FYI: The definition of floccinaucinihilipilification is the estimation of something as valueless. It is rarely
used (for obvious reasons) and encountered primarily as an example of one of the longest words in
the English language. I have been waiting for just the right occasion to employ this word, and I finally
found it: Little deserves my use of floccinaucinihilipilification so much as relying on the historical
average of the Shiller CAPE 10 to determine whether stocks are undervalued or overvalued. It can’t
be used to time the market, despite the advice of the gurus who rely on this metric.
Regards,
Ted
http://www.advisorperspectives.com/newsletters15/25-are-grantham-and-hussman-correct-about-valuations.php
Comments
- Irving Fisher: October 21, 1929
Returns are intimately tied to when you leave the investment starting gate. Nobody can consistently predict returns for the next few years. Both GMO and John Hussman have launched signals warning that the Shiller cyclically adjusted price-to-earnings (CAPE) ratio is uncomfortably high. They imply the likelihood of a near-term downturn.
Indeed if that is the case, the question is how to prepare? I sure don’t have a definite answer. Any answer is likely to be closely coupled to an individual’s specific timeframe, his wealth, his risk profile, and his short-term/long-term need tradeoffs. But history can provide some guidelines to help scope the problem.
Here is a Link to a nice chart from the Wrapmanager site that displays the S&P 500 pricing history since 1900:
http://www.wrapmanager.com/wealth-management-blog/did-the-sp-500-reach-all-time-highs-is-there-a-cause-for-concern
Note that the chart also marks off P/E ratios at critical turning points in the S&P’s storied history.
As LewisBraham suggests with his post, when the investment battle is exactly joined directly influences annual returns. Some starting dates are especially disastrous. But over time, the historical record demonstrates that even poor starts have been integrated away by the rising tide. Over the very long haul, the precise starting date is not all that significant.
Here is a Link to a nifty calculator that yields S&P 500 returns with and without dividends reinvested for any input starting and end date. The calculator is from a “Don’t Quit Your Day Job” website:
http://dqydj.net/sp-500-return-calculator/
The calculations can be easily completed both with and without inflation adjustments.
For example, if an investor had the misfortune to invest immediately before the 1929 Crash, his annual return to this month would have been 9.69% with dividends reinvested. If he had been prescient enough to have delayed that initial entry date until April of 1932, his annual return would be at the 11.37% level.
For those of us old enough to have initiated our investment program immediately after WW II, our annual return would have been 11.01%, again with dividends reinvested. If we have been in the S&P 500 Index over the last 30 years, our reward would have been 10.99%. When you leave the starting gate matters a little, but the returns are impressive regardless of the precise timing.
I hope you visit the websites that I referenced, and that you find them helpful.
Best Wishes.
JimmyfromSunPrairie