Investor Alert

Brett Arends's ROI

Feb. 20, 2021, 4:05 p.m. EST

Would Jack Bogle invest in U.S. stocks today? Maybe not.

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By Brett Arends

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Corporate earnings are going to be hard pressed to rise more than 5% a year when the Congressional Budget Office is predicting total gross domestic product to rise by less than 4% a year, on average, over the next decade.

Oh, and the forecast price-to-earnings ratio on the S&P 500, which was 18 when Bogle gave his interview, is now about a fifth higher at 22 times.

All of which means the risks are higher than they were four years ago and the likely outcome worse.

There are important caveats. Bogle warned several times last decade about the risks of rising U.S. stock valuations and the likely effect on long-term returns. His warnings were either wrong or at least premature. So you can figure the same applies today.

All forecasts are subject to massive amounts of error. They’re guesses, even if they are based on math.

On the other hand, rising U.S. stock valuations pose a major potential risk to Americans’ retirement plans. They may actually pose the biggest single risk, because U.S. stocks dominate the average 401(k) and individual retirement account so much.

Which brings us to a major alternative to U.S. stocks in your 401(k): International stocks.

We’re talking about developed markets like Europe, Japan and Australia, rather than the more volatile “emerging markets.”

“We expect higher international equity returns over the next decade compared with the last, and we believe that U.S. equity returns will be about 8 percentage points lower than the last decade on an annualized basis,” write Vanguard strategists in a recent note .

They calculate that over the next 10 years, U.S. stocks are likely to gain around 4.7% a year on average, which works out at a total gain over a decade of around 60%.

International stocks? They expect an average of just over 8% a year. That would work out at a total gain over the decade of about 120%, or twice what you would get on U.S. stocks.

All the same caveats about forecasts apply.

But we’ve been here before. U.S. stocks beat international stocks in the 1990s and in the decade just ended. But international stocks beat U.S. stocks in the 1970s, the 1980s, and the Zeros.

There’s a general tendency in finance — on Wall Street and Main Street—to treat U.S. stocks as ‘mainstream’ and foreign stocks as somehow risky and outré. That’s true even when you’re talking about stable, developed markets in Europe and Asia. It makes no logical sense.

The U.S. accounts for just 24% of global economic output, according to the International Monetary Fund, but nearly 60% of global stock market values (and 80% of U.S. investors’ stocks).

Personally, I wouldn’t have less than half my stock portfolio overseas — even if I thought U.S. stocks were cheap. And right now they are not cheap. I wonder what Jack would say?

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