Bill McNabb, CEO of Vanguard Interview

[AdrianC]

Good interview podcast:

http://www.ritholtz.com/blog/2015/05/mib-bill-mcnabb-ceo-of-vanguard-group/

McNabb is thinking investors need to have realistic return expectations, which he quantifies as:
Stocks 6-8%
Bonds 3%
60/40 Portfolio 5-5.5% less 2% for inflation, real return of 3 to 3.5%

People need to save more for retirement.

I (and Bogle) think he is quite optimistic with his stocks return guess. Good interview, though. Vanguard is a great company, that's the impression I get from the guy.

[Yankuba]

Glad to see this is catching on. I also project 6% equities, 3% bonds and 2% inflation. Not that I am an economist or quant. People really will need to save a lot more money or they will have to increase their compounding time.

[PharmaStache]

This is freaking depressing, considering that when I started saving (at the age of 18-20), I had all of my money in a high interest savings account making over 5%.

[Yankuba]

This is freaking depressing, considering that when I started saving (at the age of 18-20), I had all of my money in a high interest savings account making over 5%.

LOL - that wasn't too long ago. Maybe 2006/2007? Back then you could earn $50K on $1mil in savings, risk free. Today you earn $10K on that same $1mil. Even munis are only yielding in the twos.

[Yankuba]

The Economist weighs in on future returns - they are pessimistic

http://www.economist.com/news/finance-and-economics/21678812-pension-funds-and-endowments-are-too-optimistic-many-unhappy-returns?fsrc=scn/tw/te/pe/ed/manyunhappyreturns

[Retire-Canada]

Good interview podcast:

http://www.ritholtz.com/blog/2015/05/mib-bill-mcnabb-ceo-of-vanguard-group/

McNabb is thinking investors need to have realistic return expectations, which he quantifies as:
Stocks 6-8%
Bonds 3%
60/40 Portfolio 5-5.5% less 2% for inflation, real return of 3 to 3.5%

People need to save more for retirement.

Or go 90/10 = 6.5% - 2% for inflation = real return of 4.5% keep saving 25x costs.

Most sensible people will agree they don't know what's going to happen in the markets and then a lot of them predict what's going to happen in the markets. If you listen to the gloom and doom folks you are just as likely to work too many years and save too much.

I think it's a whole lot smarter to find a middle ground and have some flexibility in your plan.

[AdrianC]

"Most sensible people will agree they don't know what's going to happen in the markets and then a lot of them predict what's going to happen in the markets."

McNabb and Bogle aren't trying to predict market movements. They just look at the current high valuations and figure in mean reversion.

Mean reversion will happen. Fast or slow, no one knows.

I'd be very happy with a real return of 4.5%.

[fattest_foot]

I didn't listen to this, but I'm curious if the 2% inflation is explained. If equities and bonds are expected to perform so poorly, I would expect inflation to be flat or even into deflation.

Currently for 2015 it's looking to be pretty flat.

If you take that into account, we'd be right back up to 8-10% for return on equities.

[Scandium]

Good interview podcast:

http://www.ritholtz.com/blog/2015/05/mib-bill-mcnabb-ceo-of-vanguard-group/

McNabb is thinking investors need to have realistic return expectations, which he quantifies as:
Stocks 6-8%
Bonds 3%
60/40 Portfolio 5-5.5% less 2% for inflation, real return of 3 to 3.5%

People need to save more for retirement.

I (and Bogle) think he is quite optimistic with his stocks return guess. Good interview, though. Vanguard is a great company, that's the impression I get from the guy.

Haven't listened to it yet, but some important clarifications:
Q1: Over what timeframe? 5 years, 10, 30? Low returns over next 5-10 years? Whatever, personally I don't care as I'll still be accumulating then.
Q2: US or international, or mix?
Q3: since "everyone" is expecting lower returns isn't it already priced in?

Also confused how inflation can be 2% and bond returns 3%. So he's assuming only 1% real return? Or 5% nominal? Currently inflation is zero and bond funds already yield 2%+..

[REfinAnon]

I'm surprised this post didn't get more attention.

As a 28 year old, this is basically my biggest fear.

The Fed basically sold all savers down the river.

[nobodyspecial]

The Fed basically sold all savers down the river.

Or they made it cheap for companies to invest in R&D, new products and new plant so boosting their value - while making it cheap for consumers to borrow to buy all those new products ;-)

[arebelspy]

The Fed basically sold all savers down the river.

Or they made it cheap for companies to invest in R&D, new products and new plant so boosting their value - while making it cheap for consumers to borrow to buy all those new products ;-)

Great for investors like us who own those companies!

Not so much for the paranoid stuff money under a mattress folks.

[Doubleh]

This is freaking depressing, considering that when I started saving (at the age of 18-20), I had all of my money in a high interest savings account making over 5%.

LOL - that wasn't too long ago. Maybe 2006/2007? Back then you could earn $50K on $1mil in savings, risk free. Today you earn $10K on that same $1mil. Even munis are only yielding in the twos.

So back when inflation was running in the region of 3-4%, making a 5% nominal return worth 1-2% in real terms?

[YoungInvestor]

Good interview podcast:

http://www.ritholtz.com/blog/2015/05/mib-bill-mcnabb-ceo-of-vanguard-group/

McNabb is thinking investors need to have realistic return expectations, which he quantifies as:
Stocks 6-8%
Bonds 3%
60/40 Portfolio 5-5.5% less 2% for inflation, real return of 3 to 3.5%

People need to save more for retirement.

I (and Bogle) think he is quite optimistic with his stocks return guess. Good interview, though. Vanguard is a great company, that's the impression I get from the guy.

Q3: since "everyone" is expecting lower returns isn't it already priced in?

That's not how it works. With bond yields so low, investors are prepared to accept lower returns on equity. This means they are willing to pay a higher price, which explains the current situation.

If treasuries yielded 25%, you'd be an idiot accepting a p/e of 20 on the entire market. This would drive prices down.

[AdrianC]

Haven't listened to it yet, but some important clarifications:
Q1: Over what timeframe? 5 years, 10, 30? Low returns over next 5-10 years? Whatever, personally I don't care as I'll still be accumulating then.
Q2: US or international, or mix?
Q3: since "everyone" is expecting lower returns isn't it already priced in?

Also confused how inflation can be 2% and bond returns 3%. So he's assuming only 1% real return? Or 5% nominal? Currently inflation is zero and bond funds already yield 2%+..

Q1: I don't remember McNabb's timeframe. Bogle's is over ten years, but he's predicting 4% from stocks less inflation, including PE contraction over those ten years. I expect McNabb just means going forward with no PE contraction and no margin compression.
Q2: Think he was talking US only at the time. He did talk about better opportunities internationally.
Q3: "TINA" - There is no alternative.

Inflation has been running around 1-2% for five or so years. This years numbers are lower. A bit of inflation is good.

When interests rates rise current bond prices will fall. Maybe he was mentally pricing that in? Don't know. I don't do bonds myself, apart from a few ibonds bought years ago at way better interest rates.

[AdrianC]

Here's the Bogle article:

http://www.morningstar.com/cover/videocenter.aspx?id=718639

"So, we've got a 4% return for stocks--maybe a little bearish, but we just don't know--and a 3% return for bonds. That's a 3.5% return on a balanced 50-50 portfolio.

Some important caveats: That's a nominal return."

[maizefolk]

Here's the Bogle article:

http://www.morningstar.com/cover/videocenter.aspx?id=718639

"So, we've got a 4% return for stocks--maybe a little bearish, but we just don't know--and a 3% return for bonds. That's a 3.5% return on a balanced 50-50 portfolio.

Some important caveats: That's a nominal return."

It's not quite as bad as it sounds.

From the article he's basing his projections on 6% earning growth per year over the next 10 years while PE ratios compress from 20 to 15 (or 17, but let's keep things simple).

So if you bought 100k of VOO today, it'd be worth $134k in 2025, and your dividend income would grow from $2.06k/year to $3.7k/year (assuming a constant ratio of earnings to dividends). If all dividends are reinvested over that timeframe, that'd be something like $170k in value and $4.7k in income. That's a CAGR of ~5.5% for stock price and ~8.6% for income.

That's below the long term CAGR for the stock market with dividends reinvested (9.1% for the S&P 500 without correcting for inflation and 6.8% after correcting for it), but if 10 years from now we've done at least this well -- and inflation stays below 2% -- I wouldn't complain.

[Shane]

Good interview podcast:

http://www.ritholtz.com/blog/2015/05/mib-bill-mcnabb-ceo-of-vanguard-group/

McNabb is thinking investors need to have realistic return expectations, which he quantifies as:
Stocks 6-8%
Bonds 3%
60/40 Portfolio 5-5.5% less 2% for inflation, real return of 3 to 3.5%

People need to save more for retirement.

Or go 90/10 = 6.5% - 2% for inflation = real return of 4.5% keep saving 25x costs.

Most sensible people will agree they don't know what's going to happen in the markets and then a lot of them predict what's going to happen in the markets. If you listen to the gloom and doom folks you are just as likely to work too many years and save too much.

I think it's a whole lot smarter to find a middle ground and have some flexibility in your plan.

+1