Currently, the S&P 500 (as of 1/27/17) is trading at 2,294 with Q4 trailing reported earnings of $97.98. (S&P Data) This puts the current trailing P/E ratio of the S&P at a rather lofty 23.41x.
We also know that forward 30-Year returns from current valuation levels have been much closer to 2-5% than 8%. In fact, there has never been a 30-year return of 8% from current valuation levels – ever.
The level of valuations also has a massive impact on your survivability of your financial plan when you include the impact of withdrawals.
Consider The Impacts
There are generally three major flaws with financial planning assumptions that I consistently see and have to correct for.
- Return rates are nominal and compounded,
- The impact of fees and taxes during the investment time span are not included, and;
- The level of valuations are ignored in future return assumptions.
Let’s take a look at the impact of these issues.
For this exercise, using Robert Shiller’s data, I have located points in history when valuations exceeded 20x earnings and calculated real forward 30-year total returns from those points as compared to an 8% compounded rate.