BenSolar wrote:peteyperson wrote: Firstly, where do you get the analysis of the market return is usually 1.5% above inflation?
First, to be clear, I said that stock market earnings growth is usually 1.5% above inflation. I find the number quoted is usually 1.5 or 2%.
Here Bernstein writes:
The long-term real growth of earnings and dividends had not budged from the historic 2% rate, and stock yields barely poked above 1%. A future of 3% real expected returns beckoned.
Asness estimated the relationship as follows:
Nominal Earnings Growth = 2.2 + .94 * inflation
John Cambell says about 2%:
Over long periods of time, these formulas have given results that are consistent with average realized returns. For instance, from 1871-2001, the average dividend/price ratio was just under 5 percent, while the average real growth rate was just over 2 percent, adding to about 7 percent, which is the long-term compound average realized stock return in real terms, that is, correcting for inflation.
So, hmm, I'm sure I've seen 1.5% referred to, but can't find a reference. Perhaps my memory is faulty.
Let's use 2%, then we have 3.6% real return from S&P500.
you debunk your own analysis on w/d rates why?
Well, as I mentioned 'if you are willing to deplete capital', that is spend down your capital over your expected withdrawal period. I also mentioned 30 years, while you seem to be planning for longer/indeterminant withdrawal without depleting capital? As JWR mentioned 4% survived 30 years from these valuation levels in the past. A worse outcome is entirely possible, I think, as shown by raddr's mean
reverting Monte Carlo analysis What do you use for your own FIRE calculations (I don't know if you're FIREd or not) in calculating the total investments required to FIRE? That sets my target.
I'm shooting for a 4% WR for my planning purposes. I'm a long way from FIRE. I think I could build a portfolio that would support 4% in today's environment, and I hope valuations will improve.
I see the term PE10 here. I understand P/E, but what is PE10?
PE10 is a valuation measure that uses inflation adjusted price divided by inflation adjusted 10 year average earnings. Using the 10 year average earnings smooths out the bumps and dips in earnings, giving us a smoother picture of 'earnings power'.
Shiller and Cambell established that PE10 is a pretty good predictor of future long term stock market returns. You can find recent values for PE10
here and you can determine current value using this formula: current PE10 = current price * last PE10 / last price .
I didn't actually get whether you agreed with me that people should auto-correct what they have in an inflated stock market using historical P/E values so they don't retire with 80% in stock at avg P/E of 30 and then a month later the market massively corrects to 15 and they have to go back to work (read too many articles about people like this). Were you side-stepping the issue somewhat by suggesting investing in a variety of investment vehicles so I only have limited exposure to the market upon FIRE? In which case, isn't is usually the case the all other investments deliver inferior results to the market and yet we're examining swr based on what the markets do? Or did I miss something there?
I do agree with you on the first point. I also suggested the option (desireable to me) of carefully investigating other investment options and diversifying into those with low correlation to the TSM and with decent returns. The assumption that the TSM is always the investment option with the highest return is not always correct, IMO. For instance in early 2000 in the US, the S&P 500 rose such that it's dividend yield was only 1.1%. Add 2% real growth for an expected real return of 3.1 %. At that time there were US inflation protected Treasury bonds with a guaranteed real return higher than that. REITs, small cap value, large cap value, all had higher expected returns then. Presently the options aren't as clear cut and returns from the alternatives look lower. But the Vanguard REIT index fund with current yield of about 6% still looks good to me compared to S&P 500. I don't know if you have any comparable option.
I'm just thinking that I dollar cost average 15 + years of market investment, then I go to retire and the P/E is on 25. I've plowed my money into something overvalued and like okay, where do I go from there? Use the market as a growth vehicle, but heavily diversify away from it near FIRE in order to avoid the downsides? In which case, what happens to the expected return when dealing with other investments with lower returns? I wonder, how does Warren Buffett deal with investments he buys on the open market that later trade on a high multiple as most do now? He buy and holds. So does he just ignore that side of it?
If you can identify asset classes that are more attractive, then you can move money there. If not, then I guess you are stuck with dealing with lower predicted returns. If you've been able to buy in at lower levels, then at least you've had the pop in return given by the growth in valuation. Buffet doesn't sell core holdings much, but he certainly wasn't buying when valuations were sky high. If the market continues north from here, I plan to sell the last of my S&P 500 by the time it hits PE10 of 30. I'll put proceeds in fixed rate bank contract available in my 401k for lack of better options. I like the guaranteed 1.7% better than the prospects of S&P 500 at PE10 30. I'll increase exposure to S&P 500 when valuations improve. Some frown at this, but it makes sense to me.