Advertiser disclosure

Terms and Restrictions Apply
Physician on FIRE has partnered with CardRatings for our coverage of credit card products. Physician on FIRE and CardRatings may receive a commission from card issuers. Some or all of the card offers that appear on the website are from advertisers. Compensation may impact on how and where card products appear on the site. POF does not include all card companies or all available card offers. Credit Card Providers determine the underwriting criteria necessary for approval, you should review each Provider’s terms and conditions to determine which card works for you and your personal financial situation.
Editorial Disclosure: Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed, or approved by any of these entities.

Historical Market Return and Current Expectations

Have you been looking at your portfolio’s performance lately?

Has it met with what you were expecting? Do you understand how last year’s returns stacked up and how that might translate into future returns by location and sector moving forward?

It’s interesting to take in today’s guest post, originally published on Banker on Wheels back in December 2021, in light of the recent market volatility. Many posters on the Bogleheads forum, and other financial experts broadcasting on a variety of outlets, have collectively forecasted lower equity returns in the coming decade or two.

This analysis offers a similar view, with some suggestions on how to position yourself to emerge as a successful investor during this time.



It’s the humbling time of the year to acknowledge the limits of our ability to predict markets.

For the first time in decades, inflation needs to be properly accounted for when looking at asset class returns but also our plans.

If you remained invested in stocks, your objectives may be closer than ever.

Over the past decade, world equities gained over 320% and returned 12.4% annually.

It’s probably also time to rebalance your portfolio.  Sell some of the winners, and then buy some losers.

In fact, this is what Vanguard’s model implies (more on that below). While this is great for learning with some small allocation, do not forget the rules of the game and try to remain forecast-free.

While timing any sectorial rotation is tricky, Vanguard’s model can be more helpful in another key aspect – setting the right returns expectations in achieving your financial freedom goals.


Best Performers of the Past Decade


Asset Classes Sorted By Performance and 10-Year Average

  • In 2021, the S&P 500 hit 71x, which was a record high–the most in 26 years–and the second most ever after 1995 (77x).
  • The largest peak-to-trough drawdown was only 5.1%. It’s placing 2021 in the top 10 best years over a 94-year period.
  • World equities gained 18.9% in USD. From the UK investors’ perspective, Vanguard’s FTSE All-World ETF is up 20.3%. European investors recorded 28.5% gains.
  • EUR is down 7% this year while GBP lost 1.5%, both against the US dollar.
  • Alphabet, Tesla or Microsoft’s 50-60% rallies drove tech stocks, but some names began disappointing, including Amazon ending the year close to flat.
  • This bull run hasn’t been easy for small- and mid-cap growth stocks. 66% of tech stocks were in bear market territory, and at least 35% have lost more than 50% since hitting their records. As predicted in 2020, ARK ETFs ended up underperforming, with ARKK down 25%.
  • Bitcoin price growth decreased to 65% after rallying 300% last year. Volatility remains very high as BTC plunged over 50% in July before recovering roughly half of the losses. [PoF editor’s note: if you hold BTC, don’t look today.]
  • The crypto industry overall grew to a market capitalization of approximately $2.3 trillion. Bitcoin is 10% of gold’s market cap.
  • While inflation is up, the expectation that it will subside (at the time of this writing, inflation was expected to average 2.5% over the next 10 years in the US) didn’t lift gold price. Yes, investing is hard.
  • Value stocks underperformed the S&P 500 by around 5%, while REITs gained 40.5%.
  • Emerging markets continued their relative underperformance driven by crackdowns and real estate bankruptcies in China.


Best Risk-Adjusted Performers


Risk and Returns When Looking at Last 20-Year Period

  • US large caps that represent over 50% of world stocks remained the best risk-adjusted asset class. Most back-testing tools frequently overweight it in portfolios and it’s one of the reasons why some US investors are reluctant to invest internationally. Optimization for future returns using a rear-view mirror is a tricky game, though.
  • Developed markets outside of the US have a higher dividend yield than US stocks, and if the reversion of price to earning ratios (P/E) materializes as described below, this dividend yield could contribute to higher returns compared against US stocks.
  • Treasuries exhibited high volatility but hedged well during both the Great Financial Crisis (from 2008) and COVID-19 downturns. (Standard deviation doesn’t tell the whole story for bonds).


Equity Markets May Be More Rational than You Think

In 1991, John Bogle presented a model to estimate long-run stock returns in the United States in the Journal of Portfolio Management.

Bogle noted that you could (reasonably) predict stock market returns with three inputs:

  1. The initial dividend yield on the stock market
  2. The predicted change in Price/Earnings (P/E) ratio
  3. An estimate of earnings growth

Let’s focus on the last two drivers of the stock market equation in 2021.


‘Money Printing’ Didn’t Inflate Equities

Ask around you what drove asset prices higher in 2021. Chances are, that similarly to real estate, Bitcoin, and other assets, the answer for stocks will be that these were directly “inflated” by the Federal Reserve.

Was that really the case? Well, not quite.

P/E ratios actually shrank. The ratio of price to earnings for the S&P 500 fell from over 30 to around 25 on a trailing basis. The same trend applies to forward-looking earnings

As such, assets were priced at a lower P/E ratio despite this “money printing.”


S&P 500 Index And Price/Earnings Ratio


Markets Rewarded Profitability

Company earnings weren’t really flat in 2021. Quite the contrary, they were off the charts.

By taking into account higher earnings and removing the negative effect of 10-15% compression of the P/E ratio covered above, one can explain most of the S&P 500 performance in 2021.

That said, government policies inflated earnings growth, which won’t be repeated in the near future.

You can understand why, unsurprisingly, the markets punished a number of growth companies that are unprofitable.


S&P 500 Earnings per Share


Can’t Have A High CAPE And Eat It Too

Over the course of the pandemic, P/Es expanded 15-20%, with another 25-30% coming from earnings growth, explaining most of the S&P 500 rally.

Despite the recent fall in 1-year P/E ratios, equity valuations are very high in America, as measured by the cyclically adjusted price-earnings (CAPE) ratio, which compares share prices with inflation-adjusted average corporate earnings of the past 10 years.

The current Cape ratio is 38, a level that was only higher during the peak of the dotcom bubble of 2000

In the stock market, you either have high valuations or high future returns. You cannot have both. And while the CAPE ratio has not been a useful predictor of future price levels historically, it could be an indication that future returns will be much lower.

Be cautious about comparing countries on that basis, though. Indices have very different sectorial exposure, with America driven by Big Tech.


Historic CAPE Ratio by Economy


Bond Markets – An Expensive Hedge


Bogle’s Observation For Bonds

As John C. Bogle noted, since 1926, the entry yield on the 10-year Treasury explained 92% of the annualized return an investor would have earned over the subsequent decade had he or she held the bond to maturity and reinvested the coupon payments at prevailing rates.

For Europeans this means:

      • If investing for 10 years, the UK investor can expect about 1% annual nominal return. After accounting for expected inflation, the yield is -3%.
      • Similarly, for the same time horizon, German investors can expect to lose 0.3% and get a return of -2.1% after inflation.


Government Bonds’ Yields (before Inflation)


Potential Upsides

Are further price gains on bonds possible that can be harvested during a market crash by rebalancing?

These are unlikely but possible. Should there be another exogenous shock, it’s not unreasonable to expect rates to go even lower (in which case bond ETF prices may rally).

It is also a hedge against future deflationary recessions. While this may sound unreasonable in this market, this is the broader trend.

Learn more about how bond ETFs can lose value or rally using the Bond ETF Calculator.



Physicians and pharmacists, Register with Incrowd for the opportunity to earn easy money with quick "microsurveys" tailored to your specialty.


How to Invest in 2022 and Beyond

In their previous projections, Vanguard seems to have gotten it wrong.


Overvaluations were driven by ‘Investor Psychology’


One of our diligent readers, Roberto, pointed out the over-valuation of US markets.

Vanguard’s model uses the same Bogle equation comprising dividend yield, P/E ratios (also known as a valuation multiple, and earnings growth to predict future 10-year market returns.

According to their simulations, investor behavior is to blame for US equities being largely outside of the expected ranges over the last decade. As you can see in the table above, the expected range is 25%-75%.

Vanguard predicted an average approximately 9% 10-year return for US stocks, against the current 10-year performance of 16.8%.

Emerging markets are on the cusp of that range.


Setting The Right Expectations


Vanguard’s 10-Year Return Projections (Before Inflation)

Over the next 10 years, ex-US equities are expected to outperform the US by around 3% annually, according to the same model.

The strongest assumption is the relative P/E compression, to the tune of 1.5% annually over the next 10 years. European or Japanese stocks that are more value-oriented are expected to maintain a higher dividend yield of 3%, which explains another 1.5% of the difference in return compared to the US.

A growth-to-value rotation is also implied by Vanguard with US value stocks generating a 4.1% return, while US growth stocks are expected to be flat over the next decade.



While you can’t control market returns, you may still think of small adjustments.

A more practical take-away from Vanguard’s analysis would be to keep your lazy World ETF and perhaps remove that Nasdaq bet that you may have that worked so well during the pandemic!

An ex-US cyclist portfolio adjustment could be implemented. But we may also be assisting in a P/E regime shift, with low interest rates despite higher inflation justifying paying a higher price for long-dated cash flows from Big Tech.

In a low-return environment, controlling what you can is even more important:


I've got my 2 acres of non-leveraged, crop-producing, cashflowing farmland via AcreTrader. Get yours.

Share this post:

Leave a Comment


Doctor Loan up to 100% Financing

Related Articles

Subscribe to Physician on FIRE

If you do not see a subscription box above, please navigate here to subscribe.

Join Thousands of Doctors on the Path to FIRE

Get exclusive tips on how to reclaim control of your time and finances.