When P/E10=8: Accumulators

If the stock market follows its normal course, P/E10 will fall to 8 at some time within the next 10 to 15 years. This is the story for accumulators who dollar cost average.

Stock Returns Predictor

This is the range of stock returns at Year 10 when starting from P/E10=8:

The most likely inflation adjusted (real) return is 14.5%. The outer (5% and 95%) confidence limits range from 8.5% to 20.5%. The inner (20% and 80%) confidence limits range from 11.5% to 17.5%.

These returns are fantastic.

Scenario Surfer Results

I invested entirely in stocks. I started with a $5000 balance. P/E10=8 initially. I added $5000 (plus inflation) each year. Here are the Year 10 balances. I have included fixed allocation results for comparison.

100% stocks from the start. P/E10=8 initially.

Run 1. 121,185
20% stocks, rebalanced: 71,594
50% stocks, rebalanced: 88,422
80% stocks, rebalanced: 107,645

Run 2. 122,553
20% rebalanced: 71,490
50% rebalanced: 88,073
80% rebalanced: 107,666

Run 3. 135,800
20% rebalanced: 73,622
50% rebalanced: 93,855
80% rebalanced: 117,696

Run 4. 95,163
20% rebalanced: 67,848
50% rebalanced: 77,458
80% rebalanced: 87,859

Run 5. 101,088
20% rebalanced: 69,088
50% rebalanced: 80,492
80% rebalanced: 92,634

Roughly speaking: you double the total amount invested by Year 10 when you dollar cost average starting with P/E10=8. Your best decision is 100% stocks.

Dividends

Even today, you can get 3.5% yields from high quality companies that pay dividends. With P/E10 as low as 8, it will be easy to buy stocks with reliable dividends of 10% or more.

Dividends typically grow faster than inflation, although sometimes erratically.

Conclusion

About 10 to 15 years from now, accumulators will have a wonderful opportunity.

Have fun.

John Walter Russell
January 5, 2008