Retail investors are still on the sidelines and not completely in the market, said John Bogle, chairman and founder of the Vanguard Group, but he said that this won't stop stocks from being major "income generators" over the next decade.
"Retail investors have lost confidence in active management and that's why you see these flows pouring into index funds out of actively managed funds," he said. "That's a trend that's going to persist."
He said that investors "feel burned" because they've paid high fees for poor returns and have lost trust in the market. "It seems very, very likely that over a decade stocks should give a return of 7 percent per year," Bogle said, "that's a 100 percent return on stocks" if his expectations are realized.
The reluctance of retail investors to re-enter the market should encourage professional investors, since they have traditionally been late to the game. Major retail inflows have also signaled that the market was at a top.
Bogle said he expects bonds over the same period to produce returns in the 35 percent range. He thinks investors should look at stocks as "income generators" in this environment, where bonds won't be as profitable as they once were, relative to stocks.
"I can contain my enthusiasm with the Dow going to 14,000," he added, "it doesn't mean very much. The signs are mixed," adding that the Nasdaq Composite Index is still far off its all-time highs.
"I don't think the economic signs are going to change very much," he said, "I think 2 percent real GDP growth in 2013 is not a bad target, maybe 2.5 percent."