Analyzing the 64 rolling 20-year periods beginning with the period 1926 – 1945 and ending with the period 1987 - 2008 reveals the following re: the S&P 500 index return:
The best 20-year period was 1980 – 1999 in which the S&P 500 index annualized return was 17.88%.
The worst 20-year period was 1929 – 1948 in which the S&P 500 index annualized return was 3.1%.
The majority of the 64, 20-year time period returns fell in the range of 5% to 15%.
The market’s “return” volatility increases when shortening the time period under investigation. Analyzing rolling 5-year periods beginning with the period 1926 – 1930, reveals:
The best 5-year period was 1995 - 1999 in which the S&P 500 index annualized return was 28.56%.
The worst 5-year period was 1928 – 1932 in which the S&P 500 index annualized return was -12.47%.
The average annualized returns for the 5-year period time frames were between 5% and 15%.
Does this imply more tactical asset allocation to exploit the fluctuations? Or, is “buy-and-hold” a better strategy? With either approach, “volatility” or “variability” of returns needs to be put into a strategic context.
The CAPE stands for the Cyclically Adjusted PE Ratio.
It is based on average inflation-adjusted earnings from the previous 10 years.
It is also referred to as the Shiller PE Ratio, or PE 10.
Long-Term Descritive Statistics: (as of 3/7/2009):
Min: 4.78 (Dec 1920)
Max: 44.20 (Dec 1999)
The "Valuation Confidence Index" measures the percentage of investors (institutional and retail) who believe that the stock market is NOT overvalued.
Thoughts on portfolio re-balancing...
1. Active % threshold re-balancing in tax-deferred accounts (401k, IRA)...use a broker with a commission-free based ETF platform
2. Calendar-based re-balancing in taxable accounts
Excellent article re: "equal-weighted" indexing.
The #WSJ "Mixing It Up" financial advisors recommend the following asset allocation:
37%: Bonds and Cash
33%: U.S. Stocks
15%: Foreign Equities
Could this be the "optimal" portfolio design?
Graham's concept of stock pricing - i.e., every stock consists of 2 elements - is a an excellent way in which to decipher equity prices:
1. "Investment" value = the DCF # (i.e., sum of all future cash flows discounted to the present)
2. "Speculative" element = driven by investor pyschology (i.e., sentiment and emotion)
Since 1926, U.S. Equities have earned an annual nominal average of 9.8% according to Ibbotson Associates. During the time period, inflation has average about 3%. Assuming investment "expenses" average 1% and taxes 1%, the expected "real" annual rate of return is thus: 4.8%.
Why do fixed income securities with longer maturities typically have higher yields? Conventional theory postulates that investors seek higher rates of return for each successively longer time period that they must forego current consumption. The yield curve maps the relationship of yield and maturity. Typically, yield curves are upward sloping. Although at times, it can be “flat”(i.e., both short and long term bond yields are the same) or “inverted” (i.e., short-term bond yields are HIGHER than long-term ones).