6% Stock Market Returns for TEN Years…if You’re Lucky says Vanguard

Vanguard is out with its 10-year forecast and predicting a measly 5 annual return on stocks over the next decade that is less than half the 12.3 percent annual return on stocks over the last 10 years to put this into perspective investing a hundred dollars a month at a five percent annual return and you're at just 42 000 over 20 years but on the markets 12.3 percent return over the last decade you're getting somewhere with over a hundred thousand saved but if Vanguard is Right investors could be treading water for years so why is Vanguard so bearish on the stock market and should you be worried I'll show you that forecast but stick around and I'll reveal a simpler way to forecast your own stock market returns and how to invest here's that forecast from the team at Vanguard Capital markets and in this top section we see stock return estimates Vanguard expects annual returns for U.S stocks to fall between 4.1 percent to 6.1 percent over the next decade slightly higher value stocks are expected to produce a return as high as 6.4 percent so this would be something like the Vanguard value fund it took her vtv with its shares of 340 companies trading cheaply on that price to earnings basis surprisingly here growth stocks seem to be what's holding the market back with forecasts of just 1.4 percent to 3.4 returns these are those technology and internet stocks that typically post faster earnings growth like those in the Vanguard Growth ETF ticker vug which versus that Bleak forecast has produced a 14 annual return over the last 10 years and I'll show you exactly how Vanguard came to these numbers but basically it's saying growth stocks have had such a great run over the last decade and are at a starting point that could be overvalued that returns forward are going to suffer real estate investment trusts or REITs here are expected to do relatively well between 4.4 percent to 6.4 percent return but it's those foreign stocks that Vanguard think is going to win big overall Global stocks are forecast to post as much as 8.4 annual returns as for bonds the picture isn't much better but I'm going to tell you why these could be a better investment in a minute Vanguard expects the overall or aggregate U.S bond market to post 3.6 to 4.6 returns a year that would be something like the isher's core U.S aggregate Bond ETF ticker AGG with its 2.7 dividend intermediate credit bonds so bonds of companies with credit ratings not quite the highest but still strong are forecast to as high as 5.2 percent while high yield bonds those with companies of lower credit ratings could do six and a half percent over the next 10 years examples here would be the ishares investment grade Corporate Bond Fund ticker lqd with its 3.6 dividend and the high yield Bond ETF ticker hyg with its 5.6 dividend yield no what is really interesting here is the difference in stock and bond returns or I guess the lack of difference really and the volatility of the Investments now volatility on the right here is just a measure of that risk in an investment how much you can expect the price to go up or down in any given year in stocks you can expect that roller coaster with volatility approaching 20 for some groups bonds though are much less risky with prices usually only fluctuating maybe five percent or so a year so the idea here is if you believe these forecasts then you would be much better off investing in bonds over the next decade you'd be getting most of that return as high as 4.6 percent in the aggregate Bond group versus just 6.1 percent topside in stocks but at less than a third the volatility or the risk I'll show you how Vanguard calculated all this but first I want to personally invite you to get the weekly bow tie our free Weekly Newsletter with all the stock market news strategies and Trends you need to know each week before the Market opens I'll show you what I'm watching and the stocks that could highlight the week it's all totally free just something I like to do for all you out there in the community so look for that sign up link below now Vanguard is pretty tight-lipped on exactly how it comes to that six percent returns forecast on its Outlook but we can put together most of these pieces we'll use a method I'll show you later to forecast your own stock market returns but it looks like Vanguard is expecting inflation around three percent a year a dividend around one and a half percent and economic or earnings growth of less than two percent a year now that would give us a total return around six and a half percent a year for stocks but Vanguard is saying that stocks are so expensive right now and are bound to come down to those long-term averages we see here from factset that the current price to earnings ratio that measure of how expensive stocks are relative to their earnings is higher than the average the p e ratio here around 22.2 times earnings that is well above that 10-year average and I put a more realistic average closer to 19 times PE so if that stock valuation the p e ratio does come down to that long-term average then instead of that six and a half percent return you'd probably be getting something closer to that 5.1 percent midpoint on the Vanguard forecast now for foreign stocks here Vanguard believes higher dividend yields and a weaker dollar is going to boost the returns there by as much as two or three percent a year analysts at Charles Schwab have only slightly better news with their estimates for stock market returns the dark blue bars here are the long-term average from 1970 through 2022 with the U.S large cap stocks posting a 10.5 percent return International stocks lagged that market with an eight percent return while bonds of high quality companies posted a 6.6 return over the period and the Schwab forecast for the next decade are similar to that of Vanguard but what's interesting here is the comparison from last year the light blue bar is last year's estimate in October for that 2022 through 2031 returns well while the bar to the right is the new estimates for 2023 through 2032 returns so Schwab now believes that U.S stock returns both large cap and small will be slightly lower only producing 6.1 percent and 6.5 returns that drop contrasts with a new higher estimate for international stocks at 7.6 returns and bonds that are now expected to produce us 4.9 return over the next decade now in those estimates Schwab is forecasting two and a half percent annual inflation and an average economic growth of just 1.8 percent for the next decade now I'm going to show you how to forecast your own returns stock returns specific to your portfolio next but don't think these predictions are set in stone case in point look at vanguard's forecasted returns for 2012. so it's 10-year predictions for the returns through last year in 2012 Vanguard was saying six to nine percent annual returns was the most likely outcome for stocks that they were doing these probabilities back then which makes it far easier for them to hedge saying well we said the other returns were possible we now know that the actual returns here were 12.3 percent over that decade so that six to nine percent range or about seven and a half percent midpoint was almost five percent a year off and so we see this underestimating again and again with these long-term forecasts Wall Street always seems to be thinking that the glass is half empty on its Outlook I dug into my files to find the 10-year forecast by five firms from 2020. here we were gripped in the middle of a pandemic so some error is expected but these forecasts were way off over the last three years since these forecasts the market has returned 10 percent a year and that's after a stock crash last year so while I do think analyst estimates for stocks and market returns can be helpful in getting your own ideas more important is that you know how to make your own forecasts Nation that's my mission here on let's talk money to make you a better investor and just give you the tools to make your own decisions and making your own forecast for returns whether overall market returns or even stock Returns on your portfolio this actually isn't that difficult there are a few methods but I'm going to share the simple one here just adding up a few estimates for three factors dividend yield inflation and real earnings growth and to estimate the dividend yield on stocks in your portfolio let's use Coca-Cola ticker KO as an example I'll first go here to the historical data Tab and change the period to five years then the monthly frequency and click apply this is going to show me the dividends over the last five years along with the stock price around each and what I can do here is for each of these multiply the dividend payment times four because Coca-Cola pays four dividends a year and then divide that by the stock price at the time that gives me a dividend yield at each of these payouts so for the most recent dividend 46 cents per share times four is an annual dividend of a dollar eighty four and then divided by the 61.9 share price gives us a three percent yield try this one last year a 44 dividend is a dollar seventy six per share a year on a 58.53 share price again a three percent yield and finally this 40 Cent dividend or a dollar sixty a year divided by 49.63 is a 3.22 dividend so Coca-Cola is pretty easy the company tries keeping close to that three percent dividend yield of course for Coke or any company you have to use your analysis to determine if it's going to be able to keep up with that yield but we're gonna go with three percent here for our estimate now for the overall stock market you can use the S P 500 ETF the sby which right now pays a 1.55 dividend but the average is closer to two percent long term now these next steps you can take separately or combine them if we look back on those Schwab estimates we see inflation has been four percent long term but expected to be around two and a half percent over the next decade now I'm thinking we get a little higher than that maybe two point seven five percent inflation but it's all pretty close long-term real earnings growth has been around six percent but I'm thinking we see closer to five percent for the foreseeable future so if we're building that market forecast then that two percent dividend yield plus 2.75 inflation and then five percent real earnings growth it gives us about a 9.75 annual return and for an individual stock you can combine the inflation and real earnings growth estimates by using just the total earnings growth for this we'll use Morningstar since it gives us four years of earnings data free and we'll go to the financials data tab here and the income statement next we'll scroll down and look for this diluted earnings per share or EPs and we see here in 2022 the company reported two dollars and nineteen cents and per share earnings now scroll over here and we can see what it did over the last four years so here in 2018 it reported a dollar fifty per share so to find an annual growth rate we take two dollars and nineteen cents divided by a dollar fifty per share and we get 1.46 now we have to take that to the power of 0.25 since it's four years here and we get an annual earnings growth of nine point nine percent now just like that dividend yield we have to ask ourselves if that 10 earnings growth is realistic and something Coca-Cola can do for over the next decade for my research I found that Coke's longer term earnings growth is closer to 5.5 percent a year but willing to give them the benefit of the doubt with a six percent estimate for the next ten so here if we add up our three percent dividend yield and then a six percent earnings growth estimates for shares of Coca-Cola we get a forecast of nine percent annualized total returns which is a pretty solid return now most companies like to keep their dividend yield fairly consistent so it's going to be your earnings estimates that's always going to be the most difficult and the most prone to error here but this estimate is simple and straightforward you can do this for each stock in your portfolio and then get an average for your overall portfolio or one weighted by how much you have in each stock all right if you're still with me you're my kind of people because I know this is a lot of numbers and sounds like a lot of work but this will make you a better investor and and make sure that you're not depending on Wall Street to feed you those forecasts so now you've got those Wall Street forecasts as well as your own how do you invest with this information if your own estimates confirm that low overall return that we see from Vanguard then I think the way to go here would be a bond heavy portfolio remember back in that chart if we see here a similar return on corporate bonds that 4.2 to 5.2 percent range which is only a little below the range for stocks but with bonds we get it with less than a third the risk then that is just a much better risk-adjusted return basically what you want to do here is just park your money maybe even 30 or 40 percent of it in safe bonds and get that return until better opportunity comes along in stocks you could also sell covered call options against your socks so selling call options at a strike price say 10 or 15 percent above the current price if you're only expecting to stocks to rise maybe six percent a year at best you're going to collect that premium on those covered calls and still keep the stock when the call option expires now if however your estimates for returns are quite a bit different from those analyst estimates I wouldn't just ignore the analyst forecast ask yourself where your estimate might be different and it's usually going to be in those potential earnings growth so do you think companies or the stocks in your portfolio can produce those higher earnings growth that you're estimating rather than the Wall Street estimates but if you still do believe this stocks will produce that higher return than expected in this case you'd want to have a stock heavy portfolio I'd still holds some bonds and real estate stocks for that diversification but holding maybe 70 or 80 percent even of your money in stocks is going to give you that upside potential when returns are higher than Wall Street expects get the weekly bow tie free each week before the Market opens with the link below or click on the video to the right for seven investing rules from Peter Lynch possibly the greatest investor of all time don't forget to join the let's talk money Community by tapping that subscribe button and clicking the Bell notification

Channel: Let's Talk Money! with Joseph Hogue, CFA

Views: 21,223

Keywords: stock market returns, stock market, stock market news, stock market forecasts, stock market predictions, how to invest in stocks, stocks, joseph hogue, lets talk money, bow tie nation

Id: 9sjJeGYhDTY

Length: 13min 23sec (803 seconds)

Published: Fri Jul 07 2023