What returns to expect from stock market based on Shiller CAPE

[HmtmC]

I am a big fan of the Shiller CAPE method to take a view on stock prices. I found this very interesting article, which was analyzing the returns not only for the S&P500 but also for different other markets. And to be clear: I am not involved with that company in any way and I do not want you to buy their stuff / use their service - it is just an interessting analysis; go buy Vanguard and ETFs! :D

http://www.starcapital.de/docs/2014_02_CAPE_Predicting_Stock_Market_Returns.pdf
 
I did my own calculations based on the Shiller data and came up with similar results - although I did not format it so nicely as they did ;)

So bottom line:

• For current S&P500 CAPE of ~25 you can expect a total return of ~4% over 15 years after inflation. (if interessted, check out the table on page 3 of above linked document)
  
• This includes dividends (dont get confused, they use a performance index version of the S&P500).
  
• This holds for mainly all analyzed markets (e.g. US, Germany, UK, Australia, ...)
  
• US vs. European market might be overvalued (but make up your own mind, I am not telling you this is the truth).
  

So why am I posting this?
I just want to highlight, that you cannot throw all your money into the market and hope for a 7-10% return after inflation - at least not now (dont get me wrong, I am totally convinced in investing in stocks, but watch to not get caught on an optimistic bias here)


What do I take from this?

• Invest more in market downturns on top of regular buying plan - this will improve return (market timing is impossible but at least its possible to tell "sort of cheap" and "sort of expensive")
  
• Don't overestimate the power of the stock market - Since the US market was around a Shiller-CAPE of ~16-28 for most of the last 30 years you can expect a return of 4-6% after inflation (cost averaging might help a little)
  
• Be flexible in withdrawing your money once you hit FI - be extra frugal in downturn markets, this will help to avoid downturns and improve your overall return
  

Glad to hear your opinions on this!

[Pooperman]

Don't forget that rebalancing is a form of forced market timing (the good kind).

[hodedofome]

If anyone is expecting 7-10% real (after inflation) then they don't really know their market history that well. Roughly 4% real is what the US has returned for the past few hundred years or so. Yeah the market has given 7-8% total returns but then you gotta take out 3-4% for inflation.

Forecasting returns based on valuation may have some merit, but I think I weigh population growth as more important. If the world stopped growing, I would not expect future returns to be that great at all.

All this to say, I don't currently use any of this information in my trading, it's all just mental exercises at this point.

[HmtmC]

Who believes in 7%?

Well, there is this one guy, who calls himself MMM... ;)

http://www.mrmoneymustache.com/2011/06/06/dude-wheres-my-7-investment-return/

And returns have not always been just 4% - but for levels of valuation like nowadays they have.

So your assumption is, that stock are very long-term rising with growth of world populaiton?

[kpd905]

Yeah the market has given 7-8% total returns but then you gotta take out 3-4% for inflation.

The S&P 500 has returned 9.55% from 1928-2013 according to this data: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html

I've seen other data showing around 10%, so then you get a 7% real return after 3% inflation.

This data here shows 6.86% real return since 1871: http://www.moneychimp.com/features/market_cagr.htm

[Pooperman]

If the world stopped growing, I would not expect future returns to be that great at all.

Don't discount technological productivity increases. Real growth includes productivity increases, business cycles, politics, and numerous other factors we don't think about in that way (like how market fluctuations correlate with in what mood people woke up in).

[hodedofome]

Yeah the market has given 7-8% total returns but then you gotta take out 3-4% for inflation.

The S&P 500 has returned 9.55% from 1928-2013 according to this data: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html

I've seen other data showing around 10%, so then you get a 7% real return after 3% inflation.

This data here shows 6.86% real return since 1871: http://www.moneychimp.com/features/market_cagr.htm

It all depends on your starting point.

[kpd905]

It all depends on your starting point.

I guess when you said "Roughly 4% real is what the US has returned for the past few hundred years or so." 

I remembered seeing that 6.86% number since 1871.  So I'm not sure what date you'd go to in order to get the 4% real return that you stated.