Portfolio Investing Blog: Portfolioist

Vanguard founder and investing icon John Bogle doesn’t believe we’re in a bond bubble, but he does think bonds will produce only modest returns for quite some time. Still he says investors generally belong in the conventional stock and bond markets — not reaching into more exotic categories for yield.

In this interview (video below) with Morningstar at the recently concluded Bogleheads reunion outside Philadelphia, he runs through a common sense approach to estimating what kind of yields investors can expect over the next five to ten years from those conventional categories.

Between dividend yield, now around 2.25%, and earnings growth tracking GDP of around 5%, Bogle thinks 6-7% return on U.S. stocks is “reasonable”. Current valuations have stock prices on average trading for around 18 times earnings per share. That might come down a bit but is “more or less” in the right range.

As for bonds, he put returns overall in the 3.5% range with intermediate bonds now 2.5% or so and corporate bonds around 4.5%.

Neither number is a barn burner, but over time returns do add up: With compounding, 7% on stocks doubles your investment in a decade. Bond’s 3.5% get you half that return.

He does acknowledge real risk to that scenario, though. “America,” he says, “is a troubled nation.”