Here is the link to a particularly useful article for ITA readers. As you read the article, pay particular attention to the fundamentals that provide clues as to whether or not the market is likely to generate lower than average, average, or above average returns over the next 10 to 20 years. Be sure to read the Price/Earnings ratio section and also the “Siegel long-term trend line” section.
ITA Wealth Management readers are very familiar with the definition of correlations, but R^2 or R Squared is likely to be less familiar. Check these links if you are unsure of the definitions. In our analysis we use either VFINX or VTSMX as the equity benchmark and SHY as the treasury or bond benchmark.
Where are we today?
- Price/Earnings ratio of several benchmarks. These P/E ratio values are historically about average. It would be to our advantage is the values were in the 13 to 15 range.
- VTI P/E ratio = 17
- VT P/E ratio = 16
- SPY P/E ratio = 18
- Link to long-term trend line predicts lower than average returns so long as the current curve lies above the trend line.
When running optimization or Quantext Portfolio Planner analysis, the final results are tied to our assumption of future returns for the S&P 500. Right now it makes sense to set that assumption somewhere between 6% and 7% depending on how pessimistic or optimistic you are as a 20-year investor.