Tags: Bogle | investors | funds | stocks

Bogle: Stocks Might Drop 50% in Next 10 Years

Tuesday, 09 Apr 2013 07:51 AM

By Glenn J. Kalinoski

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Investors should be prepared for up to a 50 percent drop in stocks in the coming decade, according to Jack Bogle, senior chairman and founder of The Vanguard Group.

“When I tell people I think we ought to have a 7 percent return on stocks, doubling your money in 10 years, that’s a 2 percent dividend yield and perhaps 5 percent earnings growth,” Bogle told CNBC.

“But I also tell them they should expect at least a few 25 percent to 30 percent drops along the way, and maybe even a 50 percent drop in the coming decade.”

Video: Economist Predicts 'Unthinkable' for 2013 

Bogle noted that he doesn’t worry too much about the annual outlook.

“The market is going to do what it wants,” he explained. “So you’ve just got to keep a stiff upper lip. I think the best strategy is to just do your best to avoid reacting, and it’s hard to do. I have a hard time doing it myself.”

Bogle instead focuses more on the long-term investment horizon.

“If you’re only in for the day, the week or the month, I think you’re in for a lot of unpleasantness,” he stated.

“But if you look out a decade and I think earnings could grow as much as 5 percent a year and that would imply, because they track very closely, a nominal increase of 5 percent a year of [gross domestic product]. That might be high — it might be more like 4.5 or 4 percent, but that’s what we expect in the next 10 years.”

The effort by central banks worldwide to stimulate economic growth could put a damper on Bogle’s forecast.

“We have an enormous fiscal problem around the world,” he said. “The [Federal Reserve] seems to have done one of the best, if not the best, jobs in the world of trying to do some stimulus. All of that austerity they’ve tried in the European Union, Great Britain and Greece … doesn’t seem to be working at all.”

Regarding the massive flow of money from actively managed funds into indexed funds, Bogle stated that there is “a lot of dissatisfaction with active management, and there should be.”

“To the extent that we can take — for want of a better word, ‘phonyism’ — out of this … and just get back to running sound, long-term, low-cost, tax-efficient mutual funds — indexed or otherwise — that’s the direction we should be going and it seems to be the direction we are going.’’

The Standard and Poor’s 500 could continue to make new highs, with very few stocks making new highs because a lot of stocks have not performed well and are already down significantly from their highs, according to Marc Faber, editor and publisher of The Gloom, Boom & Doom Report, told CNBC.

“If we continue to move up, the possibility or the probability of a crash becomes higher, sometime in the second half of this year,” Faber said.

Video: Economist Predicts 'Unthinkable' for 2013

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