Date: Fri, 7 Jan 2005 11:49:00 CST
From: beliavsky@aol.com
Newsgroups: misc.invest.financial-plan
Subject: Re: Retirement investment advice wanted
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Paul Michael Brown wrote:
>Going forward, will this pattern hold? Who knows. But Barron's pointed
>out: (1) that fewer stocks pay smaller dividends than in the past
>(although there is some data suggesting this trend may be reversing);
(2)
>earnings in the past couple of years are at an all-time high, which
>suggests they have nowhere to go but down; and (3) the broad market's
P/E
>(using legit numbers for earnings actually booked, not bogus "forward
>earnings") is also quite high by historical standards.

Assertion (2) is dubious and should be checked using data at (for
example) http://aida.econ.yale.edu/~shiller/data/ie_data.htm . There is
no reason earnings cannot increase for many years in a row during an
economic expansion. Statistically, the time series of earnings probably
follows a random walk with positive drift (tracking GDP), whereas the
P/E ratio should be mean-reverting (it cannot rise or fall
indefinitely).

I agree with your general point that future stock market returns will
probably not match historical returns, because an expansion in P/E
ratios should not be counted on.