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Want to know a secret? I know where the stock market will be in 10 years.

– Nicholas Gerber, Founder

The stock market, as measured by a broad index like the S&P500, will be about 55% higher in ten years or about 5,280 up from today’s approximate 3,200. This is down from historical projections of the stock market doubling every ten years or so.

There are two strong proven formulas behind this forecast:

  1. The Bogle Model
  2. The Demographic Model

The Bogle Model

John Bogle (1929-2019) was the founder of The Vanguard Group, one of the first people to create an index fund for retail investors, author, and generally smart & nice guy. In 1991 he wrote an article in the Journal of Portfolio Management called “Investing in the 1990s: Remembrance of things past, and yet to come”. In it, he wrote that only three things mattered in the aggregate when it came to figuring out the long-run returns of the stock market. The stock market’s current yield, the growth of earnings, and the level of price to earnings (PE ratio) at the end compared to the beginning. The S&P500 is currently yielding about 2% a year, earnings are projected to grow slowly at 3% a year and the PE ratio is projected to stay the same at about 22. Historically the PE ratio has averaged about 15 but with interest rates so low, it makes sense to keep PE high or maybe even move it up a bit. So total average long-run growth from today’s levels should be 2% (dividend yield) plus (3% growth of earnings) + 0% (PE ratio change) or 5% a year which comes to about 55% after ten years.

The Demographic Model

Another simple-but-effective model is the Demographic Model. It simply states that stocks are reflections of business and business can only grow if population increases, if productivity increases or if inflation increases. The US Census Bureau estimates that the population will grow by about 1% a year over the next ten years. Productivity has been slow this century and while expected to pick up with the advent of technology being taken advantage of more, a stable conservative number of only 2% a year is warranted. Inflation is low today at about 2% and expected not to grow until the economy can get to full employment again which might take a few years. Once it does, watch out but that is a story for another article. If we add up the components of business growth; 1% population, 2% productivity, and 2% inflation we get 5% a year which again comes to about 55% after ten years.

What to Do?

The best way to take advantage of this knowledge is to invest and forget. Create Money Pools for your savings and investing dollars. Attached goals and end values to the Money Pools like Christmas in 3 years $500, College in 10 years $35,000, or Retirement in 35 years $3,000,000. Once you know how much money you want and when it then becomes simple math to use the formulas above to figure out how much you will need to save today to reach them.