John Bogle’s Stock Market Prediction

John Bogle recently got asked by Benzinga what kind of returns investors should expect over the coming decade. He assumed that investors owned a portfolio of 50% large stocks (index-fund based) and 50% bonds (U.S. government issued). He argued that he expects 5% earnings per share growth, 2% dividends, and -3% returns due to valuation compression from the S&P 500 as a whole. He expects the P/E ratio to switch from nearly 20x earnings to 15x earnings. This amounts to a 4% return from the stock portion of a portfolio.

With bonds, Bogle is predicting 3% annual returns over the next couple years. The implication is clear: Someone owning a portfolio equally stuffed with typical S&P 500 stocks and U.S. government bonds should expect 3.5% annual returns over the next ten years, and that may very well amount to 0% purchasing power gains when you include the effects of inflation, … Read the rest of this article!

The S&P 500 Has Been Draining Investors Since 2005

When people buy shares in an Index Fund, they assume that they are buying shares in the largest companies available in the United States. You look at Apple, see its $700 billion market capitalization, compare it to the 4% allocation in the S&P 500, and figure it sounds about right. And for much of the 1950s, 1960s, 1970s, 1980s, 1990s, and 2000s, this was true. But in 2005, the S&P 500 shifted from selecting stocks based on market capitalization to selecting stocks based on a market capitalization with a formula that takes into account the free float of the stock.

The consequence is this: Those precious businesses with high insider ownership do not become nearly as represented in the S&P 500 as the market cap of the stocks should suggest. There are 38 stocks that are underweighted in the S&P 500 compared to what the weighting would be if the … Read the rest of this article!