Anemic Stock Returns Likely? Here’s What You Can Do

Investment guru and author Jack Bogle rained on his own parade during the recently concluded annual Bogleheads Conference.

The founder and former chief executive of mutual-fund company Vanguard Group said that investors who expect stock returns in the area of 8 percent over the next decade are kidding themselves:

“I think when investors are doing their financial planning and their IRAs or their 401(k)s, predicting a 7.5 percent or 8.5 percent return is just silly. …

“I won’t say they’ll get only 1.5 percent or 2 percent or 3 percent. But I will say they are not going to get anywhere near 7.5 percent.”

By Bogle’s calculations, investors could see returns on U.S. equities as low as next-to-nothing after accounting for inflation and expenses. Here’s how he broke it down in his interview with Morningstar:

Investment return: While Bogle understands why others’ calculations show returns of 8 percent, he predicts more conservative returns of 4 percent — “and that’s not a very good number.”

Inflation: Bogle expects 2 percent inflation over the next decade, which could bring 4 percent returns down to 2 percent returns.

Expenses: Bogle expects fees and other expenses associated with investing in stocks could amount to 2.5 percent, which would bring stock returns into the negative.

Not investing is not an option, however, as it “will guarantee you will have no retirement plan,” Bogle says.

Instead, he tells Morningstar in a subsequent interview, investors should focus on a factor they can control — fees and expenses:

“You can avoid all the foolish ins and outs chasing winners, and at least get your bad investment behavior, if you will, out of the picture, and buy low cost funds.”

In other words: Invest in passively managed stock mutual funds, also known as index funds, instead of higher-cost actively managed funds or riskier individual stocks.

As Bogle says, fees and expenses for index funds amount to as little as 0.04 or 0.05 percent.

To learn more about these topics, which Money Talks News founder Stacy Johnson often talks about, check out:

• “Ask Stacy: Do I Need a Financial Adviser, or Can I Manage My Money Myself?“
• “Beginning Stock Investor? Here’s All You Need to Know“
• “Ask Stacy: How Do I Invest in a Mutual Fund?“

Have you taken any steps to lower your investment costs? Let us know how below or on Facebook.