Calculator Predicts Poor Long-Term Stock Returns Due to Stock Valuation Effect

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A new calculator casts doubt on claims that stocks are always a good buy, showing the effect of changes in stock valuation levels on long-term returns.

The S&P stock index is likely to provide a real return of less than 3 percent over the next 20 years. So reports a new calculator that employs regression analysis on historical stock-return data going back to 1870.

“Investors have been misled by reports on what the historical data says that ignore the effect of changes in stock valuation,” said Rob Bennett, co-author of the new calculator. “Today’s stock valuation level is not at all typical, and it is not realistic to expect stocks to generate typical returns again until stocks are again being sold at reasonable prices.”

Bennett is founder of the Financial Freedom Community (a group of internet discussion boards). He co-authored The Stock-Return Predictor calculator with John Walter Russell and is the creator of the Valuation-Informed Indexing approach to investing. Russell has been engaged for over four years in breakthrough research on the effect of changes in stock valuation levels on long-term stock returns.

The new investing calculator is available free of charge at web sites run by Bennett and Russell. The calculator page at Bennett’s site is -- The calculator page at Russell’s site is --

The historical stock-return data shows the most-likely 30-year real return for purchases of the S&P index made today to be 5.3 percent (with a range of possibilities stretching from 3.4 percent to 7.4 percent). The outlook is considerably darker for the more immediate future, however. The calculator reports a most-likely 10-year return of 1.3 percent (with a range of possibilities stretching from a negative 4.7 percent to a positive 7.3 percent). For 20 years, the most likely return is 2.7 percent (with a range of possibilities stretching from a negative 1.3 percent to a positive 6.7 percent).

Robert Shiller, John Bogle, Warren Buffett, William Bernstein and other stock investing experts have often warned investors that it is not reasonable to expect the sorts of returns that fueled the bull market of the 1980s and 1990s now that valuations have reached such high levels. Until publication of the calculator, though, stock investors have not had a means of quantifying the valuation effect and of thereby putting advice to be wary of the effect of valuation changes to significant practical use.

Rob Bennett writes the daily “Financial Freedom Blog” and is the author of “Passion Saving: The Path to Plentiful Free Time and Soul-Satisfying Work.” His next book, “Investing for Humans: How to Get What Works on Paper to Work in Real Life,” is slated for publication in 2008.

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