The Business of Investing

Ok, I know this is a logistics blog but I also have a passion for business in general so I thought I would write very quickly about investing.  Warning:  I am a Jack Bogle, index investor who believes there is absolutely no way to beat the market in the long run.  I am reading "Don't Count on It!" by Jack Bogle and he summarizes the simplicity of investing in this way:

A return on a stock / equity investment is simply the addition of:

1) The economics (i.e., growth rate plus dividend yield) and...

2) Speculation / Emotion - This is essentially the change in the P/E ratio over or under the long term averages.

For P/E, he basically says if P/E is under 10 then it is clearly likely to increase and if P/E is around 20 it will likely decrease (of course as all good indexers remind you, you just never know when!).

Applying this very simply, here is what I think of what your or my expectation of stock market returns should be right now:

1) Growth of the entire market is about 2 - 4% (i.e., the GDP0
2) Dividend yield is (Using the vanguard total market ETF as proxy): 1.76%

This means you can plan on "enterprise" returns of 3.76% to 5.76%.  However, the P/E is 8.04 which means you are likely to pick up an additional 2% or so in "emotional or speculative" returns as the P/E reverts to the mean.  So, you should plan on about 5-10% returns on stocks with the middle ground being most likely.  That is a normal expectation.