Hey Mustachian Investors,
I've been kicking around some investing considerations and wanted to see if anyone had feedback. It seems like one of the biggest concerns that both early retirees and investors in general have is the high CAPE (Shiller) P/E ratio on the S&P 500, which indicates basically that we're currently paying more per dollar of earnings (based on the previous 10 years) than we have during any time outside of 1929 and from the mid-1990's to 2007. What I'd propose is that it isn't a coincidence that in the years since index funds, no-load funds, discount brokers, and lower tax rates on investment gains and dividends (early 90's through today) that people are willing to pay more per dollar of earnings because they'll be keeping more of their gains.
The easier way for me to think about it was using the reciprocal of the PE ratio (E/P ratio) to create something more like a Yield on the S&P 500. At the current PE10 ratio of around 26 you have a yield of 1/26=3.85%, which compared to the median PE10 reading of 16 (1/16=6.25%) seems quite high (
http://www.multpl.com/shiller-pe/). That was when I took a look at what "reasonable" fees would have done to your yield prior to the investing improvements we've seen in the last 25 years. If 50 years ago you paid 2.00% in fees, loads, commissions, etc., your 6.25% yield on the S&P 500 would be down to 4.25%. The introduction of qualified dividends removed another drain from investor earnings and a less visible boost to returns (by eliminating a subtraction).
Overall, it seems like it's a great time to be an investor with regard to availability of low-cost investment choices, but I've got to think that those improved choices may require us to alter our expectations for returns moving forward. In looking at what's been published I've seen references to changes in the economy from industrial to consumer/technology and more information about individual companies being responsible for an increased PE10, but little about the changes in the investing environment. There are many other possible factors that might play into why PE10 ratios have been higher for most of the last two decades (401k's becoming widespread, artificially low interest rates, etc.), but does it seem crazy to think that investors would account for improved investing efficiency and thus pay more for future earnings?
Of course a contrarian view could be that once people start thinking they've figured out why "this time it's different", the market will prove that it isn't. Thanks for any feedback you've got!