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Re: A Backtest of the Dividend Growth Model, 1871-2010

Personally, I ended up with a mix of both methods, using the Bogle approach with earnings growth, but doing the full math in real terms. All good points, siamond . The important thing here is for investors not to get lost in the minutia and to find a version of the forecast model that makes sense a...
by Simplegift
Thu Oct 30, 2014 9:52 am
 
Forum: Investing - Theory, News & General
Topic: A Backtest of the Dividend Growth Model, 1871-2010
Replies: 66
Views: 3339

Re: A Backtest of the Dividend Growth Model, 1871-2010

What is wrong is losing sight of how the Gordon Equation is derived. It is from cash flow. We might be over-thinking things here. The forecast model that's being backtested in this thread is a very simplified version of the Dividend Growth Model — one that is commonly used by Bogle, Bernstein, Arno...
by Simplegift
Thu Oct 30, 2014 8:53 am
 
Forum: Investing - Theory, News & General
Topic: A Backtest of the Dividend Growth Model, 1871-2010
Replies: 66
Views: 3339

Re: A Backtest of the Dividend Growth Model, 1871-2010

Actually I am not sure why buybacks are guaranteed to add anything to returns - there is absolutely no guarantee of that! In the Dividend Growth Model, the earnings growth rate is "earnings-per-share." Significant net share buybacks reduce the number of shares outstanding and increase ear...
by Simplegift
Wed Oct 29, 2014 6:47 pm
 
Forum: Investing - Theory, News & General
Topic: A Backtest of the Dividend Growth Model, 1871-2010
Replies: 66
Views: 3339

Re: A Backtest of the Dividend Growth Model, 1871-2010

Not sure why Simplegift says buybacks only add about 0.3% to total returns. Buybacks are a few hundred basis points to price. Can clarify? Hi, at . It's just a long-term estimate of the additional return to shareholders as a result of lower payout ratios and increased net share buybacks. Since buyb...
by Simplegift
Wed Oct 29, 2014 6:26 pm
 
Forum: Investing - Theory, News & General
Topic: A Backtest of the Dividend Growth Model, 1871-2010
Replies: 66
Views: 3339

Re: A Backtest of the Dividend Growth Model, 1871-2010

If buybacks are good in general, their effect will show up in an increased earnings or dividend growth rate. Their effect is already included in the formula for good or bad. The problem arises when we use a long-term earnings growth rate derived from 140 years of history and then also try make allo...
by Simplegift
Wed Oct 29, 2014 1:15 pm
 
Forum: Investing - Theory, News & General
Topic: A Backtest of the Dividend Growth Model, 1871-2010
Replies: 66
Views: 3339

Re: A Backtest of the Dividend Growth Model, 1871-2010

Today only about 30% of companies pay dividends and the total payout rate is way down. At least in theory that should produce faster earnings growth. FWIW, that probably moves the estimated earnings growth up to say 2%. Sounds good. Rick Ferri has made this same point in a different way, suggesting...
by Simplegift
Wed Oct 29, 2014 11:59 am
 
Forum: Investing - Theory, News & General
Topic: A Backtest of the Dividend Growth Model, 1871-2010
Replies: 66
Views: 3339

Re: expected returns and Black Swans

This is an excellent article, Larry. It provides a helpful framework for thinking about expected returns — and serves as a good corollary to several of the recent Forum discussions we've had on this topic. Thanks for sharing it!
by Simplegift
Wed Oct 29, 2014 11:16 am
 
Forum: Investing - Theory, News & General
Topic: expected returns and Black Swans
Replies: 5
Views: 876

Re: How should we invest if interest rates never go up?

My view is that the "way we invest" should not change in lower-return world. The same principles of buy-hold-and-rebalance still apply. One exception might be to consider taking on a bit of extra stock risk, consistent with one's risk tolerance. But the main focus should be on other factor...
by Simplegift
Wed Oct 29, 2014 11:06 am
 
Forum: Investing - Theory, News & General
Topic: How should we invest if interest rates never go up?
Replies: 17
Views: 1547

Re: A Backtest of the Dividend Growth Model, 1871-2010

Try running the regression using only rolling historic earnings growth to and see how well it works. It might work wonderfully. It might work terribly. Without checking the actual data, there's no way to know. As discussed upthread, the historical earnings growth rates are just too variable, even o...
by Simplegift
Wed Oct 29, 2014 2:30 am
 
Forum: Investing - Theory, News & General
Topic: A Backtest of the Dividend Growth Model, 1871-2010
Replies: 66
Views: 3339

Re: A Backtest of the Dividend Growth Model, 1871-2010

All I know is that the research shows that if you look at all the typical suspects everyone finds that CAPE is about best and current valuation is very close... Agree that CAPE earnings yield is a useful metric for forecasting — but I'd point out that Antti Ilmanen (as you know, the fellow who lite...
by Simplegift
Tue Oct 28, 2014 4:35 pm
 
Forum: Investing - Theory, News & General
Topic: A Backtest of the Dividend Growth Model, 1871-2010
Replies: 66
Views: 3339

Re: Asset Allocation by Roger Gibson

I'm curious, of those who are fans of the book and appreciate the improved portfolio efficiency achieved with multi asset class investing, have you all become tilted slice & dice multi asset class investors? For me books like this led me to accept somewhat higher portfolio maintenance costs for...
by Simplegift
Tue Oct 28, 2014 3:53 pm
 
Forum: Investing - Theory, News & General
Topic: Asset Allocation by Roger Gibson
Replies: 21
Views: 2741

Re: A Backtest of the Dividend Growth Model, 1871-2010

Simplegift... Has anyone done the same using info. that might have been available at that time of calculation for 10 year future return? Maybe using the starting dividend yield and last 10 years of EPS growth to see how predictive it was? Maybe doing that analysis with rolling 10 year returns will ...
by Simplegift
Tue Oct 28, 2014 3:37 pm
 
Forum: Investing - Theory, News & General
Topic: A Backtest of the Dividend Growth Model, 1871-2010
Replies: 66
Views: 3339

Re: A Backtest of the Dividend Growth Model, 1871-2010

Probably no one cares, but just to close the loop on this question: how often two random set of 14 points will have R^2 > 0.2799 It looks like about 5% of the time. Thanks, grayfox , that's good to know. But don't forget that a simple average of the Dividend Growth Model and the CAPE earnings yield...
by Simplegift
Tue Oct 28, 2014 1:44 pm
 
Forum: Investing - Theory, News & General
Topic: A Backtest of the Dividend Growth Model, 1871-2010
Replies: 66
Views: 3339

Re: A Backtest of the Dividend Growth Model, 1871-2010

The problem: Using the historic average 140-year growth rate as the projected growth rate in effect gives your hypothetical historical investor a crystal ball. How would I, for example, go about figuring out the average growth rate for the US economy between now and 2150? No doubt the exact earning...
by Simplegift
Tue Oct 28, 2014 12:59 pm
 
Forum: Investing - Theory, News & General
Topic: A Backtest of the Dividend Growth Model, 1871-2010
Replies: 66
Views: 3339

Re: A Backtest of the Dividend Growth Model, 1871-2010

In my mind the only concensus that there seems to be in terms of these types of forecasts is to offer some rough parameters around expectations. For instance right now, the DDM or any number of other metrics would convey expectations of relatively low expected returns. You've expressed it beautiful...
by Simplegift
Tue Oct 28, 2014 10:55 am
 
Forum: Investing - Theory, News & General
Topic: A Backtest of the Dividend Growth Model, 1871-2010
Replies: 66
Views: 3339

Re: A Backtest of the Dividend Growth Model, 1871-2010

How much would the curves change if you only went back 60 years? We'd only have 6 independent data points over the 60 years, which is quite limited. However, you can see the historical relationship between expected returns and realized returns in the chart below. Generally, expected returns from th...
by Simplegift
Mon Oct 27, 2014 10:58 pm
 
Forum: Investing - Theory, News & General
Topic: A Backtest of the Dividend Growth Model, 1871-2010
Replies: 66
Views: 3339

Re: A Backtest of the Dividend Growth Model, 1871-2010

The research shows that CAPE 10 and current valuations both explain about 40% of the future returns, that is valuable information that one ignores at their peril IMO. Backtest of CAPE Earnings Yield Matching the methodology of Research Affiliates in the OP, I ran a backtest using the CAPE earnings ...
by Simplegift
Mon Oct 27, 2014 8:30 pm
 
Forum: Investing - Theory, News & General
Topic: A Backtest of the Dividend Growth Model, 1871-2010
Replies: 66
Views: 3339

Re: A Backtest of the Dividend Growth Model, 1871-2010

Just to add that most of us passive investors have portfolios containing both stocks AND bonds — and since future bond returns can be very reliably predicted based on their current yields (R^2 = 0.92, chart below), this will improve the precision of an investor's overall portfolio return forecast. h...
by Simplegift
Mon Oct 27, 2014 5:53 pm
 
Forum: Investing - Theory, News & General
Topic: A Backtest of the Dividend Growth Model, 1871-2010
Replies: 66
Views: 3339

A Backtest of the Dividend Growth Model, 1871-2010

This post is to report on a backtest of the simplified Dividend Growth Model for predicting forward 10-year stock returns for planning purposes (same as used by Mr. Bogle). The analysis was done by Research Affiliates in 2012, using Shiller data from 1871 to 2010 — and I reproduced their results in ...
by Simplegift
Mon Oct 27, 2014 5:49 pm
 
Forum: Investing - Theory, News & General
Topic: A Backtest of the Dividend Growth Model, 1871-2010
Replies: 66
Views: 3339

Re: Global Equity Markets — 40 Years of Evolution at a Glanc

The market cap of the U.S. relative to the rest of the world will obviously fluctuate over time, though there's been a declining trend long-term. Based on the country CAPE chart upthread, the U.S. market is currently among the most richly-valued in the world (relative to its historical average CAPE)...
by Simplegift
Mon Oct 27, 2014 1:07 am
 
Forum: Investing - Theory, News & General
Topic: Global Equity Markets — 40 Years of Evolution at a Glance
Replies: 10
Views: 1267

Re: Global Equity Markets — 40 Years of Evolution at a Glanc

And there is something funny about those charts, or at least in disagreement with Vanguard's, data, because according to Vanguard, the U.S. share of global capitalization was about 66% of global in 1970. Their chart only goes to 2011 but it is currently very close to 50%. Checking the MSCI All-Cap ...
by Simplegift
Sun Oct 26, 2014 9:16 pm
 
Forum: Investing - Theory, News & General
Topic: Global Equity Markets — 40 Years of Evolution at a Glance
Replies: 10
Views: 1267

Re: Vanguard total international

I guess Vanguard would not list a company below a particular market cap, and maybe only 5783 companies are able to make that market cap? Would that be correct? It's not Vanguard that defines the index requirements, but the companies from which Vanguard licenses each index (though, in practice, they...
by Simplegift
Sun Oct 26, 2014 4:58 pm
 
Forum: Investing - Theory, News & General
Topic: Vanguard total international
Replies: 6
Views: 1218

Re: Global Equity Markets — 40 Years of Evolution at a Glanc

And for an additional perspective, looking at the recent global stock market valuations:

Country CAPEs, Percentage Difference from Historical Mean, February 2014
Image
Source: FTI Journal
by Simplegift
Sun Oct 26, 2014 12:38 pm
 
Forum: Investing - Theory, News & General
Topic: Global Equity Markets — 40 Years of Evolution at a Glance
Replies: 10
Views: 1267

Global Equity Markets — 40 Years of Evolution at a Glance

The two graphics below present a nice visual perspective on the evolution of the investable global equity markets — first in 1970, and then 40 years later in 2010. http://i.imgur.com/Xzhi9y1.png http://i.imgur.com/bLjpQct.png (Note: Does not include the 24 investable Frontier Markets, with 127 compa...
by Simplegift
Sun Oct 26, 2014 9:55 am
 
Forum: Investing - Theory, News & General
Topic: Global Equity Markets — 40 Years of Evolution at a Glance
Replies: 10
Views: 1267

Re: How to think about expected returns--continuing discussi

^^^ “The best is the enemy of the good.” ― Voltaire (French philosopher, 1694-1778) The above is not best, it is merely an attempt to not do something really badly. One might as well not do badly when good is easy enough. Surely if you can run one MC you can run a handful to get a sense of the sens...
by Simplegift
Sat Oct 25, 2014 4:21 pm
 
Forum: Investing - Theory, News & General
Topic: How to think about expected returns--continuing discussion
Replies: 105
Views: 8284

Re: How to think about expected returns--continuing discussi

^^^ “The best is the enemy of the good.” ― Voltaire (French philosopher, 1694-1778)
by Simplegift
Sat Oct 25, 2014 1:32 pm
 
Forum: Investing - Theory, News & General
Topic: How to think about expected returns--continuing discussion
Replies: 105
Views: 8284

Re: How to think about expected returns--continuing discussi

Facts, people must agree on. But everyone is entitled to their opinion and opinions can vary. Expected return = X can not be a fact, since no one agrees on what X is. It's unrealistic to expect scientific precision from financial data — it's just not there and it's never going to be there. But that...
by Simplegift
Sat Oct 25, 2014 1:05 pm
 
Forum: Investing - Theory, News & General
Topic: How to think about expected returns--continuing discussion
Replies: 105
Views: 8284

Re: How to think about expected returns--continuing discussi

In 1982, how many forecasters were correct about the next 10 years? Actually, 1982 is a good example, because it was at the opposite extreme of today's asset yields and valuations. In 1982, 10-year Treasury bonds were yielding 14% and the Shiller PE10 was at 7. Today, the 10-year Treasury is yieldi...
by Simplegift
Sat Oct 25, 2014 12:05 pm
 
Forum: Investing - Theory, News & General
Topic: How to think about expected returns--continuing discussion
Replies: 105
Views: 8284

Re: Asset Allocation by Roger Gibson

Mr. Gibson's book, Asset Allocation , was a great help to me when I first started investing in the 1990s, as it explained the power of portfolio diversification in easy-to-read, layman's terms. However, I would say it's been superseded by more recent books from other authors, including Rick Ferri ( ...
by Simplegift
Sat Oct 25, 2014 11:37 am
 
Forum: Investing - Theory, News & General
Topic: Asset Allocation by Roger Gibson
Replies: 21
Views: 2741

Re: How to think about expected returns--continuing discussi

Which leads to my second question about expected return forecasts: Are these forecasts fact or simply someone's opinion? No doubt they are just opinions — but they are instructive opinions, in my view, that have planning utility for the average investor. For example, below are the current forecasts...
by Simplegift
Sat Oct 25, 2014 11:09 am
 
Forum: Investing - Theory, News & General
Topic: How to think about expected returns--continuing discussion
Replies: 105
Views: 8284

Re: What kind of index funds did Vanguard have 1976-1992?

I was wondering if there were any intermediate steps in the way in the evolution of Vanguard funds from the V500 to the current TSM. The intermediate step was the Extended Market Index Fund in 1987, which added mid and small caps to complement the S&P 500 Index. Here's Mr. Bogle discussing the ...
by Simplegift
Fri Oct 24, 2014 7:34 pm
 
Forum: Investing - Theory, News & General
Topic: What kind of index funds did Vanguard have 1976-1992?
Replies: 9
Views: 1240

Re: How to think about expected returns--continuing discussi

Just to show an example of the difference in error ranges between the factors of stock returns, we can look at the recent return forecasts published by Research Affiliates. They use an earnings growth model to estimate expected real stock returns for U.S. large cap stocks over next 10 years (same me...
by Simplegift
Fri Oct 24, 2014 12:23 pm
 
Forum: Investing - Theory, News & General
Topic: How to think about expected returns--continuing discussion
Replies: 105
Views: 8284

Re: How to think about expected returns--continuing discussi

It's misleading to not include some kind of error or range with a forecast. Unless you are Pythia, there should always be some kind of interval or range. And I don't think it should be left as an exercise for the reader to do the calculations. I'd just point out that Pythia has a much easier time f...
by Simplegift
Fri Oct 24, 2014 11:01 am
 
Forum: Investing - Theory, News & General
Topic: How to think about expected returns--continuing discussion
Replies: 105
Views: 8284

Re: DIY Winterizing Sprinkler / Irrigation System

Does anyone do this themselves and have any advice on compressor settings and etc? As pointed out by others, the problem for DIY homeowners is having a compressor that will move enough air to do the job. We have a compressor in our workshop that's rated at 12.5 CFM (3.2 horsepower, single stage, 60...
by Simplegift
Fri Oct 24, 2014 12:21 am
 
Forum: Personal Consumer Issues
Topic: DIY Winterizing Sprinkler / Irrigation System
Replies: 17
Views: 1568

Re: Historical corp bond annual returns?

There's an historical corporate bond series kept by the Federal Reserve that might help:

Moody's Seasoned Aaa Corporate Bond Yield

This is monthly yield data from January 1, 1919 to September 1, 2014 and available in Excel format. Hope this helps.
by Simplegift
Thu Oct 23, 2014 11:24 pm
 
Forum: Investing - Theory, News & General
Topic: Historical corp bond annual returns?
Replies: 7
Views: 480

Re: Three Possible Outcomes for Future Investment Returns

Since net buybacks generate shareholder value in a way that is very similar to reinvested dividends, it might be more informative to look at total shareholder yield rather than dividends alone. Alternatively, we might add a line for foreign developed large caps, which have maintained a more consist...
by Simplegift
Thu Oct 23, 2014 2:25 pm
 
Forum: Investing - Theory, News & General
Topic: Three Possible Outcomes for Future Investment Returns
Replies: 32
Views: 2312

Re: Three Possible Outcomes for Future Investment Returns

So, don't rush out of your bonds just yet. Yes, the takeaway from low expected asset returns is NOT to give up on safe, lower-yielding bonds or to reach for more yield and return in riskier asset classes. Rather, investors should just expect that investment returns are likely to be lower than histo...
by Simplegift
Thu Oct 23, 2014 1:23 pm
 
Forum: Investing - Theory, News & General
Topic: Three Possible Outcomes for Future Investment Returns
Replies: 32
Views: 2312

Re: Long term return forecast [Research Affil. Expected retu

So why are expected returns for bonds so high? Short and intermediate term bonds are the most widely used bond instruments for investors and they are hovering around a zero real return if sticking with a mix of treasuries, agency, and high quality corporate. This is the breakdown of Research Affili...
by Simplegift
Thu Oct 23, 2014 12:44 pm
 
Forum: Investing - Theory, News & General
Topic: Long term return forecast [Research Affil. Expected returns]
Replies: 33
Views: 2444

Re: Three Possible Outcomes for Future Investment Returns

Can you post what method you are using to calculate yields? I don't see how real 10 year treasury yields have been negative for a majority of your time period. Hi, Chan_va . On the chart of real asset yields, you might be confusing the S&P 500 dividend yield (in blue) with 10-year Treasury yiel...
by Simplegift
Thu Oct 23, 2014 10:54 am
 
Forum: Investing - Theory, News & General
Topic: Three Possible Outcomes for Future Investment Returns
Replies: 32
Views: 2312

Re: Three Possible Outcomes for Future Investment Returns

As a side note, it certainly taints established portfolio survivability withdrawal percentages... Right! Those who are planning their retirement today should take a good look at Monte Carlo simulations that incorporate 1) today's low expected real asset returns, and/or 2) the effects of mean revers...
by Simplegift
Thu Oct 23, 2014 9:14 am
 
Forum: Investing - Theory, News & General
Topic: Three Possible Outcomes for Future Investment Returns
Replies: 32
Views: 2312

Re: Three Possible Outcomes for Future Investment Returns

Not that it changes the premise or the conclusions of the original post, though. Sure it does. The S&P 500 line is practically flat and the others are much reduced. Plus, this is a totally cherry picked time period beginning at the top of a long stock and bond bull market. It's not the historic...
by Simplegift
Wed Oct 22, 2014 11:32 pm
 
Forum: Investing - Theory, News & General
Topic: Three Possible Outcomes for Future Investment Returns
Replies: 32
Views: 2312

Re: Three Possible Outcomes for Future Investment Returns

If some mean reversion of asset yields is in our future, this is how much today's current yields are below their average of the last 30 years (all nominal): ………………….………Current.…Average..…DIFF S&P 500 Yield……..……2.0%…....2.4%…..…(18%) 10-year Treasury………2.3%…….5.4%….….(58%) Equity REIT Index…...…...
by Simplegift
Wed Oct 22, 2014 7:39 pm
 
Forum: Investing - Theory, News & General
Topic: Three Possible Outcomes for Future Investment Returns
Replies: 32
Views: 2312

Re: Three Possible Outcomes for Future Investment Returns

I'd like to see that plot with real returns, instead of nominal. Ask and you shall receive — sorry, I was too lazy to deduct the annual inflation rate from the asset yields in the original chart. Not that it changes the premise or the conclusions of the original post, though. http://i.imgur.com/iXT...
by Simplegift
Wed Oct 22, 2014 3:25 pm
 
Forum: Investing - Theory, News & General
Topic: Three Possible Outcomes for Future Investment Returns
Replies: 32
Views: 2312

Three Possible Outcomes for Future Investment Returns

For a visual picture of the low-return world in which we now find ourselves, below is a chart of yields for three major asset classes over the last 30 years — the S&P 500 Index, the 10-year Treasury and the REIT Index. Seeing these declining yields converge together on one chart brings home just...
by Simplegift
Wed Oct 22, 2014 2:00 pm
 
Forum: Investing - Theory, News & General
Topic: Three Possible Outcomes for Future Investment Returns
Replies: 32
Views: 2312

Re: Why include International Index in AA?

So I suppose my main question is, wouldn't investing in an International Index increase risk and/or concentration associated with foreign markets? Looking at the total global market cap (chart below), U.S. companies dominate in the "new economy" fields of computers, biotechnology, softwar...
by Simplegift
Tue Oct 21, 2014 7:04 pm
 
Forum: Investing - Theory, News & General
Topic: Why include International Index in AA?
Replies: 39
Views: 2767

Re: Valuations and the AA decision

Interesting as I tried to do just that using some data mining comparing earning yield of Sp500 index vs. 10 yr. treasury yield since 1972. One problem might be that the S&P 500 earnings yield is considered a real rate, while the 10-year Treasury yield is obviously a nominal rate. Your method so...
by Simplegift
Tue Oct 21, 2014 6:49 pm
 
Forum: Investing - Theory, News & General
Topic: Valuations and the AA decision
Replies: 8
Views: 916

Re: How does one hedge against deflation?

The underlined sentence can only make sense if the principal may be adjusted below its original value, in the face of deflation. This is the explanation from the Treasury Direct website : What happens to TIPS if deflation occurs? The principal is adjusted downward, and your interest payments are le...
by Simplegift
Tue Oct 21, 2014 12:40 pm
 
Forum: Investing - Theory, News & General
Topic: How does one hedge against deflation?
Replies: 52
Views: 3872

Re: How does one hedge against deflation?

Would a TIPS fund have a capital gain in deflation but continue to pay interest at a lower rate? Not sure. My understanding is that there's three ways a TIPS fund would be affected be prolonged deflation: • The semi-annual interest payments of the TIPS bonds in the fund would be adjusted downward b...
by Simplegift
Tue Oct 21, 2014 11:52 am
 
Forum: Investing - Theory, News & General
Topic: How does one hedge against deflation?
Replies: 52
Views: 3872

Re: Vanguard rides wave of success

Compared with its rivals over the last 20 years, it's instructive to see Vanguard's growth of market share for all U.S. mutual funds and ETFs (chart below). There can't be much doubt that Vanguard's steady growth is driven by the much lower cost of its offerings. These are the industry's asset-weigh...
by Simplegift
Tue Oct 21, 2014 11:22 am
 
Forum: Investing - Theory, News & General
Topic: Vanguard rides wave of success
Replies: 3
Views: 1144

Re: How does one hedge against deflation?

No one has mentioned TIPS as a deflation hedge — and since they have a more complicated response to deflation than nominal Treasuries, I'll give it a go (and bond experts, please chime in if I go astray!). Backed by the full faith and credit of the U.S. government, TIPS of any maturity should do wel...
by Simplegift
Mon Oct 20, 2014 8:19 pm
 
Forum: Investing - Theory, News & General
Topic: How does one hedge against deflation?
Replies: 52
Views: 3872
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