THIS POST MAY CONTAIN AFFILIATE LINKS. PLEASE READ MY DISCLOSURE FOR MORE INFO.
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.”
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.
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?
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|
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