If you are looking for easy answers or reassuring platitudes, do not check in with Jack Bogle, the 88-year-old founder and retired CEO of the world's largest mutual fund company, Vanguard, which manages $4.5 trillion in assets.
"I seek the truth," he said. "In my long experience, one thing I know is that truth is elusive."
And even when it's painful, he believes in facing up to it.
Forty-two years after he founded Vanguard, and nearly two decades after relinquishing the CEO spot the same year he had a heart transplant, Bogle still keeps up a grueling schedule.
This fall he released the 10th edition of one of his best-selling books, The Little Book of Common Sense Investing. In a few weeks he is sitting for a Q&A at the Council on Foreign Relations. In early December, Bogle is speaking at the Public Company Accounting Oversight Board, the accounting-industry watchdog at the center of a brewing controversy over the scant qualifications of the Senate Republican staffer in line to be the new chairman. Bogle has consistently advocated to make the PCOAB a tough regulator.
In an interview with CNBC, he offered a handful of predictions on the global investment market in 2018 and beyond.
Bogle's bias comes at a time when the global recovery is on a tear. But the investment sage notes that the American market is a proxy for international markets and there is no better place to invest. "U.S. companies are innovative and entrepreneurial," he said. As he points out, over the long-term investing outside of the domestic market doesn't guarantee higher returns.
Data analysis from Morningstar proves his point. The 10-year annual average return of the is 8.04 percent, compared with 1.73 percent for the MSCI EM and a 10-year 2.01 percent return for the MSCI EAFE, an index of stocks outside the United States and Canada. But YTD the three indexes are up 17.45 percent, 33.17 percent and 21.38 percent — with most commentators putting the outperformance outside the United States to a long-awaited broad global recovery or to capital that is looking for bargains, as the price/earnings ratio of the stocks in the S&P 500 has risen to more than 24.
Bogle believes the U.S. stock market will enter a period of relatively low returns. He reached his estimate by looking at 2 percent dividend yield, a "deadweight loss from the 4.4 percent it has been historically," and earnings growth of about 4 percent, which matches typical economic growth, to predict future investment return of 6 percent. He also looked at the difference between today's price/earnings ratio of about 24, and the historic P/E ratio to estimate the speculative return.
"My guess — an informed guess, but still a guess — is that by decade's end the P/E ratio might ease down to, say, 20 times or even less. Such a revaluation would reduce the market's return by about 2 percentage points per year, resulting in an annual rate of return of 4 percent for the U.S. stock market," he wrote in the Little Book of Common Sense Investing.
That doesn't include fees, of course, which would tend to reduce investors' actual return more.
Bogle developed the estimate based on a portfolio consisting of 50 percent U.S. 10-year treasury notes, now yielding 2.2 percent and 50 percent long-term investment-grade corporate bonds now yielding 3.9 percent. Bond returns have a single dominant source, the interest rates prevailing when the bonds are purchased. Historically, there has been a very close relationship between initial yield and 10-year return. Though prices can fluctuate in between, most bonds are held to maturity.
"The main force reshaping investing is the index revolution," he said. "Forty-one percent of all stock assets are in passive investments, and it's growing every day."
In that environment, he said, more people will realize that Wall Street firms have been getting an outsize portion of the value created by corporations in the forms of high fees on financial services. They can total as much as 2 percent, including fees from financial advisors and fees on products such as mutual funds. Many of those fees are hidden in complicated disclosure documents.
"The importance of (investors) getting the return first before the vultures are on it is going to become clearer," Bogle said.
Impact investing — also known as sustainable, responsible investing — is growing exponentially worldwide as more funds focus on this niche. Over the last decade impact-investing funds have amassed more than $70 billion in assets and prominent managers including BlackRock, Goldman Sachs have added impact products to their portfolios, according to McKinsey.
According to Bogle, impact investing is a form of active management, because it requires a manager to pick which stocks or bonds to include or exclude. Every human being has to decide whether improving any social situation is more important than having a comfortable retirement," he said.
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"I do think that impact investing is not that effective. Shares go from investor A to investor B, and the company doesn't even know it. It's inevitably an ineffective way to communicate to the company your feelings."
"It's far more effective to stop buying products from companies (investors want to make an impact on)." Data reveals the trend. Impact investments have historically underperformed. For instance, the MSCI ACWI index returned an average of zero percent over the past decade.
— By Elizabeth MacBride, special to CNBC.com