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My 30 Year Market Prediction

As we’ve previously discussed, over (very) extended periods, the market’s return is made up almost entirely of dividend yield and earnings growth. In other words, one of the best methods for predicting the long-term rate of return for the entire market is to simply add the current market dividend yield (3% at the moment) to our economy’s average rate of earnings growth (5-6%).

This tells us that for every dollar we put into the market right now, we can expect a long-term rate of return in the 8-9% range. Many people may see that number and get disappointed. After all, you don’t get rich quick(ly) with an 8% rate of return. That said, I look at this number and see two great reasons for investing in the market.

It hasn’t looked this good for quite a while.

When was the last time that the market was offering a dividend yield of 3%? Almost two decades ago: 1991. If you’re feeling scared to invest in the market right now, take a moment to ponder that. The market’s expected rate of return hasn’t looked this good since before Clinton was in office.

It’s a heck of a lot better than what we can expect from bonds.

Right now, 10-year treasury bonds are yielding roughly 2.5%. In other words, the stock market’s dividend yield alone is enough to make it more attractive than the alternative. Once we add in the future earnings growth, we get a very substantial difference in long-term expected rates of return. We haven’t seen this kind of discrepency between bond yields and expected market return in a long while either.

Just for comparison, if we look back a few years ago to 2006, the market’s dividend yield was about 1.77%, giving a projected market return of roughly 7%. That’s barely any higher than the bond rate (about 6% at the time). And yet, people were confident investing in the market.

What to do?

  • The numbers tell us that now is a great time to invest–better than it’s been in over a decade.
  • The media tells us that the stock market is dangerous and we need to “wait until things settle down.”

Who do you believe? 🙂

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  1. Hi Miranda.

    Sounds like a good plan to me. 🙂

  2. I agree that now is a good time to buy. We’ve started upping our retirement fund contributions so that we can buy more shares now for the money. Down the road, we’ll see higher returns. According to your prediction, about the time we retire will be a good time to liquidate 🙂

  3. It’s funny how one can know and understand and even write about these things and still get caught up in the hysteria.

    When bank shares crashed again last week, I did think for a moment maybe this is it for shares, at least in the West. I didn’t do anything about it for numerous reasons – not least because I don’t really believe ‘this is it’, but also because as you say where are you going to put the money?

    Government bonds look like the next bubble to me. I suspect everyone will rush for the exit at the same time – either because the economy improves and shares take off again, or because it *really* doesn’t, and overseas investors get spooked, even against their own interests, and start selling.

  4. What’s the best way to take advantage of high dividend yields within the confines of a 401K?

    I agree that now is a good buying opportunity, but I’m not ready to start buying indiviual stocks yet.

  5. @Monevator: I’ve often wondered whether working in the personal finance industry (whether via a 9-5 job, or simply blogging about it) actually hurts a person’s chances of staying level-headed.

    @David: I never buy individual stocks. As to taking advantage of high dividend yields in a 401k, I’d check if there is a low cost “equity income” fund.

    Or simply invest in an all-market or S&P index fund. With prices of everything down, dividend yields on everything are up. No need to go bargain hunting when everything is on sale.

  6. Mike,

    Thanks for the response. Out of curiosity, would you be able to email me your contact info? I have a question for you about guest posts, but I could not find your email address anywhere on the site.


  7. @Mike, interesting question. The Lore of the Millionaire Next Door is that he/she salts away $50 a week for 40 years and never reads the Wall Street Journal or checks their statements until they retire accidentally wealthy. I find it pretty hard to believe that someone can grow wealthy without taking more interest, however.

    Be ironic if returns did reduce as attention to the industry/markets increased! A sort of natural dampening system.

  8. @Monevator: I know it sounds hard to believe, but my (admittedly anecdotal) experience confirms that it really does happen.

    I worked for roughly one year as a financial advisor, and I ran into several people who had done exactly that–and many more who were well on their way.

    In fact, that experience was the inspiration for creating this blog. It’s my belief that the ability to simply “not mess up” is the most important factor in a person’s investment success.

    There’s no need to come up with any brilliant investment strategy. Just come up with a decent strategy and stick with it. 🙂

    Also, I can’t help but suspect that there really is a negative correlation between an investor’s return and the attention they pay to short-term market results.

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