There are a few names in the investing business that immediately inspire respect. One of those names is 80-year-old Vanguard founder Jack Bogle. His simple, no-nonsense approach to investing has been a mainstay in the community for decades. And in these difficult and tumultuous times, Mr. Bogle has a few recommendations for which investment gurus investors might want to think about emulating.
In a recent interview with TheStreet.com, Jack Bogle talked about his expectations for the stock market in the near future. He stated that he thought it highly likely that stocks would outpace bonds in the next decade, with a somewhat higher dividend yield for stocks helping to contribute to future growth.
Bogle also singled out Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) chairman and CEO Warren Buffett as someone investors should listen to over the coming decade. Likewise, Bogle said he also admires the work that Pimco's Bill Gross has done on the fixed income side. Obviously, few would quibble with the results that both Buffett and Gross have put up in their years of service. However, it's interesting to note that each of these men have somewhat differing outlooks on the health of the economy and the stock market's prospects.
Warren Buffett has always been considered somewhat of a cheerleader for the U.S. economy. He's bullish on our nation's long-term prospects and has urged investors to "buy American." Buffett is even somewhat bullish on the financial sector, owning names like Wells Fargo
I admit I don't see quite as rosy an outlook for our banking sector. Recent data shows that the number of troubled banks jumped by 27% in the fourth quarter of last year, while the FDIC's insurance fund is straining under the weight of continued bailouts. Our financial sector still has a long way to go before it is fully healed. However, Buffett still sees better days ahead, as was evidenced by his recent purchase of Burlington Northern Santa Fe, which he called "a bet on the U.S. economy."
On the other hand, Bill Gross isn't quite as sanguine as Buffett about our economy's generating power. He sees a "new normal" ahead in which rates of return on most asset classes are below average, Asian economies outperform our own, and the dollar remains weak, thanks to an extended process of de-leveraging across the globe. He expects our economy to grow at a low 1%-2% annual rate, while unemployment and inflation will remain high. Gross's view of our future isn't a particularly pretty one, especially for investors.
The best of both worlds
So who's right? Well, in a way, both are. While I may disagree with his assessment of the relative safety of our banking sector, I do agree with Buffett's long-term bullishness on the U.S. economy. However, I also think that Gross's low-return scenario is more likely for the shorter term.
Like Bogle, I believe stocks will beat bonds in the coming decade. Just given the fact that stocks have had such a horrible 10 years, returning nothing in the case of the S&P 500, means that they are far more likely to provide better returns in the next 10 years. The whole concept of reversion to the mean is in our favor right now. Likewise, the bond market's long bull run is likely at an end. With rates set to rise sometime in the next year, bond investors could feel the pinch. That means that stocks are still your best long-term bet for generating wealth -- something I think Buffett would agree with.
But I think the near-term picture is a bit cloudier. While the economy has clawed its way out of recession, our recovery is anything but stable. With stocks already having enjoyed a huge rally, the stock market seems overdue for a breather. I also agree that, at least in the immediate future, asset returns are likely to be below average. A real test of our economy's strength will come in the middle of the year, as government stimulus is taken away, leaving the economy to thrive or flop on its own two feet. Bill Gross's expectations are pretty likely to play out, at least for the next year or so.
In it for the long run
All of this means that investors need to temper their expectations for the short-term, while maintaining their long-term focus. It also means that investors need to look to new corners of the market to find the areas that will be the next market leaders. Don't expect small-cap stocks and risky, low-quality players to continue to lead the pack.
Instead, look to higher-quality large-cap stocks to take center stage. Here we can take another cue from Bogle, who thinks that dividend yield will play an important part in overall returns moving forward. With sub-par returns on slate for the near future, stocks that pay dividends can give investors that extra juice they are craving. If you have new money to put to work, I'd recommend picking up some reasonably priced big-name stocks with hefty dividend yields, like Johnson & Johnson
Ultimately, it's refreshing to hear such common sense from Jack Bogle in a time when so many are chasing trends and proclaiming the death of buy and hold investing. We can learn a lot from Bogle, and from his favored investors Buffett and Gross -- keep your eye on the long-run and stay true to your course, regardless of the noise going on around you.
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Amanda Kish is the Fool's resident fund advisor for the Rule Your Retirement investment newsletter. At the time of publication, she did not own any of the funds or companies mentioned herein. American Express and Berkshire Hathaway are Motley Fool Inside Value picks. Motley Fool Options has recommended buying calls on Johnson & Johnson, which is a Motley Fool Income Investor recommendation. The Fool owns shares of Berkshire Hathaway, which is also a Motley Fool Stock Advisor recommendation. The Fool has a disclosure policy.