Wednesday, January 12, 2005

THIS IS IMPORTANT! (Stock-Market Related)

There's an interesting discussion going on at and Consumerism Commentary.

The whole thing started with an article posted at, entitled "What It Takes to Become a Millionaire." Take a moment to read the article. What you'll find is that the author suggests that the path to millionaire-dom is paved by (1) saving 10% of one's net income over many years (in this case, from a salary of $50k/ year, over 20 years or more), and (2) getting 10% compounded annual returns from your investments (read: any employer contributions plus your returns from the stock market).

I notice that no one is disputing the "10% returns per year" part of the article, so I guess I'll take my cue:

Double-digit investment returns over any period of time — even a 20-year period — are not a given.

Yes, employer matches to 401k contributions will help you out. Tax deferral (IRA, 401k) will help you out. Tax reduction (Roth IRA) will help you out. Good investment management will greatly help you out. But you must remember to account for inflation, taxes (if applicable), fees and expenses, execution slippage, and a host of other things, too, which DO NOT help your returns. These things add up.

I'm currently reading a book entitled Bull's Eye Investing by John Mauldin. Mauldin isn't a perennial bear, per se, but he is a realist. In his book is an eye-opening chart of nominal stock-market returns from 1900 to 2002, put together by Crestmont Research. This chart takes into account all the buggies listed above (fees, taxes, slippage, inflation, etc.) as it computes the annual returns from the stock market over ANY period of time from 1900 to today. Thanks to the wonder of the internet, you can see the most recent (updated through 2003) charts here:

Crestmont Research Total Market Returns

There are five different versions of the chart. You can elect to show returns as if they were earned in taxable accounts, non-taxable accounts, factoring for inflation, or not factoring for inflation. Each chart has a diagonal black line so that you can follow investment returns over any 20-year period (which is what every investment advisor seems to throw out there when quoting market returns). You can, in fact, look at returns over ANY period of time.

Mauldin's argument for a sort of "stagnant" or declining market over the next decade or longer rests on the fact that market returns have historically been very poor when those returns are calculated from a beginning point where high P/E ratios are the norm. Low P/E ratios, historically, have been in the 10 to 13 range, he writes.

The problem? S&P 500 P/E ratios are currently in the 22 to 24 range, which is high by historical standards.

You can also see related market P/E ratios in the charts above, and thus see how market returns followed any periods of high or low P/Es.

Again: Double-digit annualized investment returns are not guaranteed ... even over 20 years. So don't count on them!

— Posted by Michael @ 1:23 PM


More answers are available on Crestmont Research’s website ( and in a book that Ed Easterling recently completed, Unexpected Returns: Understanding Secular Stock Market Cycles. It includes most of the charts on the website (and a few new ones) and ties together the messages of the research. Some of the charts have been reformatted to complement the text and all of the charts throughout the book are presented in color.

Unexpected Returns: Understanding Secular Stock Market Cycles explains why stock market returns will be different in the 2000s than they were in the 1980s and 1990s. The book is written in a style that is directed to casual investors as well as sophisticated scholars. It is intended to be a unique combination of investment science and investment art that will enable the reader to differentiate between irrational hope and a rational view of the current financial markets.

Unexpected Returns leads the reader on a journey of insights through the past century of stock market and bond market investing, provides a rational understanding of the factors affecting returns, and concludes with answers to questions about how you can invest for returns that are more consistent than riding the stock market rollercoaster.

The book is unique in several ways: (1) it uses more than 60 full-color charts to more effectively communicate its message, (2) it is not a how-to investment book, rather it educates the reader to make rational decisions with how-to books, investment reports, and advisors, and (3) it’s particularly relevant given the current level of valuation in the stock market and frustration by investors after five years of volatility and limited or negative returns.

For more information about the book, please visit the “Unexpected Returns” section of the Crestmont Research website or link directly to it at On the site, you will find text from the inside flap, reviewer comments from the dust jacket, the table of contents, and some additional information.

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Thoughts on my personal finances, goals, experiences, motivations, and accomplishments (or lack thereof).

My financial life began turning around when I took responsibility for it.
— Dave Ramsey


Start (2005-12): ~$21,900
Currently: $0
[About Our Debt Paydown]


Savings Goal: $15,000
Currently: ~$15,115
[About Our Liquid Savings Goal]