The Long Game – Historical Market Returns & 2022 Expectations

The Long Game - Historical Market Returns and 2022 Expectations

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, 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. 


Asset Classes sorted by performance and 10-year average
  • In 2021, the S&P 500 hit 71x a record highThe most in 26 years. 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 versus the USD)
  • AlphabetTesla or Microsoft’s 50-60% rallies drove Tech Stocks but some names started disappointing including Amazon ending the year close to flat
  • This bull run hasn’t been easy for Small and Mid Growth Stocks. 66% of Tech stocks were in Bear Market and at least 35% have lost more than 50% since hitting their records As predicted in 2020, ARK ETFs ended up underperforming (ARKK down 25%)
  • Bitcoin price growth ‘slowed down’ 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
  • Crypto Industry grew to c. $2.3 Trillion Market Cap. Bitcoin is 10% of Gold Market Cap
  • While Inflation is up, the expectation that it will subside (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 c. 5% while REITs gained 40.5%. 
  • Emerging Markets continued their relative underperformance driven by crackdowns and Real Estate bankruptcies in China 


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 ex-US have a higher dividend yield than US Stocks and if the reversion of Price to Earning ratios materializes as described below, this dividend yield could contribute to higher returns vs. US Stocks.
  • Treasuries exhibited high volatility but hedged well during both GFC and COVID-19 downturns (Standard Deviation doesn’t tell the whole story for Bonds).


Bogle's Framework for Stocks

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 of 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 Fed. Through P/E multiple expansion. Was that really the case? Well, not quite.

  • P/E Ratios actually compressed. The ratio of Price/Earning 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 ‘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.
  • Wall Street Analysts expect earnings for 2021 to be 50-60% higher than in 2020 
  • By taking into account higher earnings and removing the negative effect of 10-15% compression of the P/E Ratio you 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, not both
  • The CAPE ratio has not been a useful predictor of future price levels but could be an indication that future returns will be much lower
  • Be cautious about comparing countries on that basis, though. Indices e.g. have very different sectorial exposure with America driven by Big Tech

Historic CAPE Ratio by Economy


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?

There 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.


Vanguard Got 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 (i) Dividend yield (ii) P/E Ratio aka Valuation Multiple and (iii) Earnings growth to predict future 10-year Market Returns.

According to their simulations Investor behaviour (P/E ratio) is to ‘blame’ for US Equities being largely outside of the expected ranges over the last decade (in the table above the expected range is 25%-75%). 

Vanguard predicted an average c. 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 c. 3% annually, according to the same model:

  • The strongest assumption is the relative P/E compression (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% (explaining another 1.5% difference in return vs. the US). 

A ‘long-awaited’ growth to value rotation is also implied by Vanguard with US Value Stocks generating 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 (and worked so well during the pandemic!)
  • An ex-US cyclist portfolio adjustment could be implemented. But we may also be assisting to 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:

Thank you for reading. I wish you a Happy New Year and a great start to 2022,




  • S&P 500 and NASDAQ need no introduction and are cornerstone of most portfolios
  • Dividend Stocks are favored by some investors but can be less diversified and tilted towards certain sectors / styles (e.g. value)
  • Developed Markets ex-US are important part of the Global Stock Market and include Japan, Europe or Australia
  • Emerging Markets is a volatile asset class but usually held for diversification and optionality should there was a shift of capital in global Economy towards these countries


  • Long Term Treasuries provided the best downside protection in recessions
  • Bonds are Aggregate Funds for those seeking low volatility and some income
  • Corporates are high quality US corporate bonds (Investment Grade Rating) that are primarily held for income. LQD ETF was used here and was the #1 ETF bought by the FED in 2020
  • Inflation Linked Bonds are US Government issued Bonds that are adjusted for Inflation


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About Raph Antoine 84 Articles
Raph Antoine is a Portfolio Manager and Institutional Advisor that witnessed first-hand the 2008 Global Financial Crisis and the 2011 European Debt Crisis working for some of the most prestigious names in the financial industry. Raph has experience across multiple asset classes including Fixed Income and Equity products as well as Special Situations and Restructurings in multiple jurisdictions. Raph holds an MSc in Financial Engineering and is a CFA (Chartered Financial Analyst) Charterholder. He usually rides one of his two bikes. Rarely, a Canyon Ultimate CF SLX 8.0 (that is currently in family's attic) and most of the time a Gravel Pinnacle Arkose (his favourite) that he used to Cycle the World.
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4 months ago

Great stuff to begin the new year Raph! I’m also glad to see you break down large asset manager’s views on the ‘market’ to common folk (like myself). I spent much of this xmas looking for relevant Vanguard research to help optimize my portfolio for the (coming) future as I expect lower returns than historically due to all the ‘money printing’ going on. FYI, a EU version of your source is available here: I’d be super keen to hear more about your thoughts on Vanguard’s proposed ‘Dynamic Withdrawal’ strategy as it seems like a very interesting idea allowing for… Read more »

4 months ago
Reply to  Raph Antoine

Hi Raph, Happy New Year to you too! Apologies I didn’t get a notification email for this message (my bad). I completely agree that withdrawal strategies may appear to not impact young folk yet, but they can certainly be beneficial in planning during the accumulation stage; i.e. considering the % allocation to each account type for optimal retention/disposal of assets. There is little point of FIRE if an un-informed person puts everything in a taxable account without considering tax-efficient strategies (If available) .Though if they’re reading this blog, they probably are as tax savvy as investment savvy lol An interesting/relevant… Read more »

4 months ago
Reply to  Raph Antoine

Always a great discussion with you about these topics, I’d like to once again thank you for being one of my first teachers in this space all those months ago.

Looking forward to your strategic investing(?) article and will surely be back. In the mean time, if there is anything I can help with, perhaps contribute to, feel free to e-mail me 😉

4 months ago

Congratulation on this very good article ! I’m very pleased to read that. As far as i’m concerned i would say that i got a huge propotion bond assets in my portfolio. Lately, I had big purshed in stocks at the 2020 Covid donwturn. Lots of bonds were purshed in 2021. These are overwhelmingly special inflation linked hungarian goverment bonds for the hungarian public. I have a fewer international aggregate bond etf too. I feel the stock market is very dangerous an overvalued. To my mind, i will have a plan to purshe stocks and stocks etf at the next… Read more »

Last edited 4 months ago by T.L.
4 months ago

Raph – thanks so much for all the time spent creating these valuable resources! I’ve finally written my own plan… and yes, it’s taken me a loooooong time but I finally get it after reflecting on my own investing actions over the last few years (no plan, no clue, mediocre returns). Fighting against the tweaker in me and the thoughts of being Kumiko right now, I’ve set up a 60/30/10 portfolio and started my new and boring journey into 2022. Why 60? I’m a bit conservative with the current environment but will aim to increase this to 70/20/10 after a… Read more »

4 months ago

One of my favorite tables to show the importance of diverse asset classes. ?

João Jesus
João Jesus
4 months ago

Hello Raph,
Great article as always with great advice on wise investing.
As regards the graph “Risk And Returns When Looking At Last 20-Year Period” I would have liked to see where would an investment in Real Estate stand, for the benefit of both your friend Joanna (from here) and my investing-sceptic wife (I don’t know if this makes sense, but since you got there Cash, maybe there is some way to track Real Estate investments – if it doesn’t, just forget the dumb suggestion).Cheers, and keep them coming (the investment advice and the kms on your bike).