Is the Stock Market Cheap?

[audreyh1]

You may be right.



2.2% real return is not enough to satisfy a 4% withdrawal rate over 30 years. Using FIRECalc, plugging in the 2.2% rate and assuming a low rate of volatility (4% SD) it fails 1/3 of the time.

I thought you only needed a little over 1% real return. I must be remembering things wrong.

 

[keegs]

On the domestic front there's the inevitable pull back of Fed monetary policy and the volatility it may bring...then there's rising interest rates...

Europe, Japan, China are all facing serious headwinds... certainly is enough worry to go around there.

What are the alternatives to staying the course? Should we be directing future savings to cash equivalents?

 

[MichaelB]

What make this even more challenging is that low returns are usually a product of higher volatility, not lower.

IMO it is not a happy prospect.

Ha

No disagreement there either. It brings to mind my favorite quote, from Peter Bernstein, who probably forgot more about investing than I will ever know.

Equities are still valued at historically high prices. Interest rates, I don't have to tell you, are historically low. And so you start from there, and there you are. I think something very important to think about this, that a period of low returns, you think, well, every year maybe we'll have 4%, 5%. It doesn't work that way. Low returns result from high volatility. You have a big year, and then a bad year, and the pattern of low return periods is high volatility, not low volatility. It's a scary time.

I think the Fed is keenly aware of this and is doing everything it can to keep volatility very low. How long they can keep it down is another matter altogether, and a worthwhile discussion.

 

[Bikerdude]

You may be right.



2.2% real return is not enough to satisfy a 4% withdrawal rate over 30 years. Using FIRECalc, plugging in the 2.2% rate and assuming a low rate of volatility (4% SD) it fails 1/3 of the time.

I put in 2.2% return with 0 inflation and got 95.5 success over 30 years. What am I missing.

 

[haha]

I put in 2.2% return with 0 inflation and got 95.5 success over 30 years. What am I missing.

Things that go bump in the night.

In fact, if everything proceeds like clockwork, 0 real return and 0 inflation should give you 30 years @ about 3.3% withdrawal. But the volatility will get you when you least expect it.

Ha

 

[MichaelB]

I put in 2.2% return with 0 inflation and got 95.5 success over 30 years. What am I missing.

My inputs were: portfolio value $1M, spending $40K, and on the "your portfolio" tab, I chose the last option - "A portfolio with random performance" and inputted 5.2% mean return, 3% inflation, and 4% SD. I get a success rate of 69%.

 

[bondi688]

Sticking to the question asked by OP, the stock market is not cheap now.

 

[jmzf1958]

I have about $200,000 to invest that I won't need for at least ten to fifteen years. Would you invest it now, and if not, what would you do?

 

[Bikerdude]

My inputs were: portfolio value $1M, spending $40K, and on the "your portfolio" tab, I chose the last option - "A portfolio with random performance" and inputted 5.2% mean return, 3% inflation, and 4% SD. I get a success rate of 69%.

Well, I used the same option and put in 2.2% mean return, 0% inflation and 4% SD and get a different result each time I run it. Some as high as 95% and others lower. I guess that's the random "Monte Carlo" results?

 

[EvrClrx311]

I have about $200,000 to invest that I won't need for at least ten to fifteen years. Would you invest it now, and if not, what would you do?

something like VTTVX (Vanguard Target Retirement 2025) it's 70% stocks and 30% bonds at the moment and will transition to safer investments as your 10-15 year mark approaches.

 

[clifp]

I thought you only needed a little over 1% real return. I must be remembering things wrong.

You would be correct if the 1% real rate was constant. But the sequence of returns matter a lot. Normally stocks and bond have very low correlation, and this century have had a negative correlation -.55. However, it is entirely possible that a pick up of inflation+interest will decrease the real value of both stocks and bonds at least over the next few years.

This in turn would make it tough to withdraw 4% even if the overall return for a 60/40 portfolio was 2.2%.

 

[imoldernu]

Not being very smart in the area of finance and investing, I probably shouldn't post here, but since we're in a period of "Who do you trust?", it's probably ok to at least voice an opinion.
40% of all US based corporate revenues are generated overseas.With the advance of the US dollar against other major currencies, doesn't this artificially distort the current PE? Are the PE10 numbers becoming a shadow banking phenomenon?
In looking at the instability of international markets and the soaring debt. I wonder if we may be getting beyond historical charting. The smoothing from PE10, or PE30, over history assumes a relative international monetary balance as it has existed for decades. As we see mountainous levels of debt growing, leverage at unprecedented levels, and fiat currencies being included in projections, are the Schiller charts still predictive? How do we fit QE into the charts?
The second part of the "earnings" that seems to be hitting many businesses, is where technological progress may be coming to the point of diminishing returns, ala the most recent flap concerning Walmart coming up against a profit wall. The single most variable profit factor of payroll, which reduction has contributed greatly to increased bottom line profits in almost all industries may well stress consumer spending and come full circle in diminished profits. Consider today's jobs outlook. Does anyone really believe in a return to significantly lower unemployment numbers?
Some have said that corporate 10 year plans have been replaced by quarterly profit adjustment panics. Is this the time to trust in market projections? Are the variables of today even close to those that affected the historical ups and downs that make up the historical charts?

Anyway, as of today, the market it still going up, so somebody has to know something, eh?

 

[photoguy]

When looking back 150 years, every period of time where the market has performed as bad as it has the last decade, we've seen a very positive run in the market the next couple decades.

I guess you are referring to the US market? and not other markets like Japan? There's a strong danger of survivorship bias here.

That said, I actually feel very positive about future returns. Maybe it's just magical thinking, recency bias, and rationalizing that I have large portions of my portfolio in international/small/value all of which have higher expected returns.