More from Bogle...

We thought it would be worth highlighting another exchange in our interview with Vanguard founder John Bogle on Wednesday.

(See my earlier post.) Strikingly, in the midst of this week's volatility, he said that he expects the stock market "to deliver a return ... in the 10 percent range" over the next ten years. Here's the exchange:

TOM ASHBROOK: Would you have the nerve to stride into an index fund today?...

JOHN BOGLE: ... If everybody gets scared to death, the market could easily go down another 10 or 15 or 20 percent. I've no way of knowing that. But the value of business is not going to go down that much. And in the long run it's that business value that is created for investing....

I don't see any reason that corporate earnings — from this relatively low level, particularly in the financial sector, which is going to have problems for a long time — I don't see any reason corporate earnings can't grow about 7 percent a year, compared to the long-term rate of 5, because we're starting from a depressed level.... I'm talking about over the next 10 years — earnings will double at 7 percent in 10 years, so that would be a 7 percent earnings growth, and a 3 percent dividend yield. I think from somewhere around these levels the stock market will ultimately deliver a return — I've been saying 6 or 7 or 8 perent for quite a while — but now that the market is down I'd say the future returns ought to be in the 10 percent range, just because we're at the depressed stage in earnings.

ASHBROOK: Sounds like a buy signal from a pretty big investor.

He also had this to say about John McCain's proposed cut in the capital gains tax as part of a response to the current economic crisis.

ASHBROOK: Capital gains.... John Bogle, what about John McCain saying let's cut it back down to seven percent? Do you see that as somehow an economic kick-start? I wasn't sure how that would work here.

BOGLE: I think that's absolutely absurd. And the reason I think so — and I haven't seen anybody else mention this simple fact — and that is, it was only maybe 50 years ago, not very long as time goes, where institutions, financial institutions, owned 8 percent of all stock, and individual investors owned 92 percent. Today these financial institutions own 76 percent of all stock. And individuals own 24 percent. Now the important point about that on taxes is, that almost all of that 76 percent institutional holding is exempt from capital gains tax. They don't pay any capital gains taxes — if you're a pension fund, if you're in 401K as an individual investor, if you're an endowment fund manager, none of that gets paid....

ASHBROOK: ... So why do you say ... it's absolutely absurd to call for a capital gains cut now?

BOGLE: Because you're cutting capital gains taxes on a very small, maybe even tiny, part of the population, given all these tax-deferred holdings.

(Listen to the full show here.)

This program aired on October 17, 2008. The audio for this program is not available.


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