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When future returns are lower

Bogle's 2007 forecast, built from dividends, growth and the P/E ratio, and what actually happened next.

FinanceBogle ch. 7About 5 min: 3 reading, 2 practiceUpdated

General education, not financial advice.

After this lesson you can
  • Build a rough return estimate from dividend yield, earnings growth and an assumed P/E change
  • Show why the same costs take a bigger share of a lower return
  • Explain the limits of any forecast

Builds toward: Invest on your own. Understand low-cost funds, read a fund factsheet, and spot a sales pitch.

Common-sense investing: the case for index funds: lesson 6 of 12
  1. Costs and the market
  2. Investors as a group earn the market minus costs 7 min
  3. Bogle ch. 2
  4. Where stock returns come from 5 min
  5. Bogle ch. 3
  6. Owning the whole market 4 min
  7. Bogle ch. 5
  8. Fund returns versus investor returns 6 min
  9. Bogle ch. 6
  10. Taxes are costs too 5 min
  11. Bogle ch. 7
  12. When future returns are lower 5 min
  13. Bogle ch. 8–9
  14. Why past winners rarely repeat 5 min
  15. Costs and the market
  16. Is advice worth paying for? 7 min
  17. Bogle ch. 11–12
  18. Costs go on forever 5 min
  19. Bogle ch. 13
  20. Bonds and money-market funds 4 min
  21. Bogle ch. 14–15
  22. New indexes and ETFs 5 min
  23. Bogle ch. 16–18
  24. Graham, the arithmetic, and a plan 5 min

Try first

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Pairs with Bogle, The Little Book of Common Sense Investing (2007), chapter 7, "When the Good Times No Longer Roll"

What it is

Bogle uses the method from Where stock returns come from to look ahead, from the end of 2006 to 2016:

  1. Dividend yield then: just under 2% (the historical average was 4.5%).
  2. Earnings growth: about 6% a year, in line with the economy's expected growth. So the investment return ≈ 2 + 6 = 8%.
  3. P/E ratio: about 18 then. If it eased to 16 over 10 years: (16 ÷ 18)^(1/10) − 1 ≈ −1.2% a year.

His estimate: about 7% a year for U.S. stocks, well below the 12.5% of the previous 25 years, of which about 2.7 points had come from the P/E doubling from about 9 to 18. He calls his P/E assumption "little more than" a guess, and invites readers to plug in their own P/E: 25 would add about 3 points, 12 would take about 4 away.

Quick check

Tap an answer to check it.

  1. Dividend yield 2%, earnings growth 5%, P/E unchanged. Estimated return?

    Show answer

    about 7%. With no P/E change, return ≈ yield + growth.

Why it matters

The same costs take a bigger share of a smaller return. Bogle's example: costs of 2.5 points a year take about 17% of a 15% return, 25% of a 10% return, but about 36% of a 7% return (he rounds the last to "nearly 40 percent"). When returns are low, costs matter more.

Worked example

What did U.S. stocks actually return over the next 10 years? From the S&P 500's yearly total returns (2007: +5.48%, 2008: −36.55%, then a long recovery to 2016: +11.77%), 1 invested at the start of 2007 grew to about 1.95 by the end of 2016: about 6.9% a year.

That is close to Bogle's 7%, but look at the path: the decade included one of the worst crashes in history, in 2008. A forecast of the average says nothing about the ride, and the near-match was partly luck: the P/E, dividends and growth didn't follow his exact assumptions along the way.

Building a stock return

Drag a slider and watch the result change.

For learning only. Real accounts have fees, taxes and changing rates.

Common mistake

Treating the past few decades' return as the expected future return. If part of a past return came from a rising P/E, it can't simply be repeated: the P/E would have to keep rising forever.

Key terms

expected return
a reasoned estimate of a future average return, never a promise
assumption
an input you choose, such as the future P/E
sensitivity
how much the answer changes when an assumption changes
sequence
the order of good and bad years along the way

Practise the key terms

Tap a card to turn it over. 4 cards.

FrontBack
expected returna reasoned estimate of a future average return, never a promise
assumptionan input you choose, such as the future P/E
sensitivityhow much the answer changes when an assumption changes
sequencethe order of good and bad years along the way

Practice

Work it through

A market has a dividend yield of 1.5% and you assume earnings grow 5% a year. You assume the P/E falls from 25 to 20 over 10 years.

Quick quiz

Tap an answer to check it.

  1. Why did Bogle expect lower returns in 2007 than over the previous 25 years?

    Show answer

    The dividend yield was low, and the past P/E rise couldn't repeat. Lower yield, plus no repeat of the P/E doubling.

  2. The S&P 500 returned about 6.9% a year over 2007–2016. What does that show?

    Show answer

    Bogle's estimate was close, but the decade included a crash the forecast didn't describe. An average return says nothing about the path.

The other view

Other analysts can reasonably assume different numbers for each building block: how fast earnings per share will grow (Bogle himself notes that new share issues can drag it up to 2 points a year below total earnings growth) and what P/E is "normal". Bogle says his own P/E assumption is little more than a guess. Use the method to understand what you are assuming, not to predict a number.

Returns data: Aswath Damodaran, "Historical Returns on Stocks, Bonds and Bills", NYU Stern (updated January 2026). Last checked: 27 October 2026.

In short

  • Rough expected return ≈ dividend yield + earnings growth + P/E change per year.
  • Bogle's 2007 estimate: about 7%. The actual 2007–2016 return: about 6.9%, through a severe crash.
  • The same costs take a larger share of a lower return.
  • A forecast states assumptions; it is not a promise.

Mastery check

Answer without looking back. Score 80% or more and the lesson is marked done. Your result is kept only in this browser.

Check yourself

Answer in your head first, then open the answer. Nothing is saved.

  1. Name Bogle's three building blocks for a return estimate.

    Show answer

    Dividend yield, earnings growth, and the change in the P/E ratio.

  2. Costs are 2 points. What share do they take of a 4% return, and of a 10% return?

    Show answer

    Half (50%) of 4%; a fifth (20%) of 10%.

  3. Why isn't a forecast that came out close proof that the method works?

    Show answer

    One result can be partly luck; the assumptions along the way didn't all match, and the path included a crash.

Further reading