Stocks Poised to Outperform

Thoughts from Jack Bogle founder of the Vanguard Group:

I would say given the dire outlook for the U.S. economy, unless our Congress can get its act together, that one might want to be a little more conservative than one usually is. If one wants to do anything at all it will be to lean to the conservative side. I am not recommending, you know, all of a sudden go out and do something very conservative. But if you are worried, just take a little bit less risk rather than a little bit more risk thinking there are some advantages here because there are lot of problems down the road that we have no idea whether they will be solved one way or the other.

But we do know that, for example, and this is a really important point, and that is if you look out for a decade, we know pretty much what the return on bonds is going to be. That's your first course in safety; when money market funds are yielding essentially zero, you go to bonds. And the 10-year Treasury is yielding around 2.3%. That means that’s what its return will be around 2%- 3% during the next 10 years.

And curiously enough, as I looked in the recent newspaper, the inflation-hedged version of that 10-year bond, the inflation bond, has a yield of zero. So, there are not a lot of great places to move. But over that decade, the way I look at it and nothing is certain in this world, is that stocks could give you a return significantly higher than that. Stocks also have a yield of around 2.3%, the same as the 10-year Treasury, but they have earnings that should grow even if the economy grows a little more slowly than say at 4% instead of 5% in nominal terms, that would be a 6% return on stocks. Maybe they can grow a little faster. That would be a 7% return on stocks for example.

So in terms of what will do a better job for you over the decade ahead, the odds are very, very much in favor of stocks. But that's not guaranteed. I will be very clear on that because of the problems I have discussed earlier. But if you want to shift around what you are doing, you’ve got to look at probable returns, however uncertain those probabilities are.

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