If valuations affect long - term returns, knowing the valuation level that applies at the time you purchase an index fund must tell you something about what the long -
term return on that stock purchase will be.
I have little doubt that this estimate was obtained by some version of the dividend discount model: Price = D / (k - g), where Ed Kershner decided to pick a long -
term return on stocks k really, really close to the long term growth rate of dividends g. Gee, why didn't he just go ahead and set them equal and shoot for thrills?
Ideally, we'll observe both a further decline sufficient to raise the expected long -
term return on stocks toward say, 9 % or more, coupled with a better interest rate environment and a uniform strengthening of internals off of that weakness.
Now, my long - term view is a different story, because ultimately, the long -
term return on stocks is tightly linked to valuations.
In order to drive the long -
term return on stocks even 1 % higher, the market would have to plunge over 40 % (this would drive the yield on stocks from the current 1.4 % to 2.4 %).
Yesterday I looked at John Hussman's method for estimating the long -
term returns on stocks.
That's about half of the average long -
term return on stocks.
The quarterly cash payout from dividend stocks is one of the only certainties in the stock market and have accounted for about 40 % of the long -
term return on stocks.
Neither light reading nor cheap (it's hard to find online for less than about $ 75), this book is the most thoughtful and objective analysis of the long -
term returns on stocks, bonds, cash and inflation available anywhere, purged of the pom - pom waving and statistical biases that contaminate other books on the subject.
As a non-institutional investor who doesn't care as much about the «mark to model» on any bonds I would hold, I would view double - digit Treasuries as free money, especially in light of long -
term returns on stocks barely cracking the DD with divvies included...
But be careful - it is tempting to assume that if inflation comes in higher (as seems likely in the back half of the decade), the long -
term return on stocks will also be commensurately higher, but that is the inflation - hedger's first mistake.
What most people don't realize is that the majority of the long
term returns on stocks came from dividends.
In the event that we see another stock crash within the next few years, the most likely long -
term return on stocks will be going up to 15 percent real per year.
If you assume low multiples at the end of say, a 10 - year holding period, it would take heroic assumptions about the growth of dividends and earnings to get a respectable return from stocks (see: Estimating the Long
Term Return on Stocks).
Yesterday I looked at John Hussman's method for estimating the long -
term returns on stocks.
Going for the Gold Valuing Foreign Currencies Estimating the Long -
Term Return on Stocks The Importance of Measuring Returns Peak - to - Peak Hussman Price / Peak - Earnings Ratio Featured in Barron's Magazine The Two Essential Elements of Wealth Accumulation Mutual Fund Brokerage Fees and Trading Costs The Use (and Abuse) of Short - Term Performance Bear Market Insights How and Why Options Should be Expensed from Corporate Earnings
That's about half of the average long -
term return on stocks.
In short, depending on the time span, nearly one - third to one - half of the long -
term return on stocks comes from sources other than dividend yield, such as inflation, growth in dividends, and changes in valuation levels.
The performance of any long - term investment approach should be measured over periods that are representative of the long -
term return on stocks.
But even if you include the past ten years, the long -
term return on stocks has been between 6 % and 7 % per year after inflation.
Those who lowered their stock allocations when the long - term value proposition was poor (the most likely long -
term return on stocks was a negative number at the top of the bubble) have a lot more in the way of assets to invest in stocks now that they again offer a reasonable long - term value proposition.
Not exact matches
Important factors that could cause actual results to differ materially from those reflected in such forward - looking statements and that should be considered in evaluating our outlook include, but are not limited to, the following: 1) our ability to continue to grow our business and execute our growth strategy, including the timing, execution, and profitability of new and maturing programs; 2) our ability to perform our obligations under our new and maturing commercial, business aircraft, and military development programs, and the related recurring production; 3) our ability to accurately estimate and manage performance, cost, and revenue under our contracts, including our ability to achieve certain cost reductions with respect to the B787 program; 4) margin pressures and the potential for additional forward losses
on new and maturing programs; 5) our ability to accommodate, and the cost of accommodating, announced increases in the build rates of certain aircraft; 6) the effect
on aircraft demand and build rates of changing customer preferences for business aircraft, including the effect of global economic conditions
on the business aircraft market and expanding conflicts or political unrest in the Middle East or Asia; 7) customer cancellations or deferrals as a result of global economic uncertainty or otherwise; 8) the effect of economic conditions in the industries and markets in which we operate in the U.S. and globally and any changes therein, including fluctuations in foreign currency exchange rates; 9) the success and timely execution of key milestones such as the receipt of necessary regulatory approvals, including our ability to obtain in a timely fashion any required regulatory or other third party approvals for the consummation of our announced acquisition of Asco, and customer adherence to their announced schedules; 10) our ability to successfully negotiate, or re-negotiate, future pricing under our supply agreements with Boeing and our other customers; 11) our ability to enter into profitable supply arrangements with additional customers; 12) the ability of all parties to satisfy their performance requirements under existing supply contracts with our two major customers, Boeing and Airbus, and other customers, and the risk of nonpayment by such customers; 13) any adverse impact
on Boeing's and Airbus» production of aircraft resulting from cancellations, deferrals, or reduced orders by their customers or from labor disputes, domestic or international hostilities, or acts of terrorism; 14) any adverse impact
on the demand for air travel or our operations from the outbreak of diseases or epidemic or pandemic outbreaks; 15) our ability to avoid or recover from cyber-based or other security attacks, information technology failures, or other disruptions; 16)
returns on pension plan assets and the impact of future discount rate changes
on pension obligations; 17) our ability to borrow additional funds or refinance debt, including our ability to obtain the debt to finance the purchase price for our announced acquisition of Asco
on favorable
terms or at all; 18) competition from commercial aerospace original equipment manufacturers and other aerostructures suppliers; 19) the effect of governmental laws, such as U.S. export control laws and U.S. and foreign anti-bribery laws such as the Foreign Corrupt Practices Act and the United Kingdom Bribery Act, and environmental laws and agency regulations, both in the U.S. and abroad; 20) the effect of changes in tax law, such as the effect of The Tax Cuts and Jobs Act (the «TCJA») that was enacted
on December 22, 2017, and changes to the interpretations of or guidance related thereto, and the Company's ability to accurately calculate and estimate the effect of such changes; 21) any reduction in our credit ratings; 22) our dependence
on our suppliers, as well as the cost and availability of raw materials and purchased components; 23) our ability to recruit and retain a critical mass of highly - skilled employees and our relationships with the unions representing many of our employees; 24) spending by the U.S. and other governments
on defense; 25) the possibility that our cash flows and our credit facility may not be adequate for our additional capital needs or for payment of interest
on, and principal of, our indebtedness; 26) our exposure under our revolving credit facility to higher interest payments should interest rates increase substantially; 27) the effectiveness of any interest rate hedging programs; 28) the effectiveness of our internal control over financial reporting; 29) the outcome or impact of ongoing or future litigation, claims, and regulatory actions; 30) exposure to potential product liability and warranty claims; 31) our ability to effectively assess, manage and integrate acquisitions that we pursue, including our ability to successfully integrate the Asco business and generate synergies and other cost savings; 32) our ability to consummate our announced acquisition of Asco in a timely matter while avoiding any unexpected costs, charges, expenses, adverse changes to business relationships and other business disruptions for ourselves and Asco as a result of the acquisition; 33) our ability to continue selling certain receivables through our supplier financing program; 34) the risks of doing business internationally, including fluctuations in foreign current exchange rates, impositions of tariffs or embargoes, compliance with foreign laws, and domestic and foreign government policies; and 35) our ability to complete the proposed accelerated
stock repurchase plan, among other things.
He expects the long -
term stock market
return to be 3 % — not the historical norm of 7 % that pension plans continue to lean
on.
Buybacks, said Aguilar, are done because that's the way companies think they can get the best
return on their investment, so with a more volatile
stock market and harder access to credit, spending cash
on long -
term growth becomes the best option.
Vanguard is telling investors to expect
returns in the «medium
term» of 4 percent to 6 percent, the most cautious outlook it has had
on future
stock returns at any time during the post-financial crisis economic recovery.
Zaino, who counsels the Millennial children and grandchildren of his primary client base, says, «Younger investors who can't handle the risk associated with
stocks are missing out
on significant long -
term growth through higher
returns and the positive effects of compounding interest.
Although the long -
term returns on real estate are less than common
stocks as a class (because an apartment building can't keep expanding), real estate can throw off large amounts of cash relative to your investment.
Consider this simple example with a three - instrument portfolio comprised of a S&P 500 ETF, a long -
term bond ETF and a cash - proxy ETF.1 Based
on daily
returns since 2010, the annualized volatility
on the cash proxy (a short -
term bond ETF) is effectively zero, compared to 16 % and 15 % for the
stock and bond ETFs.
As Figure 1 shows, the impact of this failed acquisition in
terms of both
stock price and
return on invested capital (ROIC) was similar to the ’08 recession.
Given those durations, an investor with 15 - 20 years to invest could literally plow their entire portfolio into
stocks and long -
term bonds, in expectation of very high long -
term returns, with the additional comfort that their financial security did not rely
on the direction of the markets, thanks to the ability to reinvest generous coupon payments and dividends.
What we have really seen over the past several years, in
terms of the appreciation of markets and the decline of interest rates based
on what the Fed has been doing, is a result which has eliminated the possibility of investors in bonds and
stocks to earn an adequate
return relative to their expected liabilities.
The whole «Dow 36,000» argument was essentially based
on the notion that all earnings could be paid out as dividends, earnings would still grow, and that investors would be willing to hold
stocks for a long -
term return of just 6 % annually.
And even if the indicator was valid (counterfactually), the article asks readers to accept as given that earnings are properly reported here, that they will grow by nearly 50 % over the coming year, and that investors are willing to key the long -
term return they require from
stocks to the yield
on 10 - year bonds, which has been abnormally depressed in a flight to safety.
For instance, a portfolio with an allocation of 49 % domestic
stocks, 21 % international
stocks, 25 % bonds, and 5 % short -
term investments would have generated average annual
returns of almost 9 % over the same period, albeit with a narrower range of extremes
on the high and low end.
The example, which illustrates a long -
term average
return on a balanced investment of
stocks and bonds, assumes a single, after - tax investment of $ 75,000 with a gross annual
return of 6 %, taxed at 28 % a year for taxable account assets and upon withdrawal for tax - deferred annuity assets.
Even without suggesting that money will move «out of cash and into
stocks,» one might argue that relative valuations are too wide, and that
stocks should be priced to achieve lower long -
term returns, given the poor
returns available
on bonds.
So far the lack of yield
on gilts is more than made up for by the negative correlation with
stocks on down days, but more curious how the long
term total
return compares.
The study also found that long -
term annual
returns of the MSCI KLD 400 Social Index, which comprises firms scoring highly
on environmental, social and governance (ESG) criteria, outperformed the S&P 500, a benchmark of the broader US
stock market, by 45 basis points, since its inception in 1990.
Moreover, short -
term investors betting
on the sale — who perhaps now hold a quarter of all Dell's shares — will mostly vote for the bird in hand if the alternative is the
stock returning to earth with a thud.
Based
on the Dividend Discount Model (DDM) with a 10 % discount rate (the target rate of
return), if the company grows the dividend by an average of 7 % per year for the long
term, then the fair price is over $ 90, compared to the current
stock price of only about $ 83.
Investors who assume that favorable equity
returns can be relied
on in the long
term or that
stocks are safe so long as they are held for 20 years are optimists.
Since total
return is comprised of income (via dividends or distributions) and capital gain, with the former counting much more over the long
term, the case for this
stock having a great 2018 is certainly already there based
on that higher - than - average yield.
Investing may earn you more based
on oft - quoted long
term averages but, consider this, if the market tanks by 50 % in one year, it would take over 7 years of so called «average
stock market
returns of 10 %» to
return to the same position you were in just prior to the loss, and that is not even factoring in inflation.
Consider adding fixed income to
return to the right mix of
stocks and bonds based
on your comfort with risk and long -
term financial goals.
In other words, if a very long -
term investor is willing to rely
on the notion that valuations when they sell will match or exceed the unusually high valuations of the present, that investor can reasonably expect
stocks purchased at current levels to deliver long -
term returns somewhere the range of 8 - 10 %.
If you listen to the tenor of investment strategists here, the basic message sounds a lot like what we heard in the late 1990's:
stocks may not be priced to deliver strong
returns on a sustained basis, and there are substantial risks in the longer -
term picture, but for now, things seem to be going well and so there's no need to be defensive just yet.
Taxation Of Distributions Besides taxes
on capital gains incurred from selling shares of ETFs, investors are also subject to pay taxes
on periodic distributions, which can be dividends paid out from the underlying
stock holdings, interest from bond holdings,
return of capital (ROC) or capital gains — which come in two forms: long -
term gains and short -
term gains.
As the late, great Benjamin Graham said, in the long
term, the
stock market is a weighing machine, judging
stocks based
on measurable criteria like earnings, sales, debt, profit margins, and
return on equity.
As I've noted before, for an investor looking to capture all the market's long -
term returns with substantially less downside risk, it would actually have been enough, historically, to simply step out of the market
on a price / peak multiple of 19 and then wait for a 30 % plunge before repurchasing
stocks, even if that meant staying out of the market for years in the interim.
Though there may be some risk that the value of the house, the income from a business, or the
return on stocks will not turn out as hoped, the loan will be paid off in a specified amount of time, and the interest rate will be locked in for the
term.