 Good day, fellow investors. What if Jack Bogle, what if the index fund industry is wrong? I recently listened to a Morningstar interview with Jack Bogle and he shows his side of the story. In this video you will get the other side of index fund investing to put things into perspective and to give you, to enable you a better decision-making process and to see how what can happen regarding from Bogle to a negative perspective and how does that fit your portfolio and what would you do if what Bogle says doesn't really materialize as people understand him. He says everything right, he says everything correctly, but people misunderstand him very, very easily. Let's discuss that. In a recent interview with Morningstar, when asked what he expects when it comes to market returns for the next decade, Bogle gave the next answer. What you're expecting in terms of market returns for the equity and bond markets in the next decade? Sure, it hadn't changed from what we talked about last year very much, but there's a reality to the stock market. Let's take that first. And the reality is that the fundamental return, the dividend yield plus the earnings growth of companies, drives the long-term return of the stock market. The only thing gets in the way in the short term is the speculative return. Are people going to pay more for stocks or are people going to pay less for a dollar of earnings in essence? And if, for example, the price earnings multiple were to go from 10 to 20 that over a decade, that would be 100% increase and be 7% added to the return each year. So it can be very substantial and it also can be negative. So PE goes from 20 to 10 minus 7% or roughly 7% a year. So where are we now? Well, the dividend yield is about 1.8% less than 2%. I'm looking for future earnings growth of around 5%. I don't think we can do much better than that. Maybe a lot better this year with the tax cut and maybe maybe a little bit better next year too, but maybe 5%. So let's call the dividend yield 2 and 5 is 7. By my numbers, that's the investment return, 2%. Dividend yield, 5% earnings growth. That's a 7% return. And if the price earnings ratio is to go down a little bit, I think 1.5% off that 7% return, which would be a 5.5% return on stocks over that period. And that's a little higher than I've been using. Maybe right, maybe wrong. I've usually been using about 4%. But that's a ballpark. It doesn't really matter what we guess in these areas. There's no precision in any of this. Well, let's say in the 4% to 5% range just for the phone out for stock. So thank you, Jack. I think people here, 2% plus 5%, 7% returns from the market per year. That's what the majority hears. Then even less people hear that 7% minus 1.5% from lower valuations leads to 5.5%. It is in his ballpark of 4% to 5%. So 4% to 5%, and then even less people hear this. That's a ballpark. It doesn't really matter what we guess in these areas. There's no precision in any of this. Well, let's say in the 4% to 5% range just for the phone out for stock. So Bogal correctly says it's all a ballpark, nothing is precise. So I think it's very dangerous now that many expect, okay, the market will go up another 5% for the next 5 years. That will give me 30%, 40% more on my capital. I can retire. I can do this. I can do that. But few think about, okay, can the market decline 50% and stay down for the next 10 years? That is also a possibility. I think it's an equal possibility like the market going 5% per year up for the next 10 years. It's an equal possibility as it going down 50% and staying there for the next 5, 6, 7, 10 years. So that's something that's the first thing people forget. Let me give you four reasons why index fund investing should be, okay, approached as normal index fund investing. But what is the other side of index fund investing? The first thing is interest rates. These are Vanguard assets under management since it was founded in 1976. You can see that it really got traction after in the 1990s when this index fund and mindless investing mania started. However, that is perfectly correlated with this, the effective federal funds rate. So interest rates go down, asset prices go up and rising tide lifts all boats. And that is why Vanguard was such a success in the last 40 years because of declining interest rates. And I have found this amazing chart from 2014 that shows how interest rates impact the markets. From 1960s, 1970s till 1982, there was a secular bear market because interest rates were going up. Then the chart shows a secular bull market up till 1999. But with the surge in the last five years, the secular bull market has been lasting since 1982, as also interest rates continue to decline in that period. So the next stage might again be a secular bear market as we see higher interest rates, which are we just now seeing by the Fed. Number two, a different perspective on earnings. Bogle sees earnings growth of 5% per year, which is correct from a historical perspective, but those earnings include inflation. If you see here, 22 was S&P 500 earnings 40 years ago, now it's 122, that's around 5% per year, which is correct and Bogle is completely correct here. But that includes an average inflation of 3.14% of the history of the US. However, if you adjust things for inflation, so if you care about inflation adjusted returns, which people cared a lot in the 60s, 70s, a little bit less now because we haven't seen inflation for a while, but still. You can see that in the 2000s, S&P 500 earnings practically didn't go anywhere, then 40, 40 years from 1960 till 1990 earnings didn't go anywhere, 30 years, no earnings growth, no real earnings growth. From the 1900s till the 1950s, almost 40 years, no real earnings growth and similar period in the 1800s, 40 years of no earnings growth, no real earnings growth. So, yes, earnings will probably grow, but a lot of that will be thanks to inflation, especially if we get higher inflation. So, okay, index funds, okay, but shouldn't then people really think, okay, how can I protect myself in other ways from inflation? You can invest in index funds, you can pay off a mortgage, so that's another way of taking advantage of inflation, of course, with a fixed interest rate. So, I'm just saying use common sense, apply common sense to what can happen and then see in your life, okay, these are my options, these are my personal finance options to invest index funds, stocks, businesses, real estate, mortgages, education, paying off my credit card debt and then put that into a perspective, okay, what is the upside, what is the downside and then see how to invest. Just blindly investing 99% of your assets in index funds because that is what people have been doing in the last 40 years is stupid, that's it. So, my message is please diversify and the part inflation and a part this common sense approach, I have still two topics. One topic is GDP. If you look at what happened over the last 100, 120 years, the 20th century was the century of the United States of America, no question about it. However, the next century will be the Asian century as things look now, unlikely that it will be the US or European century. Century of the US stocks did extremely well, one of the best performing markets from the other 50 stock markets in the world. So, the SAP 500 is really cherry picked from a lot of other markets that did much, much worse. So, if in the next 40 years the SAP isn't the leader, SAP 500 isn't the leader, but some other index funds are the leader. So, you might also want to diversify across some other index funds if index funds are really your thing. So, that's another message, okay, the US might not be the dominant country in the 21st century, the stock market will also be affected. So, that's also something to think about when showing the index fund strategy. And number four is valuation. This is from Star Capital from Germany, excellent page chart that shows what happens when the cyclically adjusted price earnings ratio, the price earnings ratio using 10 year average earnings is above 30, like it is now for the SAP 500, 30-30 something. So, from 30 to the right in the red, you have average real returns. And those are from minus 4% per year to above, to let's say the maximum 4% per year, which is what Bogal has been saying. So, Bogal is saying, okay, 4% per year maximum. And that is what Bogal is saying, he doesn't count in a recession, he doesn't count in higher interest rates, he doesn't count in valuation, and he doesn't count inflation. So, therefore, his story is right, but you have to add a lot of things to his story to understand a better perspective. And if you see the long-term returns from this valuation level, plus the potentially higher interest rates, then I would say real returns can be from minus 4 per year over the next 15 years, which is a terrible disaster for many index fund investors, to plus 4. So, let's say 25% chance for plus 4, 25% chance from 0 to 2, 25% chance from 0 to minus 2 per year, and 25% chance from 0 to minus 4 real returns from minus 2 to minus 4. So, your portfolio could be 50% of its real value in the next 15 years, or even 50% higher. Now, you have to see, okay, we don't know what will happen, nobody knows. You have to see, okay, if it is minus 4% and the real value, if I have $100,000 becomes $50,000 in 15 years, even lower $40,000, how would that affect my life? If the real value becomes $150,000, okay, how will that affect my life? Because that's the ballpark of index funds returns that Bogal just discusses, okay, if there is no recession, everything is good, will hit the 150, 160, 200,000 in the next 15 years. But that's, I would give 25% chance for that. So, that's my perspective. I just want to show the other side of the index fund perspective to a lot of index fund investors. Those who, okay, now I'm concerned, those should think about diversification, hedging, I recently done with some different video about free stocks to watch that are a little bit different. You can check more what about what I do, how am I preparing for the long term with the premise that I don't know what will happen, but I want to be prepared for a little bit of everything. So, I'm much more diversified than an index fund is. Thank you for watching. If you think this added value to your life, please subscribe as it means a lot to me. I'll do more videos like this. I try to have a common sense approach to investing that leads to more diversification, lower risk, and higher long term returns. Thank you and I'll see you in the next video.