Jack Bogle, the founder of the Vanguard Group, says stocks are valued above historical norms, echoing the Fed's sentiment expressed in the minutes of its March meeting. While Bogle uses the same "simple theory" for assessing investment returns that he has employed since 1990, the big question is how will earnings over the next 10 years be valued, he told TheStreet in an interview.

When evaluating the stock market, Bogle, 88, looks ahead to the coming decade and focuses on analyzing the sources of positive stock returns, those being the dividend yield, which is now about 2%, and earnings growth, which he says "nobody knows."

Bogle, who started the first index fund at Vanguard in 1976, believes earnings growth will be about 4%, which he said is less than the consensus estimate of 5% to 6%; coupled with a dividend yield of about 2%, Bogle expects a 6% investment return over the next decade. But he questions the high valuation of the U.S. equity market, which caught the attention of Fed members in March.

"We're at a valuation point well above historical norms," said Bogle in a phone interview. "According to my calculations, the stock market is selling about 23 times last year's reported earnings, and that's pretty high."

Despite his question about the current valuation of U.S. stocks, Bogle still says the U.S. is the best place to invest.

"We have the most diversified economy; we have the most entrepreneurial economy; we have the most technologically advanced economy; we have the strongest productive economy," said Bogle.

The investor suggests a 50/50 stock/bond asset allocation, similar to the "father of value investing" Benjamin Graham, author of The Intelligent Investor. That ratio can shift depending on a person's risk tolerance. If a person can be more aggressive, Bogle recommends a 75/25 stock/bond allocation ratio and vice versa for a more cautious approach.

"There is no rule, but I say think about it as you grow older," Bogle said. "When you get older, I think you want to take less risk and see if you can improve your income."

Bogle noted, however, that a person's asset allocation should take into account the costs of the vehicles in which a person is investing.

"If you are all in index funds, bond and stock, ... you'll be better off with a 25/75 -- 25% stock ratio -- than a 75/25 in actively managed funds because of their higher costs," Bogle said.

Bogle, understandably, believes a traditional index fund is the only way to guarantee an investor's fair share of returns.

Editor's Pick: This article was originally published on July 7, 2017.

Image placeholder title

"You don't trade it, you put your money to work basically forever, and the costs are very low," said Bogle. "That's the winning strategy."

"Other investors do not get [their fair share of returns] because they trade too much. So, too much goes to Wall Street and not enough to the investors," Bogle said.

As for international exposure, Bogle has none. He said investors should be cautious with their international exposure, adding that most U.S. investors "should stop at 20% because of the risks involved." But, he noted that he has yet to find a single person who agrees with him.

Although Bogle touted the benefits of investing in the U.S., he acknowledged that this does not mean we don't have problems.

"Some of the institutional things that are going on in our government seem to be going in the wrong direction for our society and the economy," Bogle said. "We'll see how they are resolved ... but I hope they will be resolved better than what they look like today."

The White House is currently pinning its budget agenda on reaching and maintaining economic growth of 3% but the Vanguard founder's own view is that 3% is probably more ambitious than what will get.

"The economy is a funny thing, it depends on consumer confidence, it depends on a lot of fundamentals, it depends on how a lot of these trade issues play out," said Bogle. "Maybe 2% would be more realistic, that's about where we are right now, and that's of course, well below long-term norms."

If the market goes down, Bogle said that it would be a great opportunity for people to continue to invest because they are buying everything at lower prices. Still, he said investors shouldn't really concerned about what happens today or tomorrow; they should be investing for a lifetime and should care about the next decade.

"Look for the economic power delivered by our corporations, which is their dividend yield and earnings growth, and bet on that for the long run," Bogle said. "Bet on those economics rather than the emotions that carry the market day after day, and have carried it to a fairly high valuation."

Visit here for the latest business headlines.

Employees of TheStreet are restricted from trading individual securities.