Is the stock market about to crash?

Is the stock market about to crash?

It's a question on many investors' minds, but the honest answer is that short-term market predictions are notoriously inaccurate, and investors are generally wise to ignore them. That said, to build a sound financial plan, you do need a rough estimate of what future returns might look like, and there are good reasons to think the years ahead may be leaner than the ones behind us.

In this video, you'll learn why several prominent voices, including Warren Buffett and Jack Bogle, the founder of Vanguard, have warned that investors should expect lower returns in future than they've grown accustomed to. Antti Ilmanen of AQR Capital Management, a highly respected authority on long-term asset class returns, agrees. He explains that bond yields sit near historic lows, and that other assets look expensive too: measures such as dividend and earnings yields on equities are also near all-time lows. Across the board, long-only investments appear costly relative to their own histories, potentially offering something like half of what investors might have expected over the last century.

You'll also learn what those future returns might realistically look like. While no one knows exactly what lies ahead, and experts inevitably disagree, Ilmanen offers approximate figures: very modest real returns for bonds, just above zero, and higher but still historically low real returns for equities, perhaps around 4%, or a little more in Europe. Set against a historical range of roughly 3% to 15% over the past hundred years, both asset classes look likely to deliver considerably less than the norm.

The takeaway: if we really are entering an era of lower returns, it becomes more important than ever to ensure your returns stay as close as possible to market returns. That means keeping a very tight rein on costs, especially management fees and transaction charges, and staying disciplined by sticking to your plan through thick and thin. The evidence is clear that trying to time the market damages returns. Buffett and Bogle may, of course, turn out to be overcautious, but it's wise to expect and plan for lower returns, and then be pleasantly surprised if that forecast proves too pessimistic.

Chapters / Key points

• Why short-term market predictions should be ignored
• Why you still need a rough estimate of future returns for planning
• Why Buffett, Bogle and others warn of lower returns ahead
• Antti Ilmanen on why most assets look expensive today
• What low bond yields and equity valuations signal
• Approximate future return estimates for bonds and equities
• How today's outlook compares with the last 100 years
• Why keeping returns close to market returns matters more than ever
• Why low costs and discipline are the keys in a low-return era
• Why you should plan for lower returns and hope to be surprised

Transcript

Is the stock market about to crash?

Robin Powell: Hello there. Short-term predictions about the markets are notoriously inaccurate, and investors should ignore them. But to produce a financial plan, you do need to have a rough estimate of what future returns are likely to be. Market history provides a guide, but it shouldn't be relied on. Several prominent voices, including Warren Buffett and Jack Bogle, the founder of Vanguard, have warned that investors should expect lower returns in the future than they've been accustomed to in the past.

Antti Ilmanen from AQR Capital Management is a highly respected authority on long-term asset class returns, and he agrees.

Antti Ilmanen: Sadly, we can expect lower returns from today's environment. That's pretty obvious for anybody looking at bond yields, which are near historical lows. But in addition, any other asset that we look at seems to have low starting yields from today's level, so if you look at the dividend or earnings yields of some equities, these types of measures tell us that we are near all-time lows on them as well. Overall, we just find that all kinds of long-only investments are expensive versus their histories, offering something less, maybe half of what we could have expected in the last century.

Robin Powell: Of course, no one knows exactly what the future holds. And experts will inevitably disagree. But I asked Antti Ilmanen to put approximate figures on future long-term returns.

Antti Ilmanen: For bond markets, very modest. Just over 0 real returns is probably what's feasible from here, given starting yields. For equities the numbers are bigger, maybe 4 percent, maybe in Europe a little higher, 5 percent real long-run return from here. It's higher than bonds, but from a historical perspective it's very low. The historical range has been 3 to 15, looking at the last 100 years of data. So both asset classes offer much less than has been the norm.

Robin Powell: If indeed we are entering an era of lower investment returns, it's more important than ever to make sure that your returns are as close as possible to market returns. That means keeping a very tight rein on expenses, particularly management fees and transaction costs. And also being disciplined, in other words, sticking to your plan through thick and thin. The evidence clearly shows that trying to time the market has a negative impact on returns.

Of course, it may turn out that the likes of Buffett and Bogle are being overcautious. But in any case, it's wise to expect and plan for lower returns, and then be pleasantly surprised if your forecast turns out to be pessimistic. Thanks for watching.