Investing in the 21st Century: With Occam's Razor and Bogle's Wit

Abstract

Forecasting returns is a mix of art and science, with a fair share of sorcery. In fact, the smaller the number of assets in the portfolio, and the shorter the period for which forecasts are made, the bigger the role played by this last factor. Sir William of Occam taught us to focus on the essentials, and Bogle showed us how to apply that lesson to forecasting the long-term returns of stock markets. Taking a cue from both, I evaluate the forecasting ability of two simple models, show that they are surprisingly successful, and then use them to predict the returns of 12 international stock markets over the coming 2006-2015 period. I find that, on average, the expected mean annual compound return over the next 10 years is 9.3%.

Keywords: long-term returns, returns forecasting, dividend yields, P/E ratios

JEL Classification: G12