Foolish economic girly-man

retire@40

Yup, you are an optimist alright. May I also suggest naive, if you use the average results of the late 1990's as a predicter of your future results.

This was a stellar time of returns and to use this as an average you'd have to be a fool.
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Looking at the results of the past 10 years (1994 to 2004), the markets have returned 10%. I think most people would agree that's a reasonable return to expect long-term in the stock market. Heck, over the past 28 years, the Vanguard S&P 500 made an average of 12% a year.
 
retire@40, if ***** were here he would surely explain to you that the fact that the stock market grew much faster than the economy in the last 30 years is *not* a good thing for the future of the market.
 
I tell my niece and nephews(20 yrs minimum to retirement) - keep the faith and DCA on.

For us old pharts in ER - different kettle of fish - stay reasonably diversified, balance income and 'expected' growth, mind the store.

Given the horse I rode in on - that's a balanced index - roughly 60% stocks with a REIT, and dividend tilt.

Not to mention non cola pension, SS in one year and willingness to aggressively frugalize dryer sheet usage to the point of getting out the clothes line if required.
 
Looking at the results of the past 10 years (1994 to 2004), the markets have returned 10%. I think most people would agree that's a reasonable return to expect long-term in the stock market.
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retire@40,

I think it may be hard to find a single person here that would agree with that statement! ;)

I am planning for a real return  of 3% with a 60/40 stock/bond Portfolio, and there are some folks here that call that wildly optimistic. :)

Why don't you run FIRECalc with your plan and see if it holds up over the historical returns of the last 120 years or so. I believe that things going forward won't be as bad as 30 periods in our past history. But then again some call me an optimist here :D
 
My view is if I I rode in fast on a horse, that horse is tired.

Theres an awful lot of data mining here for comforts sake.

Bottom line is, long term we do have a predictor of stock valuations: the gordon equation. According to it, you can draw a line from one year out 20-30 years and get a result. Short term the real numbers wander back and forth across that line. But eventually the weight of financial mathematics brings it back.

For those who dont want to read the book and do the math, we're WAY above the line right now, which all but assures that during the next 10-20 years we're going to see not only weaker returns but inevitable losses in equities.

Factoring in the greatest bull market in history and glomming another decade onto the back of it and saying the future will be almost as good? Thats not optimistic, thats something else but I'll be nice and not say it.

Oh and Jane, dont go buying the jobs numbers. You know how those work? They get some real data, and then they add what they 'think' the rest of it is based on economic performance data they get from another government division. By the way, that other government division looks good if the economy is reported as doing well, so you can bet theres some data manipulation and mining going on over there.

In essence, the jobs folks say "if the economy is doing well, then small businesses MUST be getting started in response to that economic goodness and other small businesses must be adding people...we dont have a mechanism to count those jobs so we've simply come up with a formula to guess what those are. We stuck that white paper on a link 47 pages down on a web site somewhere, put in an asterisk and a 3 point footnote in one 500 page report, and then we added these numbers to our jobs data and stuck it in a bar chart that makes the jobs numbers look great!. Because they must be because the economy is up!".

Which ignores the opinion that most small business owners and prospective business starters are being very conservative with the current economical situation, and the fact/opinion that many business owners are leveraging our productivity improvements and oursourcing to reduce costs.

My opinion (and its just that) is that our economic upturn was created with credit cards and HELOCs, that the jobs situation is no better than it was 2-3 years ago, and that we're going to see a sliding economic downturn starting later this year and lasting into the end of 2005. Cant guess any further than that.

But lets come back to this in a year and see how good my guess is...
 
TH,

Oh you're one of those Fricken Pessimists! - Almost as bad as a Communist in the 1950's!

And yes I agree with you :)
 
I had never heard of the gordon model, so I found a good description:

http://news.morningstar.com/doc/article/0,,115230,00.html?hsection=Comm1

As for the jobs report... the nice thing that they always leave out is the fact that it takes 150,000 NEW jobs just to employ the people entering the workforce.   :p
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From the article:

"However, the 4.75% expected return for the S&P 500 is relatively lackluster compensation, which provides even more incentive, in our opinion, for investors to find individual stocks that can outperform the market as a whole. :

Naw, I 've got an easier method. Just go to Las Vegas and ask the man spinning the roulette wheel whether the little ball will land on Red or Black and then bet Accordingly :D
 
Marshac - good hunting, thats a decent explanation of it and what you should expect.

By the way, as explained in "The four pillars of investing", the gordon equation is not only good for the US stock model, it works on just about every prior civilizations "equity market".

Bernstein uses an analogy in the 4 pillars that I like and use often. A man walks a dog from his apartment to the park. The dog runs back and forth during the walk. The mans path is the gordon equation. He's going to the park. He's gonna get there. You can bank on it. The dogs path is the day to day movements of the stock market. Its the speculative (and unpredictable) component of the market. Indexers say they buy the total market and go fishing, and let the gordon equation pay them off over the long haul without worrying about where the dog will go tomorrow.

Make sure you also read this one (which was pointed to from the first article):
http://news.morningstar.com/doc/article/0,1,114455,00.html

Note that they expected return range for the next decade or two (2.1-4.2%) is before inflation, and almost completely consumed by it.

This is what you're going to get, in aggregate, from the broader markets over the next 10-20 years unless PE's go higher (and they're already more than 50% higher than average), or earnings rates accellerate to a rate higher than any time in history.

Now someone needs to jump in and explain how we'll get historic return rates 'because thats the way its always been and the future will be the same', when all the other parameters are banging their heads on levels that have no historic analog.

You're stuck with the paradox of "its not going to be 'different this time' because its going to be different this time." :p

If you buy into the historical mathematical model, you have to buy into what the same models tell you is going to happen going forward.

This is the thing thats bugged me about index investing from the get-go. If you buy into indexes at the point where they're at or below the "gordon line", long term over 20+ years you're going to make a very predictable amount of money. If you buy in above that line, especially if you're well above it, you can count on making nothing or losing money over 20 years.

I think it DOES matter when you get in. Or get out.

But you can wait a long time before seeing results. Clearly the market looked overvalued against the gordon equation in the mid 90's. But it kept going higher. You can lose a lot of money waiting for "the right time".
 
Note that they expected return range for the next decade or two (2.1-4.2%) is before inflation, and almost completely consumed by it.

This is what you're going to get, in aggregate, from the broader markets over the next 10-20 years unless PE's go higher (and they're already more than 50% higher than average), or earnings rates accellerate to a rate higher than any time in history.
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Hey retire@40 - Now here's a pessimist for you  :D


As far as the Gordon equation, It's probably correct in that no matter what happens the data inputs can be adjusted (mined) to give the proper answer.

This will be done 5 years after the actual results of the market. With of course an annotation of why the adjustments had to be made in light of the economic conditions that have just transpired and how they were 'different' than previous history. :D
 
Its not pessimistic at all, unless you count reality as pessimism! :)

As far as mining, thats the beauty of the gordon equation. The inputs are all real numbers. Over decade long periods of time its ability to predict returns is quite solid.

Its simply earnings and dividends. Theres no ability to mine anything, exclude anything, or enhance anything. Unless all the companies in the index being analyzed are fudging their earnings.

Now if you believe companies will boost earnings to rates far higher than the highest we've ever seen, that dividend rates will be doubled, or that productivity improvements will be far higher than they've been in the past, then you might see a higher rate of return than that 2-4%. But then you'd have to be saying that its "going to be different this time". Right?

Otherwise, we'll return to the mean and proceed from there. Whether it happens all at once like in 1929, or over 20 years like 1965 and whether it happens next year or ten years from now...well...you'll have to ask the dog. ;)
 
So TH,

If you really believe what you are saying, why do you have anything invested at all?

Why not get a CD that pays a higher interest rate like ***** and just wait for the correction.

I'm not saying it's not going to happen, I'm saying I have no clue, therefore I am invested.
 
A man walks a dog from his apartment to the park. The dog runs back and forth during the walk. The mans path is the gordon equation. He's going to the park. He's gonna get there. You can bank on it. The dogs path is the day to day movements of the stock market. Its the speculative (and unpredictable) component of the market.
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Ha, I don't think Bernstein has a dog. My pooch pulls me to the park, then starts the random walk/sniffing, then I have to pull him back home.
 
Note that they expected return range for the next decade or two (2.1-4.2%) is before inflation, and almost completely consumed by it.
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I think you misread the part about inflation. They talk about dividend/earnings growth "ignoring inflation." In this context, it means that instead of the 1.25% they used, inflation would bring that up to 4.25% or so.

In other words, those return numbers you're throwing around are "real" rather than "nominal."
 
So TH,

If you really believe what you are saying, why do you have anything invested at all?

Why not get a CD that pays a higher interest rate like ***** and just wait for the correction.

I'm not saying it's not going to happen, I'm saying I have no clue, therefore I am invested.
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Oh boy. Stick me to the tar baby. :p

I believe its going to happen, I just have no idea when or how. So I do the only thing that makes sense. Diversify broadly and with equities, stick with cheap value stocks that wont take a beating when it does happen, and give me a good dividend in the meanwhile.

But I do have a hunk of cash waiting for dips.

I'm more interested in the california intermediate munis right now than CD's. About the same real return and that income doesnt inflate our joint income level. But I think you still have to own equities. Just be careful of how much and what kind.

John - thats how it works with my dogs too, I get dragged. But we always start at home and end up where I planned. Just not always by the same route...
 
Why not get a CD that pays a higher interest rate like ***** and just wait for the correction.
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The problem is that ***** thinks he knows when the correction will happen based on the 10-year moving average P/E value. That's nonsense, and we're already 8 years outside of the window when that correction was supposed to happen.

It's true that we're probably way overdue, but it may also be true that some fundamental things have changed in the last 20 years that mean higher P/E values are normal (discount brokers, information via the internet, IRAs and 401-Ks, etc).

So, there's a fair chance that the long-term returns aren't as bad as some would predict based on history. But there's absolutely nothing that would suggest that P/E ratios should continue to grow as much as they have in the last 20 years.

So, ignoring the mess our economy is in, the Gordon equation might have been pessimistic. Unfortunately, our economy has enough really fundamental problems that two wrongs cancel and make Gordon pretty close to right.
 
For what it's worth, my understanding of the Gordon
Equation is that it forecasts the long range return of
the "market" (or a stock for that matter) based on
the current yield plus the current earnings growth.
Thus if the current yield of TSM is 1.56%, for example,
and the current earnings growth is 6.8% then the
Gordon Equation predicts a long term return of 8.36%.

TH, when you say we are "way above the line right now"
I don't understand what you mean. IMHO by definition,
the "line" for TSM, today, goes through 8.36% . That is,
with today's numbers you can expect a long term average annual return of 8.36% going forward.

Cheers,

Charlie
 
On the other hand, if the market had a 50% correction
on Monday, then Gordon would predict a long term
return of 16.7% going forward from Tuesday, assuming
the yield and earnings growth rates in $ do not change.

Cheers,

Charlie
 
Charlie, no offense, but your version of Gordon makes no sense to me.

The Gordon equation is really simple.  Too simple.

The basic assumption is that our economy will just keep on growing at about the same rate it always has.   That's about 1.5%/year in real terms.   (Of course, there's no fundamental reason our economy should keep on growing at that rate, and this is the main flaw in Gordon.)

Then you just add that growth rate to the current stock yield adjusted by price to get long-term yield.   You can use either dividends *or* earnings, since some stocks have no dividends.

So, all Gordon is saying is that you get the current yield + the growth of the economy.    That certainly hasn't been true for the last 20 years as we've had both P/E growth and high returns.   But another way to interpret it is that low P/E values (or high dividends) are good.  Duh  :)
 
No offense taken, Wab. I am just regurgitating what
Bernstein and Bogle explained in their books. No more,
No less. It makes perfect sense to me. Duh.,

Cheers,

Charlie
 
OK, we'll let Bernstein settle this one then :)

Four Pillars, p. 54:

DR (Market Returns) = Dividend Yield + Dividend Growth

Again, the long-term dividend growth has been about 1.5% in real terms (and basically grows as the GDP grows).

It'd be wonderful if we could add recent dividend growth and recent earnings growth together to figure out long-term returns, but I just don't see the rationale.
 
Wab, I am making the assumption that the dividend
growth rate and the earnings growth rate, on the
long run, are equal. Do you have a problem with
that? Of course, all of this assumes a constant P/E,
which may or not be a good assumption for the
future.

Cheers,

Charlie
 
P.S. Look on page 60 of Bernstein's "4 Pillars....".
The graphs of earnings growth and diviidend growth
look pretty similar to me.

Cheers,

Charlie
 
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