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Like most in the FIRE community, I am a huge fan of Jack Bogle, the founder of Vanguard. I always look forward to his insight on the stock market. It seems like he drops nuggets of wisdom whenever he talks.
Prediction on Investments
Recently, he gave an interview to CNBC’s Mike Santoli. Bogle mentioned that investors should expect investment returns to be dramatically lower over the next decade.
“Just for mathematical reasons, the dividend yield is 2%, a little under 2% in fact, and the long-term dividend yield on stocks is pretty close to 4 … the earnings growth on stocks has been a little over 5, that’s going to be a very tough target in the future so let’s call it 4 … 4 and 2% give you a 6% investment return, but then you have to take … the valuations in the market. …You take that 6% return and maybe knock it off a couple of points perhaps for a lower valuation, slightly lower valuation over a decade and you’re talking about a 4% nominal return on stocks. And that’s low, lower than history. History is around 6 and a half.”
The History
Currently, the S&P 500 trades at a price to earnings (P/E) ratio of nearly 26. This is substantially higher than the long-term average of the S&P 500, which has averaged 15.68 and a median of 14.67.
Source: Multpl
Bear in mind, past performance in not indicative of future performance. However, if the P/E ratio for the S&P 500 were to revert back to the mean, earnings would need to rise substantially, or the price of the S&P 500 would need to recede. In this case, earnings would either need to rise to by 63%, or the S&P 500 price would need to fall closer to the 1600 mark, rather than the 2600 mark that the S&P 500 has been flirting with.
Related article: Why It Doesn’t Matter If You Accurately Predict A Recession
Why does this matter to you?
Recently in the news, you may have seen the tax bill that is making its way through Congress. The standard deduction is to dramatically increase to $12,000 for singles and $24,000 for married couples. Therefore, the number of people who will be claiming an itemized deduction will be much lower than usual. The Tax Policy Center estimates that the number of people claiming the mortgage interest deduction to fall from 21% to 4%.
Thus, only a small subset of the population will qualify for the mortgage interest deduction moving forward.
It makes me wonder. If less people can itemize their mortgage interest, and if Bogle’s prediction of a 4% market return over the next decade is true, will more people opt to pay off their mortgage?
Mortgage Rates
A recent glance at mortgage rates shows that the 30-year fixed rate has risen above 4% (Source: BankRate).
| 30-year fixed | 15-year fixed | 5/1 ARM | 30-year jumbo | |
| 10/25/2017 | 4.13% | 3.43% | 3.63% | 4.20% |
Essentially, you could receive the same rate of return on your 30-year fixed mortgage, if Bogle’s prediction on the market is accurate and you’re not able to deduct the mortgage interest. Then, does it make sense to potentially pay off your mortgage instead of invest?
Related article: Mortgages 101: What You Need to Know
That’s an interesting question for this audience. I think the answer is yes however many people in the FIRE community need little encouragement to pay down their mortgage.
In the general population, I think the answer is no. I think a lot of homeowner don’t have spare cash to pay down their mortgage so they have limited options in reacting to the elimination of the mortgage interest deduction.
The first thing I thought of is if Bogle is predicting 4% nominal returns, that blows a hole in the 4% rule going forward. I don’t know. As you may recall, the efficiency gains of the 1980s & 1990s was based on widespread adoption of PCs and then the internet. Business have been able to grow earnings by reducing costs in the form of efficiency gains. If you drew a trendline from the beginning of your chart to 1980, it would be flat. From 1980 to today, the trendline is increasing. That is widely attributed to PC & the internet.
I’ve read there is another efficiency frontier that is being approached. That is automation. Automated warehouses, automated shipping & trucking, automated cars, etc. That would allow for flat or reduced costs with increased or flat earnings, respectively. In other words, the trendline would continue increasing if automation’s full potential is achieved.
It will definitely be interesting to see how automation continues to add productivity to the world and what it does to jobs. I’m excited to see what the next type of jobs are in the future 🙂
I’m a big proponent of paying off the mortgage. I like the sure thing. I think Bogle’s argument for future stock market returns is pretty sound. Of course it won’t work as logically as he puts it. Something in the future he references will trigger a sell off, correction or bear market. That will be the time to put money in the market to earn higher returns. Doing so is always easier said than done, but that’s when one will be able to significantly out perform early mortgage pay down by putting the money in stocks. Happy Thanksgiving. Tom
Tom @ Dividends Diversify recently posted…The Lights Are on But No One is Home
Like you I think Jack is incredibly smart but predictions have a way of making us look silly in the future. I hope things turn out differently but Jack makes a lot of sense 🙂
I think Jack Bogle is fantastic. However, I disagree with his analysis. I think the next decade is actually going to be really good for stocks. I believe we are in the early innings/middle of a secular bear markets. And secular bear markets have above average returns. If the normal cycle continues we will average about 15% a year for the next decade. However, things come back to reality when we go into a secular bear market where the average gain is usually 2% per year. So it all averages out, but I think the next decade will be good and then we will see a repeat of 1966-1982 again….not totally, but I am a believer in these historical patterns. No matter what I am just going to keep putting money away and hope Bogle is wrong for the next decade. And he will surely be right after that though.
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Thanks for sharing Jason!!! It will definitely be interesting to see what happens in the long term 🙂 Hopefully things continue the upward trend that it’s been on. It’s been a nice ride so far 🙂
Oh and let me say I am also a BIG fan of paying off the mortgage. Every little bit I get extra goes toward the mortgage. Even if it is $2.50 rebate check I put it on the mortgage. Yes, that is a little dumb, I would like it gone faster to supercharage our savings.
Jason recently posted…What the ROB’s Are Getting Each Other For Christmas
Agreed Jason every little bit definitely helps!!!
Interestingly reading a couple of similar predictions is what made us put extra money to our mortgage (as in for example we were 25k above savings goal this year and instead of more stock we paid extra mortgage) to take a balance approach to this.
Next year we will do the same – we have a #in mind we want to hit for balance in assets. If we hit it all extra money will go to mortgage. If not because market tanked, then money goes to the market.
We are still about 10 years away so to me I thought well maybe when we retire the market will be super strong again and sequencing when withdrawing won’t be a terrible issue…
Since we don’t have a crystal ball we continue to put money there and focus more on things in our control: higher savings rate and diversifying a bit by adding extra payment to mortgage and putting a little money Into an annuity that gives me 4% during accumulation stage. What we don’t want to do is start looking Into riskier investments…
Lastly I assume then inflation will be in check and anyways our plan assumes 5.5% growth next 10 years and 3% inflation so really 2.5% real, to be conservative and assume a 3.25% withdrawal rate. This will all be adjusted as we get a couple of years closer see where we stand. If I was too conservative I am cutting the cord sooner. If not we keep chopping chopping!
Thanks for sharing TTR!!! My wife and I paid off our mortgage and it was the best thing that we did!!! We treated it as a bond to diversify our income especially during the down turn of 2007-2009. Definitely glad we did what we did now 🙂
The emotional aspect of paying this off is a huge part of our decision. I noticed people that have actually done it are so giddy lol I want in on that action!
It took a couple of months for it to sink in on our side but man once it did it was an incredibly feeling 🙂
I’ve been putting a bit more in our mortgage in anticipation of loss of the mortgage deduction. I’m not doing anything in terms of the market as I don’t think mr Bogle knows more then anyone else. After all everyone has been expecting low returns going forward so technically it’s prices in to some degree.
FULLTIMEFINANCE recently posted…Indisputable Benefits of Multiple Income Streams
Thanks for sharing Full Time Finance!!! It’s interesting to hear different perspectives when it comes to the market. I’m not sure he has a crystal ball but it’s interesting to hear nonetheless.
I have had this same thought recently. Speaking to my own unique situation we are focused on paying down our mortgage rapidly. We invest in all the tax-advantaged accounts and then are paying down our mortgage. I would like to invest in multi-units down the road so I am positioning myself for this.
Thanks for sharing!!! Sounds like you have an awesome plan and place and multi-units down the road sound like an amazing way to generate wealth. Congrats on your progress so far!!!
I’ve heard these kinds of predictions now for over 10 years. For some reason the big names in money always want to predict that the future will not live up to past averages. However, capitalism has many incentives to continue to grow earnings for shareholders, so I don’t see anything changing anytime soon. Also, nobody can predict the future, so why pay attention to these people?
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Thanks for sharing Jeff!!! It does seem like people try to be pessimistic and sound smart rather than optimistic and dumb. Like you I think the future is bright 🙂
Interesting, and good to know. I’m hesitant about predicting markets, but if anyone might be able to well, Bogle and the like are the ones. And yes, if he’s right, or starts to look right, I imagine people will pay down their mortgages faster. I’m a tremendous proponent of no debt or extremely little debt, so it takes me no extra encouragement. That’s a 4% guaranteed return you get when you pay your own debts off. Plus you eliminate a payment and reduce your necessary expenses.
Mr. FWP recently posted…Happy Thanksgiving – Some Financial Thankfulness, And a Question For You
Thanks for sharing Mr. FWP!!! I definitely agree that if returns in the market fall people will shift towards paying off their mortgages. It will be interesting to see how many people end up doing it 🙂
I’m not sure what the markets will do or what Congress will do or what investors will do. I paid off my mortgage a long time ago and have no regrets. It was a tremendous emotional relief to become fully debt-free. I highly recommend it no matter what predictive math we use.
Thanks for sharing WealthyDoc!!! Like you, we paid off our mortgage and it’s something that is indescribable at times. I hope to not need a mortgage ever again 🙂
Here in the Netherlands the mortgage interest is around 2% (10yrs fixed), so I personally don’t pay much extra to my mortgage. A 4% interest would definitely change this….
Roadrunner recently posted…If I Had Less Mortgage
Thanks for sharing Roadrunner!!! 2% mortgage interest rates are incredibly low. Sounds like a great deal…I wonder if I could tap into it 🙂
I live in Canada and our mortgage rate is currently at 2.35% after the most two recent rate hikes. But even if it rises to 4% or so we’ll still invest in the markets because we are willing to take the risk. Also, we’re in it for the very long term (i.e. over 30 years). So many financial experts have been talking about major corrections for a pretty time (and I admit that the valuations do look high ATM, maybe they may be right), but I personally will avoid timing the markets and the all of the noise out there lol. With that said, we will just keep investing in the market for the longgggg term despite it rising or falling, and hope for the best. That’s what we’ve been doing so we shall continue it this way lol.
fin$avvy panda @ finsavvypanda.com recently posted…10 Ways To Be Financially Prepared For Christmas – Especially #2 and #3
Wow your mortgage rate is only 2.35%, if I had a mortgage still I would definitely see if I could get Canadian rates 🙂
I hope Bogle is wrong 🙂 We like our returns and 4% would be hard to FIRE by. I’m looking towards India and China for growth.
Lily @ The Frugal Gene recently posted…5 Frugal Dog Things We Don’t Do
I definitely agree. I wouldn’t mind the market returning 10% for the foreseeable future 🙂
This is interesting to ponder. I go back and forth with if we should hustle to pay off our mortgage ASAP or not. I feel we have a rate that lies right in the middle of making an argument either way. It’s only 3.75% so some days I think it’s still debt to get rid of, other days, I think it’s only 3.75%. We still throw an extra couple hundred a month at it, but aren’t aggressively paying it off yet.
Thanks for sharing Laine!!! I had a rate of 3.5% back in the day. I don’t miss making the payment for one second 🙂 But I can see the allure of investing with the market doing so well 🙂