«If we assume extremely pessimistic nominal earnings growth of 3 % over the coming decade and a compression in the price - earnings ratio to 10, equities would still deliver returns
above current bond yields.
They simulate future bond yield as a linear function
of current bond yield with noise, assuming a long - term average of 5 % and bounds of 1 % and 10 %.
For example, if we assume extremely pessimistic nominal earnings growth of 3 % over the coming decade and a compression in the price - earnings ratio to 10, equities would still deliver returns
above current bond yields.
Don't go hog wild, but
current bond yields are no competition for stocks at present.
Until then, the best way to temper your expected returns is to focus on
the current bond yield, plus or minus a percent or two.
Current bond yields are lower than the rate of inflation.
For example, if we assume extremely pessimistic nominal earnings growth of 3 % over the coming decade and a compression in the price - earnings ratio to 10, equities would still deliver returns above
current bond yields.
Current bond yields, current bond prices, and current as well as future interest rates all may have a big impact on the return of a fixed - income investment.
So, another way to decide when to switch to bonds as ballast might be when
the current bond yield is a percentage point or two above the current and expected rate of inflation.
If you're really a long - term investor (10 + years), the historical ERP has been so high and
current bond yields are so low that it takes a rather irrational level of risk aversion to own bonds, unless you think the ERP is wrong and / or there's a substantial risk of deflation.