John Bogle finally has it right about stocks.

Bogle, the legendary founder of mutual-fund giant Vanguard Group, and a staunch defender of index funds, said in a recent interview with Morningstar’s personal finance editor Christine Benz that U.S. stocks over the next decade will return just 4% on average annually. (See video here.)

This is a sharp departure from Bogle’s 7% annualized forecast two years ago in an interview with MarketWatch’s Chuck Jaffe . In the MarketWatch interview, Bogle didn’t forecast the market’s P/E multiple contracting, and that’s the difference between his 2013 view and this more recent view.

In this new forecast, Bogle joins the ranks of notable value investors and market observers Jeremy Grantham, Robert Arnott, and Robert Shiller , whose dim views of stock valuations and future returns are well-documented.

Although he didn’t argue this specifically, Bogle’s new forecast amounts to a tacit admission that the “equity risk premium” (the supposed amount of excess return that stock are supposed to deliver over bonds) isn’t static. Rather, it can change over time. Stocks are not always guaranteed to deliver, say, 10% annualized returns on a nominal basis, even over decade-long periods.

Multiple compression

In decomposing equity returns, Bogle started with a roughly 2% dividend yield on the S&P 500 SPX, -2.14% in both his 2013 and 2015 forecasts. Each time, he added subpar earnings growth of 5%, for a total of 7%.

Fed weighs December rate hike

However, this time, with Benz, Bogle also assumed a 3% loss from earnings multiple compression — the idea that investors will award stocks cheaper prices for the earnings and dividends they deliver. Those three components together result in his new 4% forecast.

The P/E multiple of the U.S. stock market is likely to move to a more normal 15, according to Bogle. That’s down from the current 20 multiple or the 17 multiple that many analysts are using for future forecasted earnings.

Previously, with Jaffe, Bogle forecasted that the 20 P/E multiple would hold.

Many of the value mavens, with whom Bogle now agrees, use the Shiller PE (current price of stocks relative to past 10-years’ average, inflation-adjusted returns) to arrive at their forecasts. Bogle, however, is sticking to a conventional PE ratio, which uses the past year’s worth of earnings.

Academic studies have shown that the Shiller PE has greater statistical validity than a conventional PE at forecasting future returns. One year’s worth of earnings can be misleading. Nevertheless, Bogle and the value mavens are now in agreement about likely future returns.

Balanced portfolios under siege

On bonds, Bogle thinks investors can squeeze 3% from a fixed-income portfolio with an average maturity that’s a little longer than 10 years and ia somewhat heavy in corporate bonds. The 10-year Treasury TMUBMUSD10Y, 0.676% currently yields slightly more than 2%.

Overall, the implications for a standard balanced portfolio are grim.

Bogle predicts that a balanced portfolio (roughly half in stocks and half in bonds) should return around 3.5% for the next decade. Adjusted for inflation or in “real” terms, Bogle thinks a balanced portfolio will return 1.5%, barely increasing purchasing power.

Fees may destroy paltry returns

Bogle then asserted that fund fees of, say, 1%, will destroy much of that balanced portfolio’s real return. Combined with advisor fees of 0.50% (a conservative number), investors may be left with nothing after adjusting for inflation.

Moreover, taxes and well-documented investor bad behavior (buying funds at high points and selling them lower) will likely erode investor returns further.

Benz raised the question of whether investors should invest at all given this forecast, and Bogle said, “Invest we must.” The reason for that is cash is yielding virtually nothing, which means it’s producing a negative return in real or inflation-adjusted returns.

Given Bogle’s grim view, however, it isn’t clear why investing really is better since it can also produce negative real returns.

Only yield is certain

Bogle also stressed that the only certain part of his stock forecast is the starting dividend yield of stocks. Earnings growth and multiple changes are always guesses, and he could be wrong about both.

Both advisers and investors can plug other numbers in for earnings growth and multiple changes. Still, they should be careful not to veer far from historical precedent. For example 10% earnings growth would be “beyond precedent.”

Save more and ignore pension forecasts

Investors should take serious note of Bogle’s forecast.

The biggest lesson is that investors must save more to meet their goals. The markets are unlikely to do the heavy lifting that they’ve done in the past with prodigious returns.

As for pensions, which continue to plug the customary 7.5% returns in their forecasts for balanced allocations, investors should disregard their forecasts completely.