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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Amy J who wrote (16804)	2/6/2004 7:45:24 AM
From: Wyätt Gwyön	Read Replies (1) \| Respond to of 306849

Amy, re: Input variables: historical stock growth = 11.35 i don't see how one can build a multi-decade strategy off such a flimsy number. past is not prologue. it is important to examine why the past return was what it was in order to have a reasonable expectation of what future returns may be like. stock growth over the next 35 years is unlikely to be anywhere near this level of 11.35% compounded. as i explained, stock growth over long periods of time can be broken down into COMPONENTS. the most important of these, the normalized dividend yield, is now less than 18% of the historical norm (0.8% vs 4.5%). furthermore, growth in the normalized dividend yield will be less than the historical level due to the much smaller base from which the growth starts (percentagewise). next, the PE expansion has added tremendously to historical returns and now stands at double the historical average, or about where it was at the peak of the 1929 crash. so it is not unreasonable imo to expect a long-term PE contraction, which would subtract, say, another 1 point from the return. the contraction may be even more severe when one considers that the REASON for the expansion in the first place was all the baby boomers piling into stocks. thus, as they pile out of stocks in the coming decades, there will be net selling pressure which will reduce the PE in and of itself. add these things up and i expect very poor returns on stocks in the decades ahead.