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The market’s expensive, right?

17122019_US Equities

The market’s expensive, right?

Finance theory teaches that when you invest in a firm, your expected percentage annual return is some spread over and above the risk-free interest rate (typically viewed as the annual yield on a government bond). The size of this “spread” is proportional to the risk that you bear.


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Andrew Macken is the Chief Investment Officer of the Montaka funds and the Montgomery Global funds. He established MGIM in 2015 in partnership with Montgomery.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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  1. If financially literate aliens came here they would more likely say, you idiots are running a debt Ponzi scheme based on ever cheaper money, that’s nothing more than a ticking time bomb.
    I know it’s not cool to highlight inconvenient facts but reality is far more interesting than fiction these days.

  2. Andrew, I think I will go with Freud here – human beings are fundamentally irrational – the madness of crowds is that each member follows the herd

  3. Hi Andrew

    Some months ago I decided to have a look at what “real” equity returns were achieved over long periods of time (decades) and the number I came up with was 6.4%.

    If 6.4% is the “real” return an investor can expect , it then follows that a “nominal” return of 7.9% is acceptable (assuming inflation of 1.5%).

    What “real” and “nominal” returns do you see as being acceptable in the current environment?

    • Hi Max,
      I think a logical approach would be to look at the historical “excess” equity return over and above a government bond yield; and then apply that to a forward looking government bond yield arrive at an expected equity return.
      The short answer is probably a lower return in the future than in the past.
      All the best,

      • Thanks Andrew

        On the RBA website there is an article written by T Mathews 20/6/19 titled “The Australian Equity Market over the past Century” which can shed some light on your comments. It covers Total Returns from 1917Q1 to 2019Q1 and states the historical Total Market return over that period has been 10.2%, with the 10 Year Gov’t bond over the same period coming in at 6.2% making the “excess” equity returns over the Bond Yield at 4%. So if we look at the current investment environment with 10 Year Gov’t Bonds currently at 1.24% a reasonable conclusion is that we should only expect “today “a Total Return of 5.24% – making the Sharemarket look very attractive at current valuations , but what is the 10 Year Gov’t Bond rate going to be going forward??? If a lower for longer scenario plays out then all is OK. My only concern is that the current low interest rates have been manufactured and “may not” be sustainable and that taking Inflation into account is a better measure at determining Returns in this “current” investment environment as Historical “Real” returns are a more realistic starting point . I see that the 4% “excess” Return as being too low compensation for taking on Equity Risk, but then I am challenging history and history also tells us that the CPI from 1917Q1 to 2019Q1 has come in at a high 3.9% and going forward it will be much lower.

        So while we may not fully agree on which method should be used going forward, It should be clear to everyone that no matter what method you use, returns will be lower than the historical past and if rates stay low for a very long time the current overall Sharemarket valuation looks attractive.

  4. ” But we humans tend to gravitate towards headlines predicting demise and hardship over those predicting prosperity. It seems to us that, at a time when investors are rushing to add more fixed income to their portfolios, this asset class is offering relatively meagre expected returns for the risk borne by investors. And on the end of the risk spectrum, many equities are offering highly attractive returns for the risk being borne.”

    Not convinced by first sentence but rest seems to hold up. I also wonder about the generational dimension and the boomers (with most of the $) now becoming increasingly risk adverse

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