The "Gordon Formula"

[charlie]

Hi all,

If you are a Bogle/Bernstein fan like myself, you are
probably concerned about the long term forecast
for the "market". The Gordon formula says:

Return = Current Dividend + Dividend Growth
(assumes constant P/E ratio)

I believe that for a well diversified fund, you could
assume that earnings growth is a proxy for dividend
growth. With this in mind, I applied the formula to
several Vanguard funds:

FUND DIV % GROWTH % RETURN%

Index 500 1.44 7.8 9.24
Total Stock Mkt 1.31 5.2 6.51
Value Index 2.30 5.0 7.30
Growth Index 0.48 11.3 11.78
Extended Mkt 0.81 5.1 5.91
Mid Cap Index 1.10 9.1 10.20
Small Cap Grth 0 12 0 12.00
Small Cap Index 0.94 6.5 7.44
Small Cao Value 1.90 3.3 5.20
Windsor II 1.93 9.3 11.23
Growth & Income .24 11.3 12.54

What do you guys make of this? I was surprised
that Index 500 looks better than the Total Stock
market. Also Windsor II looks better than both.

I will be 70 this spring and struggled for years
picking stocks, bonds, managed funds, etc. After
reading Bogle and Bernstein I became convinced
that Index investing was the answer. I switched
everything over recently to Target Retirement 2025
thinking this was the best compromise, for me. I
still believe this, but I feel myself wavering.

Help!!!

Charlie

P.S. Please forgive the messed up appearance of
the table. I could not figure out how to fix it.

 

[Michael]

My impression is that the formula has limitations, as it predicts a positive return for any possible valuation. If dividends on the S&P were to fall to .00001%, the formula would still predict a positive return based upon the dividend growth rate. IMO, it may not be reasonable to assume constant P/E multiples regardless of valuation.

Also, the growth rates should probably be based upon the longest available data to improve the odds of using a statistically valid sample size. Data on the S&P is available back to 1871, which gives a reasonable data base. Many of the others have such a short history that their results may not be representative of their long term behavior.

 

[Cut-Throat]

Charlie

I
still believe this, but I feel myself wavering

If you are a Berstein fan, you have to remind yourself to set an asset allocation for yourself and never waiver. Despite what experts on this forum and others may recommend. If you waver, you will will lose!

I assume that you have read the 4 Pillars?

 

[unclemick]

The 2025 is not too far from my Lifestrategy moderate as for initial asset mix. The point of these funds is that they rebalance themselves UNEMOTIONALLY. During the recent 2000-2003 unpleasantness my fund was down almost 16% at one point - I waviered all over the place - But didn't act - so with recent upswing - back ahead again - maybe 4%/yr last 5 years - not great but the auto-rebalancing did it's job.

 

[charlie]

unclemick, cut-throat & mikeschoren,

Thanks for your responses, guys. I keep "4 Pillars..."
by my bed and read it whenever I start having 2nd
thoughts.

Regards,

Charlie