Predicting stock market returns

Reaper

I also notice in this post he says 6% is "normal" as much as anything ever is. Going back to 1955 the average annual real total returns are:

alexanderalexander

Very interesting. Clearly this is yet more evidence advocating a contrarian investment strategy.

bowlhead99

alexanderalexander wrote: »

Very interesting. Clearly this is yet more evidence advocating a contrarian investment strategy.

How so? The article makes the argument that valuation metrics aren't perfect and mean reversion does not always happen, but that future real returns from here will probably be less than the 6% historical average. It then concludes that the valuation metrics can't arbitrate the debate between those who expect 3% real return and those who expect zero in real terms and those who expect negative.

If you are a strict contrarian and always sell when others are buying you will miss all the gains they make but hopefully miss the losses they make. It doesn't guarantee you will make more money than them going forward from today.

A herd mentality can be something to avoid (if, say, you are just jumping on a bandwagon and following the crowd based on some persuasive marketing), but some of the top hedge funds use simple moving average techniques because they know that the action of people jumping on the bandwagon and buying more or selling more will create predictable momentum.

Clearly, 'buy when there's blood on the streets' is a good way to value invest and may produce better returns than buying when markets have already been going up for five years. But if valuation metrics are not perfect and performance does not reliably revert to mean without you being selective with the data, it is hard to say when you should buy and sell.

If markets are fairly valued today, you will get a worse deal than if you bought them when they were hilariously undervalued (which may have not been evident at the time). But that doesn't mean you shouldn't buy fairly valued assets, or even highly valued assets if they can produce a better return than risk free assets and you are seeking a return rather than a complete break from the markets.

Glen_Clark

IronWolf wrote: »

Typical that you start a thread showing how to predict stock market returns and everyone just ends up talking about QE

Thats because QE has been the biggest driver of stock market returns.
I'm not sure of the American figures, but to stop QE the British Government would have to sell £375 billion of bonds and burn the cash. To say they have stopped it now would be like saying they have stopped VAT by not increasing it above 20%

gadgetmind

bowlhead99 wrote: »

If you are a strict contrarian and always sell when others are buying you will miss all the gains they make but hopefully miss the losses they make.

Perhaps, but the article does suggest that those who maintain a strict asset allocation will do better than the majority, and that being contrarian enough to go against the prevailing sentiment (so holding more equities when no-one else wants anything to do with them) will perform even better.

Apropos not very much, looking at my trading spreadsheet for the last few years, I made 28 purchases in 2011, 13 in 2012, and 3 in 2013. But in 2014, other than when moving some SIPPs and ISAs, I haven't bought anything and have made 3 disposals.

Make of that what you will.

bowlhead99

gadgetmind wrote: »

Make of that what you will.

Well I could make a hat, or a brooch, or a pterodactyl...

Sounds like gadgetmind is buying fewer shares when markets are high, which seems broadly sensible, although it might just imply that by now he has as much of his wealth in equities as he's likely to need for retirement and is now focusing on fast cars and loose women

If you were a contrarian for a year between March 2009 and March 2010 when markets stormed back up from 3500 to 5700 you might have thought to yourself, wow this pace is unsustainable given the lack of credit and the inevitable adverse impact of the aftermath of this crunch which is delivering a recession in the western world. I'm not going to follow these idiots and pile into stocks with the rest of them. But stopping buying at 4500 would have been a big mistake when earnings multiples continued to go back up towards their old levels as the market had generally come around to believe they would.

I've been buying fewer equities myself in recent times, or at least fewer UK/US ones, and with the FTSE approaching 7000 I haven't been able to bring myself to dump some of the fixed interest stuff that I had thought I'd be getting out of once interest rate rises were hinted at more strongly. There doesn't seem to be an obvious place for new money that comes available, other than simply holding some in cash and some in equities and some in non-equities.

I suppose that is how it's always been apart from at some points where equity markets were at extreme lows and just looked too cheap. Now they don't look 'too cheap' but it's hard to call what 'too expensive' looks like if other asset classes have similar high prices.

gadgetmind

bowlhead99 wrote: »

Well I could make a hat, or a brooch, or a pterodactyl...

If you were a contrarian for a year between March 2009 and March 2010 when markets stormed back up from 3500 to 5700

I was.

But stopping buying at 4500 would have been a big mistake when earnings multiples continued to go back up towards their old levels as the market had generally come around to believe they would.

I didn't stop but I did ease off the gas. I don't intend to reduce my equity allocation any time soon, but would be perfectly comfortable dropping back to 75% if I see signs that others are heading the other way.

with the FTSE approaching 7000 I haven't been able to bring myself to dump some of the fixed interest stuff that I had thought I'd be getting out of once interest rate rises were hinted at more strongly. There doesn't seem to be an obvious place for new money that comes available, other than simply holding some in cash and some in equities and some in non-equities.

Agreed. I'd intended to dump some FI and (in particular) my PPI infrastructure long before now, but I actually bought both SLXX and VGOV this AM!

Now they don't look 'too cheap' but it's hard to call what 'too expensive' looks like if other asset classes have similar high prices.

Again, I'm looking for where sentiment is dragging prices down and ITs in that sector are on big discounts. However, even here, the discounts aren't as large as they've been historically.