Updated October 7, 2019
At the end of the strong bull market of the 1990’s, a few brave financial experts predicted the next decade would not be a good one for stock investors.
What will stocks do over the next 10 years? Ray Dalio, Warren Buffett, Rob Arnott, Liz Ann Sonders and John Bogle have told us what they think will happen in the stock market over the next few years either directly or indirectly.
In case you’re new at Retire Certain, I write about what I have learned from investing for almost 40 years along with creating alternative income streams for the past 15 after seeing we needed to do so to retire comfortably.
So what will stocks do over the next 10 years? Let’s begin with the reality that we can’t know for sure exactly how stocks will perform and when the stock market will change direction.
You Can’t Know When Stocks Will Change Direction
In March of 1998 I met my mother in New York City to celebrate her 73rd birthday. My husband had arranged a personal tour on the floor of the NYSE (New York Stock Exchange) with a broker he knew before we celebrated her birthday atop the World Trade Center.
The excitement on the exchange floor was insane due to the anticipation of the Dow crossing 10,000 for the first time ever on that very day. The NYSE was giving out hats with “Dow 10,000” on them.
After saying hello, the broker’s next words were “If you own any stocks, sell them. This is crazy and it isn’t going to last much longer.”
Bill was a little over a year early in calling the early 2000 stock market crash and the subsequent “lost decade” for stock investors with the S&P 500’s annualized return of -.95% including dividends during those 10 years.
But millions of investors whose retirement savings greatly suffered from that “lost decade” would swear that his advice was close enough to being right and wish they had heard it in March of 1998, and sold stocks accordingly.
No one can know exactly when stocks will change direction. Smart investors, wealthy investors and their tactical wealth managers, however, invest based on larger trends to build wealth while lowering risk.
What will stocks do over the next 10 years?
The wise investors and wealth managers below have given their opinion about what stocks will do over the next 10 years, either directly or indirectly, by their words or actions. So, let’s look at the super smart money to see what they do when markets get overvalued.
The more well known and followed the expert is, the more guarded and less transparent their voices must be since their words alone often trigger investors, traders and other wealth managers to buy or sell stocks, often in extreme volumes. This could create panic selling in the financial markets, which no one wants again.
Often, you’ll notice a retracement or an adjustment of their original advice that didn’t follow conventional investing methods (long term buy and hold investing regardless of valuations) for this very reason.
So, sometimes, as individual investors, we have to “read between the lines”.
Transparency in Financial Services
While you’re still not going to catch Jim Cramer jumping around and yelling that you should stop investing in stocks (he’d be out of a job!), I do think that transparency has increased among top financial experts.
For example, I respect the heck out of Liz Ann Sonders, Charles Schwab Chief Investment Strategist for voicing her subtle warning about what stocks will do in the next 10 years on Twitter and elsewhere.
Similarly, Vanguard, who has always put investors first in my humble opinion, has taken a rare cautious stance about U.S. stocks over the next 10 years, as you’ll see in this post.
Below each expert, I’ll briefly note why I respect their opinion so much that I am willing to share it with my readers.
But, honestly, the fact that they are willing to suggest that it’s time to increase caution about stocks in the US amidst a country very committed to passive index investing without regard to valuations is almost enough for me to value their opinion.
Rob Arnott, Research Affiliates Founder
Arnott’s quote about the biggest surprise for most people after seeing low expected returns from stocks over the next 10 years using the projected return tool they developed – “…what has performed best in the past isn’t likely to perform well in the future, and what has disappointed in the past is where the opportunities lie” (Norton 11).
“People forget that disruptors get disrupted.” – Rob Arnott, Barron’s, August 2019
As of August 2019, this statement made by Arnott in a Barron’s interview makes it clear what stocks will do over the next 10 years based on his expertise: “I personally have essentially nothing exposed to U.S. stocks at these valuation levels.”
Below is how Arnott used basic math to arrive at his low return expectation from stocks over the next 10 years. Regularly readers know that I love this. As you may have read here, math and historical data provide the foundation for investing, not “they said” or the actions our emotions can lead us to take.
Arnott explained in Barron’s:
- The average dividend yield was 4.5% over the past century compared to 2% now.
- Growth of 8% is needed to get to that average yield of 4.5% (Norton 11).
- Such growth has never occurred off an economic peak.
- This type of growth has only happened off the bottom of deep recessions.
- Research Affiliates provides a new tool that is a Scatter Plot with 10 year return expectations from stocks and other asset classes.
The fact that this Scatter Plot shows a return expectation for U.S. stocks of only half a percent over inflation has shocked a lot of investors.
Arnott explains “Normal growth is 1 to 1.5% faster than inflation.” A 2% yield added to 1% normal growth gives a real return of 3%.
He further explained that the current Schiller PE ratio (in August 2019) was 32. If it returns to the historical norm of 17 this would equate to a 6% to 7% “haircut every year for 10 years.”
If this happened, it would take you from the 3% real return to negative 4% real return. Fortunately, Arnott added that they are not that pessimistic but expressed other concerns.
For one, there is an enormous concentration in the same types of stocks in the U.S. stock market. He provides the following story from the tech bubble which began in 2000 which can be applied to over inflated markets where the money is concentrated in only a few stocks, a common occurrence before bear markets.
Over the past 19 years since then, 5 of the companies among the 10 largest market caps in 2000 have had a negative return. Disturbingly, the average for the 10 largest market cap companies has had a slightly negative return.
There has been only one which beat the market, Microsoft (MFST). It did so by 1% a year.
(See Bear Stock Market Predictor Rule #7.)
What does Arnott like now?
Arnott likes value stocks in Emerging Markets and EAFE stocks. He invests in both these asset classes through funds.
He emphasizes that his tolerance for “maverick risk” is high and that he is okay with going “out of step with the markets” for a year or two, unlike most investors.
Arnott said that he thinks cryptocurrencies are “probably bubble material”. I point this out because bubbles are common bear market signals (Norton 11).
Read my related post Reducing Risk from Stocks with 13 Lessons from Past Bear Markets.
John Bogle, Founder of the Vanguard Company.
Bogle created the world’s first index mutual fund. Through this, he made low cost investing available to individual investors.
John Bogle promoted long term investing. Two of John Bogle’s eight rules for investors, however, suggest using past market data to improve investing results are below:
- Do not overrate past fund performance.
- Use past performance to determine consistency and risk.
Let’s see how John Bogle has applied these two guidelines after a long bull market which began in March 2009.
In October 2018, Bogle shocked the investing community when he predicted the following annual returns over the following 10 years:
- Stocks – 4%
- Bonds – 3.5%
The numbers are low by historical standards. He went on to add that considering inflation at 2%, a portfolio of half stocks and half bonds may return 1.75% annualized before considering fees.
Similar to Arnott, Bogle used historical earnings data and math to back his prediction with the following.
A 2% dividend yield with 4% earnings growth offset by a -2% change in the PE ratio was the foundation for Bogle’s prediction (Faber).
If this low stock return prediction sounds preposterous, consider this: Between December 31, 1999 through December 31, 2019 the annualized return of the S&P 500 index was -.95% including dividends but before investment fees (Mahn).
Without dividends, that annualized return dropped to -2.72%.
(Hello 1999, shortly after the Dow 10,000 hats referenced earlier in this post!) How easily we forget.
John Bogle died in January 2019. Vanguard, the firm he founded, however, predicted the following returns for the next 10 years in May, 2019 (“Market and Economic…”):
- U.S. equity returns: 4% – 6%
- U.S. aggregate bond returns: 2.5% – 4.5%
- International equities returns: 7.5% – 9.5%
- International bond returns (hedged): 2% – 4%
Vanguard surprised U.S. investors, too, when, in January 2019, they recommended a 40% allocation into non-U.S. stocks and bonds, up from a previous, and already high, 30% allocation to non-U.S. stocks (Gittelsohn).
Also, in January 2019, Vanguard predicted a 4 to 4.5% return on a portfolio of 60% stocks and 40% fixed income over the next 5 years as of that time (“What’s a Realistic…”).
The short video below from Vanguard explains this prediction on what stocks will do over the next decades very well.
Warren Buffett needs no bio here. Like Bogle, Warren promotes long term investing.
But, also like Bogle, he doesn’t invest without considering valuations. In fact, low valuations are the very foundation of Buffett’s investing principles.
And when is it easy to buy stocks at low valuations? After a bear market.
As I have written here before, Warren is more of an entrepreneur than a stock investor. This is because Charlie Munger finds deeply discounted stocks.
And after buying them, Warren becomes involved with the management of them, thereby increasing profits.
It is obvious that Buffett’s activity affects the financial markets. For this reason, it’s highly unlikely that he would suggest investors scale back stocks because they are overvalued.
His famous quotes, however, suggest that he supports buying low and selling near market tops.
“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
Investors are most fearful near the end of a bear market and greedy near the end of bull markets, right near the market tops when allocation to stocks should logically be scaled back.
This is logical, but the emotion of greed takes over and math and logic are thrown right out the window.
“Price is what you pay. Value is what you get.”
This suggests selling in overvalued markets and buying in undervalued markets.
While Buffett tends to do this on a more granular level by finding individual companies, bargains among such companies are harder to find in overvalued markets or those near the end of an extended bull market.
“Our favorite holding period is forever.” Warren Buffett
Despite Buffett’s spoken affinity for long term investing with the above quote, lo and behold, the second quarter Berkshire Hathaway operating results revealed a record high cash level at the end of June 2019.
- Bought less stock than it sold
- Reduced share repurchases
- Did not find an acquisition at a fair price.
If these actions aren’t screaming that stocks are overvalued (and hence due for lower returns) I don’t know what is.
In early 2019, Buffett told investors that “prices were sky-high for businesses possessing decent long- term prospects.”
Interestingly, Berkshire Hathaway also showed $1 billion of gains from equity index put options revealing that Buffett may be a little bit of a market timer as well as an old fashioned buy and hold investor.
Ray Dalio, Co-Chief Investment Officer & Co-Chairman of Bridgewater Associates, L.P.
Ray Dalio is an American billionaire investor and founder of one of the largest hedge funds in the world.
Dalio predicted the financial crisis and even consulted the White House in surviving the mess. I like that he makes his opinions and expertise available to everyday investors like us, often via LinkedIn and videos that are shown on YouTube.
In a LinkedIn post in July 2019, Dalio explains important ten year paradigm shifts. During these shifts, investors get hurt from investing in overly popular assets. By being aware of these shifts, investors can prepare themselves.
This is a little complex but it’s digestible and it is super important to understand what it explains so stay with me.
If, like me, you have major concerns about the insane government debt, money printing and global negative interest rates, this will make sense of why and how these events will affect your investments.
This is Dalio’s explanation below of the problem with my adaptation. Remember, this is the guy that the White House called in to help sort out the financial crisis.
Stocks have risen because interest rates have fallen, stock buy backs and lower corporate taxes.
Thus far, investors have been okay with about the interest rate (investment income) decline because investors pay more attention to the price gains (that are a result of falling interest rates) than they do to future falling rates of return.
When interest rates go down, the result is that the present value of assets (investments) increase. This gives the illusion that investments are providing good returns.
In reality, the returns (increases in asset values) are just future returns being pulled forward by the “present value effect” (not due to increased profits, the normal reason for rising asset values).
As a result, future returns will be lower than they have been during this time period when lower interest rates were causing asset prices to rise.
In other words, returns from U.S. stocks will be lower over the next 10 years.
What does Dalio like now?
Based on a recent LinkedIn article Dalio posted, he likes gold, in particular. Here is an excerpt from his post.
“I think these are unlikely to be good real returning investments (referencing U.S. equities) and that those that will most likely do best will be those that do well when the value of money is being depreciated and domestic and international conflicts are significant, such as gold. Additionally, for reasons I will explain in the near future, most investors are underweighted in such assets, meaning that if they just wanted to have a better balanced portfolio to reduce risk, they would have more of this sort of asset. For this reason, I believe that it would be both risk-reducing and return-enhancing to consider adding gold to one’s portfolio.”
You can read the entire LinkedIn article here if you’d like to really know what has and is happening with the factors that affect your investments. It’s not an easy read, but well worth the effort.
What Dalio Has Bought
Michael Jay has done an amazing job of dissecting Bridgewater Associate’s first Quarter 13f filing, which shows what ETF’s Dalio has bought lately. While the first quarter of 2019 is old news, Dalio tends to ease into long term trends so I consider this information still very relevant.
Dalio held other asset classes, including the gold ETF, GLD, and U.S. Treasury bonds. It is important to be aware that, as Michael Jay explains, not all investments are required to be reported on the 13f filing.
Liz Ann Sonders, Schwab Chief Investment Strategist
In the spring of 2009 when pessimism was highest after the devastating bear market that saw the S&P 500 index drop by over 56%, Liz Ann Sonders suggested the recession was ending. The prediction in her monthly commentary was just a little early, as June was the official end of the recession.
According to Barron’s, Sonders also predicted the Great Recession.
Sonders explained in this same recent Barron’s article from August 2019 that inverted yield curves not only predict recessions, they cause them to happen (Otter).
This point was also made by Rob Arnott in the same Barron’s issue.
As a refresher, an inverted yield curve occurs when short term interest rates are higher than long term rates. As of this writing, the 3 month Treasury bill has a higher yield than a 3 month note, indicating an inverted yield curve.
Sonders also points out that small companies have higher debt levels than they did in the worst of the Great Recession. Cyberattack and the trade war are other concerns high on Sonder’s list.
Read my related post How Will a Stock Market Crash Affect Me?
What Does Liz Ann Sonders Recommend Now?
Sonders suggests not trying to time the market but instead, re-balance more often. This leads to “trimming high” and buying low, albeit in smaller chunks (CNBC).
Given her position, it is not surprising that she is not making a bold recommendation of reducing the overall allocation to U.S. stocks, as Dalio, Vanguard and Arnott have implied.
It’s always important to realize the pressure and unseen forces driving investment recommendations.
Dalio and Arnott have at the core of their investment philosophy to invest based on valuations and trends.
Vanguard provides individual investors excellent ways to invest in their higher recommended allocations into emerging markets with their many ETF’s and index funds.
Schwab, however, also offers thousands of funds to invest in non-U.S. stocks.
Perhaps Sonders advice is not bad advice for more passive investors that want to continue to invest based on asset allocation. It allows them to easily make minor adjustments in their portfolio allocations without much effort.
Or maybe it is the fact that most simply investors want easy solutions and optimist outlooks that kept Sonders from making a bolder asset allocation suggestion with a smaller allocation to U.S. stocks.
But the fact that Sonders has openly stated her concerns about a brewing recession in a timely way (vs being a perpetual bear), predicted and called the end of the Great Recession is enough to make me respect her guidance.
Click here to read my post How to Understand Your Investments.
What Will Stocks Do Over the Next 10 Years?
While much of the context for this post has occurred over the past 9 months, this information is timeless. It is most definitely relevant for the next decade or two because it applied to decades, not months or even years.
This is because the insights gathered from these wise investors isn’t about market timing.
It’s about reducing risk while building wealth by understanding and taking advantage of how long term cycles affect asset classes, and economic realities with a little math and logic thrown in.
Thanks for reading. Please share if you found this information valuable for individual investors like you and me.
Note: I have no affiliation whatsoever with any of the services mentioned in this post as of this writing.