Regarding the wisdom of passive investing in such a market, I would imagine that it just magnifies the importance of allocating to indices that are as uncorrelated as possible, and rebalancing regularly. If it’s unlikely that any one market will reach its multi-year high/low at the same time as any other, then won’t a passive investor will get better returns than any of the individual markets?

Earnings growth however is fairly stable. Over the past 5 decades, it has been 5.5%, 9.9%, 4.4%, 7.4% and 5.7%, so a 5%-6% guess isn’t likely to be wildly off. Compare earnings growth to p/e changes (Bogle calls it speculative return) over the same time period: -1%, -7.5%, 7.7%, 7.2% and -8%.

Future Earnings growth = Who knows? Could be 4% per year, could be 12% per year….nobody could really give an argument to support knowing this with any certainty.

Future Change in P/E = who knows (far too many factors go into this)

For instance, Vitaliy’s position is not that far from John Bogle’s, who estimates future equity returns based on:

initial dividend yield + earnings growth + change in p/e

Bogle doesn’t take a position on change in p/e and figures it will be the same 16 or 17 it is today and hence figures a 10-year returns in the 7% range. Vitaliy figures p/e will be lower in the future, based on past history. And to be fair, Vitaliy does note that he could be wrong but doubts it.

Mike

Phil: The trouble with life expectancy is that it’s an average. If you are 40, there’s a 50% chance that you will live to 85 (not 72). If you are married and your spouse is also 40, there is a 50% chance that one of you will live another 51 years! You can play around with different scenarios available on this website:

Link