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Jack Bogle believes the stock market will return only 4% annually over the next decade


Jack Bogle
Shannon Stapleton | Reuters
Jack Bogle

Investing pioneer Jack Bogle believes investors should dramatically lower their expectations for returns over the next decade.

The creator of the first index fund said the following in an interview with CNBC's Mike Santoli:

"Just for mathematical reasons, the dividend yield is 2 percent, a little under 2 percent in fact, and the long-term dividend yield on stocks is pretty close to 4 ... the earnings growth on stocks has been a little over 5, that's going to be a very tough target in the future so let's call it 4 ... 4 and 2 percent give you a 6 percent investment return, but then you have to take ... the valuations in the market. ...You take that 6 percent return and maybe knock it off a couple of points perhaps for a lower valuation, slightly lower valuation over a decade and you're talking about a 4 percent nominal return on stocks. And that's low, lower than history. History is around 6 and a half."

The founder of the Vanguard Group, who was recently called a "hero" to individual investors by Warren Buffett, said that the market is even more overvalued than it appears because Wall Street today just looks at operating earnings, which take out all the "bad stuff."

So if this is the outlook ahead, what should the regular investor do?

"It doesn't mean you should stop investing, but it means you should be investing in accordance with the expectation of lower returns in the future, and if you're wrong and if I'm wrong and the returns are higher, well, you're just going to have a terrible problem: Your nest egg is going to be larger than you would have ever expected."

The comments from Bogle came in a CNBC PRO Talks interview, which can be seen in its full form here. However, a subscription is required.