A reader left a comment on a post from a few days back called Savings. The post itself was very short but whipped up some good comments about saving too much (or not) and what sort of return you need to average to make the money last.
The last comment had a link to a post by Scott Burns on this subject. The reader quoted Mr. Burns "A conservative 40 percent equity/60 percent fixed-income portfolio could be expected to produce a long-term annualized return of 7.34 percent." I made the numbers bold, not the reader or Burns.
This might be a flawed assumption. Burns cites research from Ibbotson but does not say how long the research was. This could matter if the study was only 30 years because for about 22 out of the 30, yields have been declining which means price going up which helps total return.
Another concern about the assumption is that yields are now low by historical norms. There is visibility for yields to head higher over the next few years. I do not think we will see 14% yields again but 8% or 9% is plausible even if it is not accurate. With yields so low, people are buying high which is why I have maturities very close for clients.
Anyone building a true bond barbell at 4-point-whatever today is likely to have problems.
One fun little fact to think about WRT to stocks is that with all we have been through in the last ten years the S&P 500 stood at 824.78 on May 11, 1997 (a Sunday). That is an 80% gain which ranks poorly compared to other ten year periods. There have been quite a few ten year periods where the S&P 500 has tripled.
If the market averages 6% per year over the next ten years, a number consistent with my expectation of below average returns, the S&P 500 would be at 2675 on May 11, 2017--a 79% increase. In that same time frame your expenses will likely be 40-50% higher.
The market might average 6% a year but it won't go up by that amount every year. There will be some sort of combination of up and down varying magnitudes which of course makes this much tougher but equities are very compelling when managed smartly, with the right mind set and time horizon.
These numbers should be of interest to anyone below the age of 70 and more and more to people older than 70 too.
Wikinvest Wire
10 comments:
There's another important point I think, which is that starting valuation can matter quite a lot.
If you look at a graph of S&P 500 earnings versus time (presume this is a good proxy for market, use at least 20-30 years) it goes up fairly steadily with a high frequency variation that diverges above and below trend. Of course the high frequency component is the business cycle. Today, after several years of good earnings growth we are well above that trend line, and P/E is also above average.
So to expect long term return going forward will be similar to past, it seems to me that you must believe that it's different this time, i.e. business cycle has been abolished or we have achieve a permanently higher plateau of earning multiples. Otherwise you are left expecting that at some point earning will not only stop growing, but contract to trend or even below and P/E will fall back to long term average or even below. Either implies a much lower overall market value and capital loss from here. A retiree who "needs" the income from portfolio should think long and hard about whether this risk is worth taking.
Of course all of this is long term stuff and short term anything can happen. I personally think the market can keep going up for as long as risk premiums stay low, which may be another year or more. But someone retired who is dependent on assets for living expenses should be very cautious since any signficant hit to portfolio may be unrecoverable.
Michael,
John Hussman writes about this a lot and even he concedes that PE ratios are necessarily predictive, they create an environment of attract or not valuations.
PEs were "too high" for a long time in the 1990s.
I don't put much value in the PE of the market as an analytical tool.
Even 8% return won't be enough to keep us even. Actual inflation is in the double digits right now, even though the Fed is doing it's best to hide the facts. Inflation is the increase in money supply resulting in higher prices. Something the Fed forgot. Reconstructed M3 last I saw was 13% in the US, and several other countries were running much higher. Traditional LT planning methods are meaningless since there is no reliable data for inputs. GI, GO. As Schiff says, the Dow can't even compete with the price of eggs.
As a second thought, yesterday my Gold and Silver positions were off, but almost balanced by the double inverse shorts. McHugh again called a down turn to the day with the Phi-Mate method. Last time it was to the day as well. I'll stop believing when I see it no longer work.
DaveB the point about money supply is very valid.
The point about eggs maybe less so. Here is my thinking...If you follow the uranium market you know that the cost of uranium can go up a lot w/o altering the cost structure for nuclear power.
Some things from the grocery story have gone up but some others have not; personally cereal has stayed the same and yougurt is down a ton; 80 cents down to 50.
The point is if the total cost of groceries goes up 10% there is a big chunk of the population that won't feel it. We spend $500 a month (no kids) so another $50 doesn't alter the cost structure to our life.
Here Walmart is a big help for people who are impacted by a potential extra $50 or whatever number per months.
Roger
I agree that P/E is almost completely useless as a short term (next year or two) forecasting tool. A scatter plot of P/E(ttm) versus forward market returns for 1, 3, and even 5 years yields near random results.
But if you normalize the earnings (Hussman like peak earnings, Shiller uses a moving average, I just use the long term trend line adjusted for inflation) and then do a scatter of P/normalized-E versus forward market return, you start to get something that looks like a trend at about 3 years, 5 years is significant (at 90% confidence), and 10 years is quite compelling.
So if our prototypical retiree has a time horizon of 10+ years, it seems to me that starting valuation is important risk consideration.
P/E was "high" for years in late 1990's. But if he had observed the high P/E and put assets into cash equivalents I suspect he would have done similarly to a generic market investor (although I've not actually worked out the comparison). Of course he would have missed a lot of upside for several years, but also a lot of downside. In the end it seems to me for a retiree missing the downside is more important than missing the upside.
To be clear, I'm not saying 100% cash or 100% market exposure is right, but rather that a bit more caution is called for today if you believe traditional valuation yardsticks matter, and time horizon is more than a couple of years.
Hi Michael,
Crestmont Research (http://www.crestmontresearch.com/) has a number of articles available that support your statements. Please see the following:
http://www.crestmontresearch.com/pdfs/Stock%20Waiting%20For%20Avg.pdf
http://www.crestmontresearch.com/pdfs/Stock%20Retirement%20SWR.pdf
If it does turn out that (at current P/Es) stocks might provide less than their historical returns, what alternatives should we be investing in?
Rich
Sorry, the links from my previous post did not work. Will try again below.
http://www.crestmontresearch.com/pdfs/
Stock%20Retirement%20SWR.pdf
http://www.crestmontresearch.com/pdfs/
Stock%20Waiting%20For%20Avg.pdf
You may need to copy and paste the links "piecemeal" into your browser URL text box.
Rich
Well Roger et al, if you don't think P/E ratios are predictive, what do you think about the price of pork relative to stocks.
:-)
WMT
Although I have reservations about the effect of WMT on the US economy, I just moved very close to a bran spanking new Super**2 WMT. Impressive store. Skylights all over, with light sensors to determine if lighting augmentation is needed. LED illumination in freezer cases with smart electronics. $4 prescriptions. Basically I shop at WMT and WFMI. Talk about a bipolar disorder. ;)
I was at the CS desk at WMT for a return, and the customer at the front of the line was deaf. And son of a gun, if they didn't have an associate who could sign come to the desk to take over. I also opened an account at the Woodforest Bank inside the store. Do avoid the Mickey D's tho.
And yesterday I bought some WFMI just a hair above 40 and am pleased about that. Now if only LVS will crater...
Pork
They should take note that when Pork is stir fried, it occupies about half the volume. And I smell someone heating the peanut oil.
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