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Weekend reading: 11% real returns for a decade from shares?

Weekend reading

Some good reading from around the Web.

A couple of years ago I wrote about how some statistics suggested that we might be in for a decade of 20% returns from the stock market.

Of course, the FTSE 100 pushed on very swiftly from around 4,000 to touch 6,000. Great, but it also meant that much of those mooted 20% gains were in the bag.

After its recent travails, however, the FTSE All-Share is now down to a forward P/E of 9. A few more months of going nowhere, and that will be an historical P/E of 9, too.

I think this is bargain territory, even if you discount the crummy alternative returns on bonds and cash. Look at those and presume they’re rational (a controversial decision given all the Central Bank intervention in the market!) and I think the FTSE 100 could justifiably trade nearer 10,000.

Now you know why I always sound so bullish!

Happily, I’m not alone. Recent research from Fidelity found that after previous periods when the FTSE All-Share has traded on a P/E of around 9, it has returned on average an annual 11% real return over the next decade.

The Motley Fool wrote up the Fidelity research, including this table:

FTSE All-Share P/E ratio Proportion of Observations Average annual real return over 10 yrs
Less than 5 1% 15%
5-8 10% 12%
8-11 18% 11%
11-14 28% 7%
14-17 16% 4%
17-20 13% 2%
20-23 8% 1%
23-26 3% 0%
26-29 3% -1

Feel free to fret about Europe or the number of old people in the market, or whatever else you consider yourself an expert on to find a reason not to invest.

I personally find the precedents more enlightening, and continue to buy all the shares I can for the long-term.

Obviously, past performance is no sure guide to future performance, but valuation is the best indicator we have.

Buy low, sell high: It sounds easy but it’s hard to do.

Are you doing it?

From the money blogs

Deal of the week: I love my new keyboard-less Kindle! The first Kindle book I bought since getting the new device was Reminiscences of a Stock Operator. It’s 90 years old. Pretty funny when you think about it.

Mainstream media

  • Unrest in Peace: Social inequality in the West – The Economist
  • Young Apprentice returns on Monday – BBC
  • The rewards and risks of a Eurozone rescue – Peston/BBC
  • Bogle: Market ‘about fairly valued’ Morningstar
  • Millions hit by inflation – FT
  • Dividends offer hope to income investors – FT
  • Mining’s rich seam looks tarnished – FT
  • Baby boomers ‘privileged human beings’ – The Telegraph
  • How to save £20,000 a year on your mortgage – The Telegraph
  • How I lost £21,000 in a Bulgarian property fund – The Guardian
  • MP touting 30-year mortgage offers bad advice – The Guardian

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{ 4 comments… add one }
  • 1 RetirementInvestingToday October 22, 2011, 5:01 pm

    Hi TI

    …and the FTSE 100 PE10 is at around 12.2 compared to the average since 1993 of 19.0 (RPI as the devaluer). So also implies undervaluation.

    In contrast on the other side of the Atlantic the S&P500 PE10 is at 21.

    As you know I have a very rigid mechanical strategy however if I was looking to break that I’d be thinking:
    – given previous history the FTSE100 today looks undervalued. I definitely won’t say cheap given the current FTSE 100 Div Yield is only around 3.5% which is a long way below inflation.
    – if I was gaoing to be placing money either side of the Atlantic outside of my mechanical strategy I’d be looking at the UK.


  • 2 The Money Grower October 22, 2011, 6:47 pm

    Thanks for the mention, Mr Monevator.

    A very interesting article with compelling points from both you and RIT.


  • 3 The Investor October 24, 2011, 6:05 pm

    @RIT — Many thanks as ever for bringing your latest data to the table, always like to hear it! The divergence between the UK and US is interesting… I would suspect it’s more down to the more diversified nature of the US market and its higher proportion of technology companies — as opposed to our commodity plays, drug companies, and banks on low PEs.

    The problem with your PE10 series as you have acknowledged yourself is it’s short. However it is a further string to the undervaluation bow for sure.

  • 4 Baxter Basics October 25, 2011, 10:32 am

    Just read this at the NY Times (of all places). I think you’ll like it, particularly with your previous comments regarding cognitive bias.



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