Buy-and-Hold Dollar Projections
I have constructed tables with the projected stock market returns in dollars for 1995-2005 at 10, 20 and 30 years to assist buy-and-hold investors.
Rob Bennett's Letter about Buy-and-Hold Investing
Buy-and-Hold Projections
These projections are to assist in understanding. I have based these projections only on the valuations during 1995-2005. I have not made any adjustments for what has happened in the meantime.
Buy-and-Hold Equations
Here are the equations.
Here is the regression equation for the 10-year stock return and the percentage earnings yield 100E10/P (using 1923-1972 data): y = 1.5247x-4.5509 where y is the annualized real return in percent and x is 100E10/P or 100/[P/E10]. The confidence limits are plus and minus 6%.
Here is the regression equation for the 20-year stock return and the percentage earnings yield 100E10/P (using 1923-1972 data): y = 1.0849x-1.4488 where y is the annualized real return in percent and x is 100E10/P or 100/[P/E10]. The confidence limits are plus and minus 4%.
Here is the regression equation for the 30-year stock return and the percentage earnings yield 100E10/P (using 1923-1972 data): y = 0.4159x+3.764 where y is the annualized real return in percent and x is 100E10/P or 100/[P/E10]. The confidence limits are plus and minus 2%.
P/E10 Values for 1995-2005
Here are the January values of P/E10, rounded. I have taken them from Professor Robert Shiller’s S&P500 database.
Professor Shiller's Web Site
Professor Shiller's Data
Year P/E10
1995 20.22
1996 24.76
1997 28.33
1998 32.86
1999 40.58
2000 43.77
2001 36.98
2002 30.28
2003 22.89
2004 27.66
2005 26.59
Calculated Rates for 1995-2005
Here are the 10-Year, 20-Year and 30-Year Calculated Rates (i.e., real, annualized, total returns with dividends reinvested) for 1995-2005.
Year P/E10 10-Year 20-Year 30-Year
1995 20.22 2.99 3.92 5.82
1996 24.76 1.61 2.93 5.44
1997 28.33 0.83 2.38 5.23
1998 32.86 0.09 1.85 5.03
1999 40.58 (0.79) 1.22 4.79
2000 43.77 (1.07) 1.03 4.71
2001 36.98 (0.43) 1.48 4.89
2002 30.28 0.48 2.13 5.14
2003 22.89 2.11 3.29 5.58
2004 27.66 0.96 2.47 5.27
2005 26.59 1.18 2.63 5.38
10-Year Projections
Here are projections of the final balances after 10 years. The initial balances are all $10K.
The 5% and 95% confidence levels are –6% and +6% about the Calculated Rate, respectively. That is, 5% of all outcomes will be below the 5% confidence level. And 95% will be below (and 5% will be above) the 95% confidence level. The 20% and 80% confidence levels are –3% and +3% about the Calculated Rate, respectively. That is, 20% of all outcomes will be below the 20% confidence level. And 80% will be below (and 20% will be above) the 80% confidence level. One-half of all outcomes will be above the Calculated Rate. And one-half will be below the Calculated Rate.
To clarify: the 1995 10-Year Calculated Rate is 2.99%. The confidence levels are based on real, annualized returns of (3.01%), (0.01%), 2.99%, 5.99% and 8.99%.
Year P/E10 5% 20% 50% 80% 95%
1995 20.22 7.37K 9.99K 13.43K 17.89K 23.65K
1996 24.76 6.38K 8.69K 11.73K 15.69K 20.82K
1997 28.33 5.88K 8.03K 10.86K 14.56K 19.36K
1998 32.86 5.44K 7.44K 10.09K 13.56K 18.06K
1999 40.58 4.95K 6.80K 9.24K 12.44K 16.62K
2000 43.77 4.80K 6.60K 8.98K 12.11K 16.18K
2001 36.98 5.14K 7.05K 9.58K 12.89K 17.20K
2002 30.28 5.67K 7.75K 10.49K 14.08K 18.74K
2003 22.89 6.72K 9.91K 12.32K 16.46K 21.81K
2004 27.66 5.96K 8.14K 11.00K 14.75K 19.60K
2005 26.59 6.10K 8.32K 11.24K 15.06K 20.00K
20-Year Projections
Here are projections of the final balances after 20 years. The initial balances are all $10K.
The 5% and 95% confidence levels are –4% and +4% about the Calculated Rate, respectively. That is, 5% of all outcomes will be below the 5% confidence level. And 95% will be below (and 5% will be above) the 95% confidence level. The 20% and 80% confidence levels are –2% and +2% about the Calculated Rate, respectively. That is, 20% of all outcomes will be below the 20% confidence level. And 80% will be below (and 20% will be above) the 80% confidence level. One-half of all outcomes will be above the Calculated Rate. And one-half will be below the Calculated Rate.
To clarify: the 1995 20-Year Calculated Rate is 3.92%. The confidence levels are based on real, annualized returns of (0.08%), 1.92%, 3.92%, 5.92% and 7.92%.
Year P/E10 5% 20% 50% 80% 95%
1995 20.22 9.84K 14.63K 21.58K 31.59K 45.92K
1996 24.76 8.06K 12.03K 17.82K 26.18K 38.19K
1997 28.33 7.21K 10.79K 16.01K 23.57K 34.45K
1998 32.86 6.47K 9.70K 14.43K 21.29K 31.18K
1999 40.58 5.69K 8.55K 12.74K 18.85K 27.67K
2000 43.77 5.47K 8.23K 12.27K 17.18K 26.69K
2001 36.98 6.00K 9.01K 13.42K 19.82K 29.07K
2002 30.28 6.86K 10.26K 15.24K 22.47K 32.87K
2003 22.89 8.67K 12.92K 19.11K 28.04K 40.85K
2004 27.66 7.35K 10.98K 16.29K 23.98K 35.04K
2005 26.59 7.59K 11.34K 16.81K 24.72K 36.11K
30-Year Projections
Here are projections of the final balances after 30 years. The initial balances are all $10K.
The 5% and 95% confidence levels are –2% and +2% about the Calculated Rate, respectively. That is, 5% of all outcomes will be below the 5% confidence level. And 95% will be below (and 5% will be above) the 95% confidence level. The 20% and 80% confidence levels are –1% and +1% about the Calculated Rate, respectively. That is, 20% of all outcomes will be below the 20% confidence level. And 80% will be below (and 20% will be above) the 80% confidence level. One-half of all outcomes will be above the Calculated Rate. And one-half will be below the Calculated Rate.
To clarify: the 1995 30-Year Calculated Rate is 5.82%. The confidence levels are based on real, annualized returns of 3.82%, 4.82%, 5.82%, 6.82% and 7.82%.
Year P/E10 5% 20% 50% 80% 95%
1995 20.22 30.79K 41.05K 54.58K 72.37K 95.71K
1996 24.76 27.58K 36.81K 49.00K 65.03K 86.10K
1997 28.33 25.95K 34.66K 46.15K 61.29K 81.19K
1998 32.86 24.49K 32.72K 43.59K 57.92K 76.77K
1999 40.58 22.83K 30.53K 40.70K 54.12K 71.77K
2000 43.77 22.30K 29.83K 39.78K 52.90K 70.17K
2001 36.98 23.51K 31.42K 41.88K 55.67K 73.81K
2002 30.28 25.28K 33.77K 44.98K 59.75K 79.17K
2003 22.89 28.73K 38.32K 50.99K 67.65K 89.53K
2004 27.66 26.26K 35.06K 46.68K 61.99K 82.10K
2005 26.59 27.11K 36.18K 48.17K 63.94K 84.66K
What these Projections Tell Us
The years 1995-2005 have had the highest valuations in the historical record. P/E10 levels above 20 are unusual. The worst (January) levels before the bubble were 24 and 27, corresponding to the two worst times financially (1966 and 1929) to begin retirement.
The 10-Year projections show that whether investors would make money was close to a coin toss throughout the entire period. There was a high degree of uncertainty. Roughly, investors could expect returns ranging from one-half of the amount indicated by the equations (i.e., one-half of the Calculated Rate) to twice the indicated amount.
The 20-Year projections show that investors were likely to make money. There was still a high degree of uncertainty. Roughly, there was still about a 20% chance of loss. There was also a 20% chance of doubling one’s money.
The 30-Year projections show that investors were almost certain to do well. Even starting from the highest valuations, they were likely to multiply their initial investment by four times. The worst case was to double one’s money. The upside potential starting from the highest valuations was to multiply one’s money by seven.
Investors who started in 1995 and 2003 could expect a 30% higher 30-year final balance than those who started at the peak of the bubble. The 1995 and 2003 P/E10 levels were much more reasonable, but still very high at 20 and 23. The Calculated Rates for 1995 and 2003 were about 1% below the historical average. [When P/E10 = 15, the 30-Year Calculated Rate is 6.54%. The 1995 30-Year Calculated Rate was 5.82%. The 2003 30-Year Calculated Rate was 5.58%.]
Have fun.
John Walter Russell
September 7, 2005