Depends on the company, JayCM, but I suppose I do…

You have a lot more faith in companies’ reported earnings than I do.

That makes no sense whatsoever!

The Dow at 10,000 would represent a P/E around 12, i.e. an investment return of 8% even without growth. For the Dow to stay at that level for “a decade or two” would require massive wealth destruction — essentially burning the earnings for 20 years. I suspect you of pulling numbers out of of a hat?

At a sufficiently low P/E, earnings absolutely matter. A company with a P/E of 10 and zero growth can self-capitalize in a decade, eating its tail like the legendary Ouroboros!

It is very reasonable to expect P/E ratios to fall to historically low levels (from their present historically high levels) and to remain there for a decade or two as Boomers retire. It is very reasonable to expect global growth to slow as all of the major world economies age. But even without growth, the earnings ability of the multinationals will kick out a steady 6% annual “coupon” on their stock price. As P/E ratios fall, that coupon will rise.

Based on these assumptions, a Dow of 10,000 would be reasonable this year (anything lower would be a tremendous buying opportunity), and a Dow of 20,000 should be anticipated in roughly 10-15 years after that based on the ability of these companies to self-capitalize.

That’s not a great investment return, especially if inflation picks up, but it is a far cry from what Jay suggests.

My family spends about $6,000 which is probably about double the U.S. average. Because I love where I live and love where I work and the two places are 30 miles apart I’m a bit locked into that fuel spending unless I buy a prius (which is on my short list) or put in a solar thermal heating system (which would require cutting down lots of trees I like to look at.)

So what happens to me if energy prices double… then I’ve got to cut $4,000ish out of my discrecionary spending / savings budget… and even that assumes I cut back usage to the bone. That hurts and I’ll estimate that about 50 million Americans are in the same boat. My insurance is that I’ve got roughly 35% of my net worth in energy stocks. If rising prices crush my spending power at least that part of my portfolio doubles and on net I’m breaking even.

My boss who has tripple my expierience in the industry, who has pleanty to retire today but works by choice, thinks 35% in one highly volitile sector is to risky for clients. For my personal account though the risk of rapidly rising energy prices makes me think I can’t afford NOT to over allocate to that sector.

Like it or not the safest retirement decision you can make is to find work you enjoy and dealy retirement until it is forced upon you or until you have TWICE what you think you will need squirled away. Thats a tough pill to swallow but it beats eating cat food my friends.

I’ve read at least 1,000 of your generally execelent posts… but this is by far the best. I espically like the following quote:

“one thing I can say: the amount of stocks you have the day before you retire shouldn’t be vastly different from the amount of stocks you have the day after you retire.”

-Pure gold!

You keep up the great work and I’ll keep telling everyone I know to add your blog to their regular reading. Have a great weekend!

You noted that you’ve seen zero returns from index funds over the last decade. I expect you will continue to see mediocre returns from index funds over the next decade. If you have enough savings to retire comfortably on that, then go right ahead!

But I don’t see any alternative for small-time investors that promises respectable returns over the next decade WITHOUT personal effort. Do you?

But the PE10 kind of ties to my idea of good and bad decades.

The problem with this correction is that it comes in a bad decade, and that is something retirees should fear.

I don’t know if you’re trying to turn everyone into someone like you, but it’s not going to happen. That’s why we have professionals, right? You can make the case that investing is too important to leave to the professionals, but saying that still won’t make me pay attention long enough to actively manage my own portfolio. Life is just too short for that kind of tedium.

Difficult question… You might as well burn your savings for heat as put them in long-term bonds right now. Even if nobody ever defaults on anything, the promised returns are abysmal. Twenty year TIPS have a coupon under 1%, and the real return on conventional Treasuries might be even lower.

On the other hand, there is still a huge amount of trash baked into the stock indexes. If you buy an index fund right now, you are consigning a third of that money to stagnation, another third to mediocrity, and you’re hoping that the modest returns on the final third will keep the whole above water.

Lower your expectations. If you look for companies with a steady and predictable 4% real return (perhaps a 3% dividend and 1% real growth), you will find a few dozen candidates. Pick a dozen of those that you are most comfortable with and you will hit that 4% real return with ease.

I’ve averaged 8% returns on my retirement portfolio since January 2007 using this strategy, and while that was with near-ideal market conditions (the market crash in 2009 produced many dozens of high-quality companies guaranteeing my target 4% return), I see no reason why it shouldn’t continue to be successful.

So 80% high-quality equities, 20% cash/CDs/bonds with maturities of 1-7 years. Withdraw the dividends on the equities (3% of 80% is 2.4% of the portfolio) and a portion of the cash for a 4% total draw rate. Replenish the cash as stock market valuations permit, but with a 20% cushion there is never a need to sell in the middle of a crash.

Advice to “hold stocks for the long term” is pretty meeaningless. There have been long stretches of time when stocks have gone virtually nowhere and, actually lost value when inflation is considered. Look at the S&P from 1966 to 1982 – 16 years.