-thirds of the average portfolio is being gambled just on U.S. stocks.
And, most intriguing, I wonder if he’d change the habit of a lifetime and be willing to bet big on overseas markets instead of just the U.S., as recently recommended by the company he founded.
I’m not saying this because I’ve been back to Salem, Mass. , to consult witch-doctors or commune with the dead. Bogle died in January 2019.
But we don’t have to guess what he would have thought about U.S. valuations because he gave us a pretty good idea.
Two years before he died, in 2017, Bogle warned that U.S. stocks were already so expensive that longer-term, 10-year returns on a broad stock market index fund were likely to be meager at best.
His forecast: About 4% a year.
That, he said, was based on three things that anyone could calculate and which had an excellent long-term track record of predicting returns. He started with the dividend yield on the broad U.S. market at the time, which was around 2%. He added growth in corporate earnings, which were likely to average around 4 or 5% a year. And then he subtracted a percentage point or two a year, because he expected price-to-earnings levels on the market to decline back towards their long term average.
That was in March 2017.
But here’s the problem. Since then, U.S. stocks have already produced all of the returns he predicted for the next 10 years—and then some.
Bogle’s forecasts implied that the Vanguard Total Stock Market Index Fund /zigman2/quotes/202876707/realtime VTSMX -1.33% (for example) would rise a total of 50% between March 2017 and March 2027.
But it’s already risen 70% — with six years to go. Not to put too fine a point on it, but to hit Bogle’s forecasts it would have to lose more than 2% a year through 2027.
Meanwhile the numbers Bogle used to build his forecasts look even worse than they did then. The dividend yield on the S&P 500 /zigman2/quotes/210599714/realtime SPX -1.30% large cap index is now just 1.49%, according to Wall Street Journal market data , or a quarter less than when Bogle last looked at it.