John Bogle’s Simple Formula for Expected Stock Market Returns

Investors love certainty, but markets rarely offer it. Still, some frameworks help us think more clearly about what drives returns—especially over the long term. One of the most intuitive was developed by none other than John Bogle, the founder of Vanguard.

Bogle proposed a simple yet powerful formula to estimate long-term returns for the stock market:

Expected Return ≈ Dividend Yield + Earnings Growth + Change in Valuation

Let’s break it down and look at what it means today.

Related reading: –Bogleheads 3 and 4 Fund Portfolio

The Three Components of Bogle’s Formula

1. Dividend Yield
   This is the income investors receive as a percentage of their price. In the past, dividends accounted for a large portion of total returns. Today, yields are lower, but still matter.
2. Earnings Growth
   Over time, stock prices are tethered to the growth of corporate earnings. More profits usually mean higher share prices, though not always in a straight line.
3. Change in Valuation (P/E Expansion or Contraction)
   This is the speculative part of the formula. If investors become more optimistic, they might be willing to pay more for each dollar of earnings, pushing valuations (like the price-to-earnings ratio) higher. If sentiment cools, valuations may contract and drag down returns, even if earnings are growing.

Why This Matters

Bogle’s formula is especially useful because it separates what we can reasonably forecast (dividends and earnings growth) from what we can’t (how valuations will change). That last part—the speculative return—is where surprises usually happen.

For example, in 2010, Bogle predicted the following 10-year annual returns:

• Dividend Yield: ~2%
• Earnings Growth: ~6%
• Valuation: modest contraction
  Total expected return: ~7% annually

But the actual return for the U.S. stock market over the following decade was closer to 13–14% annually. What happened? Valuations didn’t fall—they expanded, especially during the post-COVID boom. Investor optimism kept pushing P/E ratios higher.

Where Are We Today?

According to updated estimates:

• Dividend Yield is around 1.3%
• Earnings Growth could be 7–8%, driven by technology and productivity gains
• Valuation changes are the big unknown: Will P/E ratios continue rising, or eventually normalize?

If we take 1.3% + 7% earnings growth, we already get over 8% expected returns—but that assumes valuations don’t contract. If they do, returns could fall below that number.

Key Takeaways

• Bogle’s formula is not a precise forecast, but a mental model.
• It reminds us that speculative returns (valuation changes) are hard to predict, and often dominate in the short to medium term.
• Dividend income and real earnings growth are more reliable drivers over time.
• As investors, we should temper our expectations, stay diversified, and avoid extrapolating the recent past indefinitely into the future.

Final Thought

“Over the very long run, it is the economics of investing—enterprise—that has determined total return; the evanescent emotions of investing—speculation—so important over the short run, have ultimately proven to be virtually meaningless.”
— John C. Bogle

Whether the next 10 years bring boom or bust, Bogle’s formula gives us a framework for assessing what’s realistic and what’s not.