Subject: Re: S&P 500 hits record high
Both the Dow and the S&P 500 hit record highs today.
The people who have reaped the rewards of what the market has delivered over the last 15 years are the people who stayed fully invested in index funds through

Your message is very right. There is no argument that the number one remedy for good investment returns is patience and keeping away from the news.

But take care with comparing returns over a period with radically different valuation multiples at the start and end. The start and end dates really matter.

Starting from 2009 to the present, we move from very low earnings multiples (temporary) to the current high multiples (also temporary).

To look at the returns over 17 years, rather than 15, we are starting and ending with high multiples. From July 2007 to today (Jan 2023) where the earnings multiples are not so distant, the S&P500 went from 153 to 482, and CPI went from 200 to 300.

So stocks returned 4.5% per year real over the last 17 years, with comparable starting and ending valuations, plus the approx. 1% dividend (492/153*200/300)^(1/17).

Still, the valuations were lower in mid 2007 than they are today - comparing the ratio of today's S&P500 price multiple over the last 10 years of earnings (the multiple was 27 then), compared to the same ratio in 2024 today (the multiple is 32 now), and factoring that in, the normalised real return of the S&P500 the last 17 years is (492/153 * 200/300 * 27/32)^(1/17) = 3.5% per year. They are the real capital gains you would get if starting and ending at the same earnings multiple the last 17 years.

That real 3.5% growth in the S&P500 (if the valuation remained unchanged) is still higher than the historical average of about 2% real capital gains (and likewise 2% earnings growth). The reason for the returns being above average is owing to (1) corporate margins increasing, and they cannot keep increase so either way where they are or resort to the lower historical average, (2) the cultural habit for US firms to pay out a lower dividend, retaining more of the earnings for growth versus, for example, Australian firms which pay out most of their earnings in dividends, and also (3) related to stock buybacks being in vogue. Also (4) a transition from less friendly to more business-friendly taxation law.

Long-long-term (25 plus years), expect capital gains closer to 2% after inflation if things were to simply remain rosy (high margins are retained, taxation policy doesn't return to the past, sales per share grow at the rate of the last 20 years), and less than 2% if the end-obervation point has a lower earnings valuation than today (extremely likely given valuations have only very briefly been this high before).

- Manlobbi