April 17, 2017
John P. Hussman, Ph.D.
Based on current valuation extremes, the outlook for prospective 12-year S&P 500 total returns remains dismal, likely averaging less than 1% annually by our estimates.DYI: DYI's return is along the lines of John Hussman as well from my work based upon dividends.
Estimated 10yr return on Stocks
*Starting dividend yield of the S&P500-**10yr estimated average annual rate of return.
Our estimate of 12-year total returns for a conventional portfolio mix of 60% stocks, 30% bonds, and 10% T-bills remains near a historic low of about 1.5% annually. This profile of expected returns is likely to improve substantially over the completion of the current market cycle. Indeed, no market cycle in history, including the most recent cycles, and even those accompanied by quite low interest rates, has failed to bring estimated 10-12 year equity market prospects into the 8-10% range, or beyond.
In any event, investors should emphatically not rely or wait on evidence of economic risk as a prerequisite for examining their equity market risk.
Remember that the average bear market erases more than half of the preceding bull market gain, and the complete market cycle is enormously forgiving to investors who reduce their risk exposure at rich valuations.
At the very least, investors should carefully ensure that their investment positions are consistent with their actual investment horizon and risk-tolerance. That said, investors who cannot tolerate the idea of missing out on a potential market advance, even at offensively high valuations, probably should not read my stuff.
Again, even for passive investors, take care to ensure that your exposure to stocks is consistent with your actual risk tolerance and investment horizon. In particular,
I continue to believe that passive investors should set their exposure so that they would be capable of weathering a 40-60% loss in the S&P 500 over the completion of the present market cycle,
and 12-year S&P 500 total returns averaging less than 1% annually, without abandoning their discipline in the interim.DYI: Ben Graham’s Corner of my blog (shown below) is screaming an overvalued market. This matrix does not take into account the massive profit margins of corporate America that will be fleeting when they regress back to the mean.
Ben Graham's Corner
Margin of Safety!
Benjamin Graham
Central Concept of Investment for the purchase of Common Stocks.
"The danger to investors lies in concentrating their purchases in the upper levels of the market..."
Stocks compared to bonds:
Earnings Yield Coverage Ratio - [EYC Ratio]
EYC Ratio = [ (1/PE10) x 100] x 1.1] / Bond Rate
1.75 plus: Safe for large lump sums & DCA
1.30 plus: Safe for DCA
1.29 or less: Mid-Point - Hold stocks and purchase bonds.
1.00 or less: Sell stocks - rebalance portfolio - Re-think stock/bond allocation.
Current EYC Ratio: 0.96
As of 4-1-17
Updated Monthly
Updated Monthly
PE10 as report by Multpl.com
Bond Rate is the rate as reported by
Vanguard Long-Term Investment-Grade Fund Investor Shares (VWESX)
DCA is Dollar Cost Averaging.
Lump Sum any amount greater than yearly salary.
PE10 .........29.02
Bond Rate...3.93%
Lump Sum any amount greater than yearly salary.
PE10 .........29.02
Bond Rate...3.93%
Over a ten-year period the typical excess of stock earnings power over bond interest may aggregate 4/3 of the price paid. This figure is sufficient to provide a very real margin of safety--which, under favorable conditions, will prevent or minimize a loss......If the purchases are made at the average level of the market over a span of years, the prices paid should carry with them assurance of an adequate margin of safety. The danger to investors lies in concentrating their purchases in the upper levels of the market.....
Be
as that is the passive investor better be well prepared to handle money wise
and emotionally a 45% to 60% (DYI’s est.) decline.
DYI’s
model portfolio remains very defensive – WITH HUGE AMOUNTS OF DRY POWDER (CASH)
waiting for improved valuations.
Updated Monthly
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