Observations

"Too Big to Fail" Assures Bigness - and Failure Guest post by Tom Evslin

2012-01-21T10:26:00.014-06:00

This article was originally posted on Tom's blog, Fractals of Change, on 11/15/11

Reader Bobsv57 asks:

"Tom, a question for you. I am under the impression that most, if not all, of the money used to bail out banks has been paid back with interest and it is actually the money used to bail out GM that hasn't been returned. Am I correct in this observation? and if I am, then why to you make the statement calling for no more bank bailouts? (Not that I particularly support them in any case) It would seem that the bail out was a money maker for the Fed, wasn't the interest they charged the banks for TARP funds greater than the interest the Fed pays on it's national debt?"

Bob is right that the banks paid back their loans with interest. But the eventual cost of the bailout is likely to be the failure of our banking system and massively increased public debt. Meanwhile, middle America is starved for credit while the "too big to fail" banks are getting bigger at the expense of their better managed smaller and safer brethren.

An article in the Wall Street Journal explains one way that corporations are positioning themselves for the next credit crisis:

The Houston Texans Strategy is Paying Off

2012-01-14T14:39:00.055-06:00

It probably won't surprise readers of this blog to hear that I like to approach football from a strategic point of view. I avoid being frustrated by our quarterback's latest interception, or our running back's latest fumble by focusing on the bigger picture -- where do we stand compared to our strategic plan?

The Vision: Sustainable Excellence

My vision for the team is what I would call "Sustainable Excellence." By that I mean a team that is consistently among the best in the National Football League (NFL). It's a team that consistently makes it to the playoffs, and sometimes wins the Super Bowl. I firmly believe that is the organization's vision as well. And, I believe we're on the right track.

Clearly, one key to realizing that vision is getting the right people. Let's look at some aspects of the Texans' "people" strategy. Read more »

Stock Market Total Returns through 2010

2012-01-02T14:50:00.010-06:00

Last year, I archived the "Stock Market Returns through 19xx" post so that the results through year-end 2009 would continue to be available. Based upon the interest in that post, it seems worthwhile to continue the practice. So, for interested readers, following is my archive of market total returns through 2010.

Stock Market Total Return Results Through 2010

Since 1900 (end-of-year 1899), through 2010, I estimate the average total return/year of the DJIA (Dow Jones Industrial Average) was approximately

2011 End-of-Year Stock Market Update

2011-12-31T17:04:00.126-06:00

Just to refresh your memory, here are a few market-moving stories from the past year.

Monthly Stock Market Closes for 2011

December, 4th Quarter, Year-To-Date & Recovery-To-Date Review

Previous posts have demonstrated that the market periodically experiences "long, flat periods." This certainly seems to be one of those. Perhaps it was in that spirit that the S&P managed to end 2011 0.02 points away from where it ended 2010!

The DJIA (Dow Jones Industrial Average) fared somewhat better, closing the year at 12,217.56, with a dividend yield of 2.6%. Ten-year Treasury Notes ended yielding 1.89%, not far off the low yield for the year (and apparently all-time low) of 1.72%. Here are some key market stats.

From Prior Month Close of 12,046: The Dow is up 172 points (1.4%)
From 3rd Quarter Close of 10,913: Up 1304 points (12.0%)
From 2010 Close of

My SIMPLE Retirement Saving Calculator /Spreadsheet

2011-12-21T16:29:00.179-06:00

This post introduces my "back-of-the-envelope" retirement model. I've reduced retirement planning calculations to the bare minimum.

It takes a complicated model to account for all of the variables in retirement planning. In this post, I've made some simplifying assumptions. I've tried to develop a "bare bones" model so that we can focus better on the big picture, and still get results that are in the right ballpark.

The Observations Back-of-the-Envelope Retirement Savings Calculator

Note: Click on the screenshot to expand it. The link to download the spreadsheet is at the end of the post.

How Much Money Will You Need to Retire?

The key simplifying assumption was to estimate the savings you will need at retirement usingRead more »

Mission, Vision & Values: Building a Stronger Foundation for Your Personal Strategic Plan

2011-12-10T07:38:00.099-06:00

My core planning process is designed for readers who want a quick, practical approach to personal strategic planning; that process starts with your dreams. My thesis was that in 2 - 4 hours you could draft a plan that could change your life. This post is for readers who want to build an even stronger foundation for their plans, and for those developing family strategic plans.

Building a Stronger Foundation for Your Personal/Family Strategic Plan

In the core personal strategic planning (PSP) series of posts, I suggested that your Vision is the ultimate answer to "Why?" For example, you plan to begin tracking your expenditures (strategy). Why? So that you can save at least 10% of your salary (goal). Why? So that you can realize your dream/vision of retiring with at least $1,000,000.

Strategic plans for organizations typically add still another level by also including mission and values statements. Developing mission and values statements in addition to your vision can provideRead more »

November 2011 Stock Market Update

2011-12-01T18:58:00.001-06:00

Volatility Continues

November was another volatile month. The market rose and fell more or less in synch with the rising and falling prospects within the European Union. In a month of 21 trading days, the market rose or fell by more than 1% 11 times. Seven times the market changed by more than 2%; twice we saw changes of Read more »

Fire Kubiak!

2011-11-26T21:48:00.355-06:00

Whatever happened to the all those people who were screaming "Fire Kubiak"? I haven't heard much from them lately.

For the past few years, it seems that every discussion I've had with Houston Texans fans has included at least one fan of the opinion that the Texans would never be winners as long as Kubiak was the coach.

Gary Kubiak is Too Soft!

I could be wrong, but it seems to me that for many people the problem was Gary Kubiak didn't scream enough! We need somebody like Bill Cowher -- or, Mike Ditka, or Vince Lombardi, or .... That's what I kept hearing.

In my experience, for every Vince Lombardi, there was a Tom Landry. For every Mike Ditka, there was a Read more »

If You Had Invested $1 in the Stock Market in 19xx (graph)

2011-11-10T08:45:00.100-06:00

Want to approximate what $100 invested in the stock market in 1932 would be worth now? The graph below will help you estimate what $100, $1,000, $10,000 or any other amount would be worth if invested in 1932, 1982, 2002 or any other year -- assuming dividends were reinvested.

How Much Would $1 Invested in the Stock Market in 19xx be Worth Now contains a spreadsheet to make these calculations precisely -- along with several related computations (e.g. calculating the compound annual growth rate). However, you need Excel or some other spreadsheet software on your computer in order to use that spreadsheet. This post will help readers who do not have the necessary software approximate the results of the spreadsheet.

What If You Had Invested $1 in 19xx?

The graph above (click to expand) shows that, for example, $1 invested at year-end 1928 is "now" worth Read more »

October 2011 Stock Market Update

2011-11-01T13:54:00.081-05:00

Turnaround

A month ago, the Dow had just completed its fifth straight losing month, and the worst month of the year; it was within hailing distance of its 52-week low. The VIX, a measure of volatility (and fear) had just had its highest monthly close of the year. And, we were headed into October -- the month that gave us the 1929 crash, the 1987 crash, and perhaps the most stomach-churning month of the 2008-2009 crash.

Early in the month, on October 3, a new 52-week closing low was indeed established -- 10,655. However, rather than give us a repeat performance of Octobers past, spurred on by optimism regarding resolution of the European sovereign debt crisis, the Dow Read more »

Comparing Housing vs. Stock Market Growth

2011-10-22T15:46:00.165-05:00

Readers are interested in comparing increases in the price of U.S. residential real estate to stock market growth. While there have been periods where the prices of homes have appreciated faster than the stock market (especially recently), in the longer term the stock market has prevailed. This post compares historical growth in the two markets and suggests some factors that tend to constrain long-term growth in housing prices.

U.S. Housing vs. Stock Market Price Growth

In the chart above the red line shows the growth of $100 invested in the Dow Jones Index at year-end 1928, with dividends reinvested through year-end 2010. The blue line shows the results of putting that same $100 into residential real estate. All amounts areRead more »

Real World Expenses Reduce Published Market Returns

2011-10-08T13:07:00.205-05:00

The stock market returns published in this blog, and in most other publications, are theoretical returns. In the real world, investors incur expenses that reduce the reported market returns. This post overviews those expenses and shows how they can easily reduce a retirement portfolio to less than 50% of its theoretical value!

Market or Index Returns

Elsewhere on this site, we have seen that over long periods of time, the DJIA (Dow Jones Industrial Average) has returned about 10% per year. For example, the return from year-end 1990 to year-end 2010 was 10.2%. That was the return earned by the market, as represented by the Dow index, reinvesting all dividends, and ignoring all expenses -- including taxes. Unfortunately, partly because of expenses, those returns do not accurately reflect

September 2011 Stock Market Update

2011-10-01T08:15:00.053-05:00

All-Time Low Treasury Interest Rates

You could argue that the biggest stock market story in September was the bond market! Even in the face of S&P's August downgrade of U.S. debt from AAA to AA+, treasury yields continued to decline. According to Bloomberg Businessweek, 10-year yields reached an all-time low of a bit under 2% on September 6. By the end of the month, the market had blown through that record, setting a new low of 1.72% on September 22.

Granted much of the action in the bond market was a flight to safety triggered by escalating fears about the worldwide economy in general and the European economy and Euro specifically. In addition, the Fed initiated Operation Twist -- still another form of Read more »

A Look at the Houston Texans' Draft Record

2011-09-08T13:42:00.003-05:00

Building through the draft is obviously a critical part of the Houston Texans' strategy. How successful have GM Rick Smith and Coach Kubiak been in implementing that strategy? Let's take a look.

In particular, let's see how often their draft picks resulted in a player a) making the roster, b) starting, or c) making the pro-bowl. This is the progression you hope for with every drafted NFL football player, so these seem like reasonable metrics to use to measure success. We'll start with the 2006 NFL draft at the beginning of Kubiak's tenure, even though Charlie Casserly, not Smith, was the GM for that draft. We'll end with the 2008 draft since it's still too early to evaluate the results of the 2009-2011 drafts.

Houston Texans Draft Picks: 2006 through 2008

The table above (click to enlarge) includes all players drafted by the Texans between 2006 and 2008. In addition, it includes Read more »

August 2011 Stock Market Update

2011-09-01T17:27:00.004-05:00

S&P Downgrades U.S. Debt

Even though Congress reached an early-August, last minute agreement to raise the debt ceiling, and thus eliminated the possibility of a first-ever U.S. default, the month did not start well. Subsequently, continuing concerns about the European and U.S. economies, and the first-ever downgrade of U.S. debt (from AAA to AA+) by S&P resulted in the worst monthly market performance since August of last year -- a drop of 4.4%.

It was also one of the most volatile months in recent memory. Of 23 trading days, 15 showed a gain or loss of 1% or more; seven showed a gain or loss of 3% or more (3 up, 4 down). The VIX, a measure of volatility, which had been below 15 as recently as April, spiked aboveRead more »

Houston Texans Right to Let Vonta Leach Go

2011-08-27T13:13:00.082-05:00

Before Vonta Leach signed with the Baltimore Ravens, I heard many fans argue that Houston Texans GM Rick Smith was being cheap and would regret not giving in to Vonta's request to become the highest paid fullback in the league. In essence, they argued the Texans should keep Leach at all costs. I loved watching Vonta block last year, and was sorry to see him go; Leach may very well be the best blocking fullback in the league. Even so, I think the Texans made the right decision. Here are three reasons why:

Leach's Impact Not as Great as Fans Think

Some fans argued that the Texans' running game will be much less effective without Leach. I don't doubt that there will be at least one occasion this year when Read more »

How Much Would $1 Invested in the Stock Market in 19xx be Worth Now?

2011-08-20T11:41:00.017-05:00

How Much Would $1 Invested in the Dow Index in 19xx be Worth Now? This post answers that question for "any" start-year -- and any end-year (not just "now"). The calculator works whether your initial investment was $1, $100, $10,000, or any other amount.

In addition, the spreadsheet calculates the average yearly return (compound yearly growth rate) between the two years you input, and breaks out the return attributable to dividends from the return resulting from price appreciation.

The Observations Stock Market (Dow Index) Compound Growth Calculator/Spreadsheet

Note: Click on the screenshot below to expand it. The link to download the spreadsheet is at the end of the post. If you do not have spreadsheet software, see "Related Posts" below.

Following is a sample of questions this spreadsheet can answer.

$1 Invested in the Stock Market (Dow) in 1929 is Worth How Much Today?

The graphic above shows the results of a hypothetical investment in the DJIA (Dow Jones Industrial Average Index) at year-end 1929. The assumption is that the investment was sold at year-end 2010, withRead more »

The 2010 10-Year Stock Market Projection

2011-08-13T13:46:00.011-05:00

Note: The purpose of this post is just to archive the original (2010) projection for posterity. For the 2011 projection, see The 2011 10-Year Stock Market Projection. The original post follows....

Expected Return for the Next 10 Years

Previous posts have shown the results of backtesting the initial version of my market projection model. In this post, we'll develop projections of 10-year stock market returns that extend into the future where we no longer have the luxury of knowing the actual results.

Projected 10-Year Stock Market Returns

Projected Dow 10-Year Annual Returns

The above graph (click to expand) shows the projected 10-year annualized returns ofRead more »

The Best & Worst Years in Stock Market History

2011-08-06T14:15:00.013-05:00

I have previously posted the best and worst stock market returns for periods from one to one hundred years -- usually as "rolling returns." In this post, we'll rank order the yearly returns from 1900 through 2011.

The Best Dow Yearly Returns since 1900

The above table (click to expand) shows the best yearly performances of the DJIA (Dow Jones Industrial Average) index since 1900. I was originally going to show the top 25% (75th percentile and above), but expanded the range slightly to include 2009, a recent year of special interest. Note that the returns listed representRead more »

July 2011 Stock Market Update

2011-07-31T09:27:00.014-05:00

Sovereign Debt Concerns

In July, sovereign debt issues again took center stage.

For months, fears of Greece defaulting on its debt and triggering a series of dominoes have hung over the market. After some jitters in the first half of the month, a plan was finally put in place to exchange much of the Greek debt for longer maturity (15-30 year) debt. This seems to have resolved the situation, at least for now, and sparked a short-lived relief rally.

Meanwhile, on the home front, the possibility of default on our own debt continued to increase. Lacking an increase in our debt ceiling, the government has been short of funds since May. However, it has managed to finesse the situation with the use of smoke and mirrors. August 2 is the supposed date when it would no longer be possible to keep up the charade. Faced with the possibility of Read more »

100 Years of Inflation-Adjusted Housing Price History

2011-07-23T14:28:00.011-05:00

Since owning a home is often a decades-long commitment, it is important that we include inflation in our housing analysis. This follow-up to 100 Years of (nominal) Housing Price History looks at the long-term history of inflation-adjusted residential real estate prices in the United States. Interestingly, you could make the case that, after adjusting for inflation, the long-term trend for housing prices has been essentially flat.

Real, Inflation-Adjusted, Housing Prices Since 1900

Above is a graph (click to enlarge) reflecting inflation-adjusted prices for residential housing in the United States since 1900. The graph is based on Robert Shiller's housing price index, which I have summarized to yearly data. His index attempts to Read more »

What Will My Bond or CD be Worth in 5 Years?

2011-07-11T21:14:00.235-05:00

Here's an easy way to approximate what $5,000, $20,000, $50,000, or any other amount will grow to in 5 years. It works for bonds, CDs -- any investment that you expect to compound at a fixed annual rate. You can also use this graph to ballpark the results for multiples of 5 years -- e.g., 10, 15, 20 or 25 years. However, the similar graph in What Will My Bond/CD be Worth in 10 Years? will normally give better approximations for 10 years, and multiples of 10 years -- especially for higher interest rates.

You can even use this method to estimate stock market investment results if you like. However, because stock market results are so variable, for those consider the variability of 5-year stock market returns and the variability of 10-year stock market returns instead.

Approximates Results from the Calculator/Spreadsheet

I have previously posted a compound growth rate calculator that will give you precise results (that's what I used to prepare the graph below). However, since some people don't have spreadsheet software, I'm providing this graph as a way to approximate the results.

What Will my Bond or CD be Worth in 5 Years?

The graph above (click to expand) shows how rapidly a bond or CD of any denomination will grow in five years. Given an interest rate, indicated on the horizontal axis, the "multiplier" on the vertical axis tells you what your investment will be worth in 5 years (assuming earnings reinvested each year, and no taxes). The multiplier is the same regardless of how much money you invest. For example, Read more »

June 2011 Stock Market Update

2011-07-04T13:51:00.004-05:00

June, 2nd Quarter, Year-To-Date & Recovery-To-Date Review

European sovereign debt issues and the imminent ending of quantitative easing continued to weigh upon the market throughout the month. As a result, the downtrend that started last month continued. By mid-month, the market had been down 6 weeks in a row. Still, after all was said and done, Read more »

Why Investing in the Stock Market for Less Than 5 Years is Risky

2011-06-22T13:19:00.223-05:00

This post provides justification for the adage that you should not put money into the stock market that you will need in less than 5 years. It is the 5-year version of earlier posts that discussed the distribution of 10 and 20-year stock market returns (see links below).

Some years back, a friend asked me to recommend a good stock investment for her daughter's college fund. Since withdrawals were to start in about three years, my recommendation was not to put the college fund in the stock market at all! Here's why.

What will a $20,000 Stock Market Investment be Worth in 5 Years?

In previous posts, we have looked at the distribution of historical outcomes for typical (but hypothetical) investors investing in the stock market for 10 years and for 20 Years. For those holding periods, the investors virtually always made money -- though sometimes barely so. In approximately 100 sample 10-year periods since 1900, we saw only one instance where the investor's ending portfolio was worth less than his initial investment -- and no instances for 20-year periods.

The above graph (click to expand) is the 5-year version of the earlier charts. It shows the historical results of Read more »

100-Year Housing Price Index History

2011-06-11T07:00:00.027-05:00

This post illustrates the increase in U.S. housing prices since 1900. However, considering price alone is a misleading way to evaluate the performance of residential real estate. Investors who fail to do additional analysis are likely to overestimate the attractiveness of housing as an investment.

100-Year Housing Price Index Graph

The above chart (click to expand) shows a 100-year history of residential real estate prices in the U.S. The graph is based on Robert Shiller's historical housing index, which I have summarized to yearly data. As he readily admits, his data isRead more »

May 2011 Stock Market Update

2011-06-01T13:06:00.148-05:00

May, Quarter-To-Date, Year-To-Date & Recovery-To-Date Review

The month started off with a bang -- literally. On the evening of May 1, POTUS (as the White House Twitter account refers to him) announced that Osama bin Laden had been shot and killed. The relief rally was short-lived, and was soon overshadowed by the bursting of the bubble in commodities. Silver dropped more than 25%, down from its highest levels since the Hunts tried to corner the silver market back in the 80's. Other commodities suffered as well, though not quite as much.

By mid-month, U.S. debt had reached its $14.924 Trillion limit, and some congressmen were threatening not to support raising the debt limit without major spending cuts. This raised the possibility, admittedly slight, that the U.S. could actually default on its debt. Sovereign debt issues continued in Europe as well, with the restructuring of Greek debt appearing more and more to be a question ofRead more »

The Impact of Starting P/E Ratio on 20-Year Stock Market Returns

2011-05-22T18:18:00.012-05:00

One of the most dependable predictors of long-term stock market performance is the initial normalized price/earnings (P/E) ratio. This post uses a scatter plot to demonstrate the relationship that has existed historically between P/E and returns over the next 20 years.

Note: if you find the graph below difficult to understand, see Initial P/E and 20-Year Rolling Returns first.

Scatter Diagram: Starting P/E Ratio vs. 20-Year Stock Market Returns

The above scatter plot (click on image to expand) shows the historical relationship between the P/E ratio of the stock market at the time of purchase and the typical investor's return over the next 20 years. It is exactly analogous to the previously posted Starting P/E Ratio vs. 10-Year Stock Market Returns. And, both are conceptually related to Rolling Returns vs Initial P/E Ratios, which looked at the relationship of initial P/E and subsequent returns over time -- that is, with time as the horizontal axis.

Similar to the 10-year chart, each dot represents a hypothetical Read more »

What Would $10,000 in 19xx be Equivalent to Today?

2011-05-13T20:18:00.007-05:00

Want to approximate what $1 in 1900 or 1929 or 1985 (or any other year) would be equivalent to today? How about what $100 or $1,000 today is equal to in past years? The graphs below will help you convert amounts in current 2011 dollars to amounts with the same buying/purchasing power in any prior year (beginning in 1900); you can also use it in the reverse direction.

I originally designed The Observations Inflation Calculator/Spreadsheet to answer questions like the above, along with many other questions related to inflation and the impact of inflation on the dollar's purchasing power. However, you need Excel or some other spreadsheet software on your computer in order to use the calculator. This, a friend recently reminded me, eliminates a lot of people.

The graphs will allow you to approximate some of the calculator's results. However, to get the most accurate results, and to take advantage of the remaining capabilities, you need to download the calculator.

What Was a Dollar in 19xx Worth vs. Today? e.g., What Was $10,000 in 1900 Equivalent to in2011?

The graph above (click to expand) converts dollar values from past years into their equivalent in today's dollars. For example,Read more »

End of April 2011 Stock Market Update

2011-05-01T15:46:00.045-05:00

April, Quarter-To-Date, Year-To-Date & Recovery-To-Date Review

After taking a month off, the market resumed its another-month-another-52-week-high advance. In fact, for the fourth of the last five months the market set a multi-year high -- this time besting levels last seen in 2008. All this while shrugging off yet another bit of bad news.

Last month, the Japanese earthquake, tsunami and near nuclear meltdown caused the market to "hiccup," and, ultimately cost it a chance to reach a multi-year high for the fourth month in a row. This month, the market received news that S&P, while continuing to rate U.S. debt as AAA, had changed the outlook for our debt from "Stable" to "Negative" -- for the first time in history. Not surprisingly, the market again "hiccupped" -- falling to Read more »

What Will $10,000 be Worth in 10 Years? (CDs, Bonds, Dollars...)

2011-04-27T14:10:00.018-05:00

Here's an easy way to approximate what $10,000, or $100,000, or any other amount will be worth in 10 years. It works for bonds, CDs -- any investment that you expect to compound at a fixed annual rate. You can also use it to ballpark the results for 20, 30, 40 or 50 years. (Note: to estimate returns for 5 years, and multiples of 5 years, see What Will my Bond or CD be Worth in 5 Years?.)

You can even use it for stock market investments if you like. However, because those results are so variable, for stock market results see What Will a $10,000 Stock Market Investment be Worth in 10 Years? instead. Finally, you can use it to estimate the impact of inflation on the value of a dollar. In all cases, you supply the interest/growth rate, and read the multiplier off the chart.

Approximates Results From the Calculator/Spreadsheet

I have previously posted a compound growth rate calculator that will give you more accurate results (that's what I used to prepare the graph below). However, since some people don't have spreadsheet software, I'm providing this graph as a way to approximate the results.

What Will a $10,000 Bond/CD be Worth in 10 Years?

Note: the multipliers (on the vertical axis) range from 1 to 10. The lines are not the same distance apart because I am using a log rather than linear scale (see about log graphs).

The graph above (click to expand) shows that for your investment to double in 10 years (multiplier equals 2) requires a growth rate or interest rate of aboutRead more »

The Decrease in Purchasing Power of the U.S. Dollar Since 1900

2011-04-21T09:30:00.012-05:00

The declining value of the dollar -- it is one of the biggest threats to retirees, and near retirees. This post explores the history of that decline over the past 100 years or so, with graphs going back to 1900.

One of the biggest threats to my own retirement plan is the cumulative impact that future inflation rates will have. Readers whose retirement income is not cost-of-living-adjusted need to evaluate the impact that inflation and the declining value of the dollar will have on their income, and be prepared to supplement their income as necessary.

Decreasing Purchasing Power of the U.S. Dollar: What's $10,000 in 1900 Worth Today?

The graph above (click to expand) shows that if a shopper were magically transported from the year 1900 to 2010, the $100 bill that he had in his wallet in 1900 would now be worth only $3.64! That is, $100 in 2010 would have the purchasing power that $3.64 had in 1900; $10,000 would be worth only $364 today. That's a 96.4% decrease in buying power. Our shopper would consider current dollars virtually worthless. (Note: the calculations in the post were made using the inflation calculator introduced earlier this month.)

The Cumulative Impact of Inflation on Retirement Planning

Since 1900, U.S inflation has averaged 3.1% per year. However, even at that moderate rate, the cumulative effect isRead more »

The Observations Inflation Calculator/Spreadsheet

2011-04-12T14:49:00.023-05:00

This spreadsheet:

calculates the inflation rate between any two years
converts dollar values from one year to another using the CPI (Consumer Price Index)
calculates the change in the purchasing power of a dollar
and more.

What is that in today's dollars?

That's a question my readers sometimes ask -- especially when I'm reporting financial data from long before they were born. Since intuition is often useless when comparing dollar amounts from different eras, I've developed a calculator/spreadsheet to help.

The spreadsheet below can help answer questions such as:

My parents' house cost $50,000 in 1970. What would that be in today's dollars?
My current salary is $40,000/year. What was the equivalent 1985 salary?
What was the inflation rate between 1929 and 1935?
What will $100,000 be worth in 20 years?
What rate of return do I need to grow $10,000 into $30,000 in 10 years?

The Observations Inflation Calculator/Spreadsheet

Note: Click on the screenshot below to expand it. The link to download the spreadsheet is at the end of the post. If you don't have spreadsheet software, see Related Materials at the end of this post.

What Was the Inflation Rate Between 1900 and 2010?

Given the start year (1900 in the example) and ending year (2010):
The line labeled "CPI" (Consumer Price Index) shows :

The CPI was

Navigation Instructions Using the Graphical Navigator

2011-04-03T17:19:00.023-05:00

In my continuing effort to make Observations easier to navigate, I'm trying out a new navigation tool. It looks like this

You can access it by clicking on the image above, or the similar image located in the sidebar on the left.

Note: These views require modern browsers such as Internet Explorer 8+, Firefox 3.5+, Chrome or Safari -- else, will just take you back to the Home page.

Basic Navigation in the Snapshot View

Once you click on the image you will see:

a snapshot from each Observations post, with the first 30 characters of the title -- similar to 12 snapshots in the image above, but larger.
Mouse over any snapshot and you will see a short snippet from the post -- the first sentence or two.
Click on a snapshot and you will be taken to the post. You will get the "short feed" for the post -- the first 200 words or so. (Note: You can navigate through the short feeds by using your <- and -> keys, or clicking on "older" or "newer" at the top of the page. "Back to all Posts" takes you back to the initial view.)
To see the full post, click on the post title, or click on Read More at the end of the short feed.

March 2011 Stock Market Update

2011-04-01T17:55:00.021-05:00

March, Year-To-Date & Recovery-To-Date Review
Note: Click here for April 2011 stock market results

For the first time in months, the stock market did not set a multi-year high. The pullback that started last month amid concerns about unrest in the Middle East, and the resulting increase in oil prices, continued as the disturbances spread and escalated -- even to the point of U.S. (limited) military involvement.

Fukushima-Daiichi Nuclear Plant Incident

In addition, one of the largest earthquakes in recent memory (9.0 on the Richter scale) struck Japan. The earthquake caused not only major damage and scores of aftershocks, but still another tsunami. The combination of the earthquakes and the tsunami caused widespread devastation in Japan; one result was enough damage to the Fukushima nuclear power plant to ultimately cause radiation leakage and raise the possibility of a nuclear meltdown. It also raised the possibility of worldwide supply disruptions, especially in the automotive and electronics industries, in a global economy supplied by "just-in-time" (JIT) inventories.
(Note: for explanations of what happened in the Fukushima-Daiichi nuclear plant incident, see Anatomy of a Nuclear Crisis: A Chronology of Fukushima or this excellent PowerPoint presentation by Areva.)

Not surprisingly, the market "hiccupped" -- falling as low asRead more »

100-Years of Inflation-Adjusted Stock Market History

2011-03-24T12:55:00.099-05:00

When analyzing stock market performance over multiple years, it is important that you consider inflation-adjusted performance. The more years being evaluated, the more important it is to include the impact of inflation. If you don't adjust for inflation, you're comparing apples and bananas. Previously, I've suggested that you at least mentally factor in the impact; in this post, we'll update the 100-year stock market chart to make that "factoring in" explicit.

100-Year Stock Market Graph -- Inflation-Adjusted

In the chart above (click to expand), the red line shows Dow Jones Index year-end closing prices in "then current" dollars -- as they were reported at the time. That is how you normally see them, and how they were displayed in my original 100-year stock market graph. In that original chart, you could see that the Dow is now more than 100 times higher than it was in 1900! But what does that really mean? Does it mean that if some (very) long-lived soul had invested $1 in the stock market in 1900 it would now be worth more than $100? Yes, but that's misleading because you're comparing apples and cumquats; the first amount is Read more »

100 Years of Inflation Rate History

2011-03-15T15:21:00.152-05:00

Inflation can be devastating; while it has been under control for the past 25 years, there is no guarantee that it will remain so. Since this blog emphasizes long-term planning, it is important that we address the issue of inflation, and the impact that the declining purchasing power of the dollar has on our investments. For perspective, as always, let's first look at the past century.

U.S. Inflation Rates since 1900

The above chart shows the yearly rate of inflation as measured by the Consumer Price Index for All Urban Consumers (CPI-U) for the past 100 years. By 2010, prices were more than 27 times higher than in 1900 -- the CPI increased from 7.9 to 216.7. Phrased differently, a dollar buys 27 times less now than a dollar bought in 1900 (see inflation calculator). While inflation has averaged only 3.1% for the complete period, and 3% since 1982, such subdued inflation has clearly not always been the case. The graph shows several periods where inflation rose to 10% or more. Here's a quick summary of inflation's impact on some key areas.

The Impact of Inflation: A Dollar Buys a Lot Less Than it Used To

Inflation increases the Read more »

March 2011 Stock Market Update

2011-03-01T10:08:00.085-06:00

February, Year-To-Date & Recovery-To-Date Review
Note: Click here for April update with March 2011 stock market results

The market continues its remarkable recovery; in February the market again reached a multi-year high. The DJIA (Dow Jones Industrial Average) closed February at 12,226.34, after a late month pullback from its high close of 12,391.25 on February 18. The pullback was sparked by unrest in the Middle East and the resultant run-up in oil prices.

Here's a summary of the extent of the advances after this remarkable 2-year run:

From Prior Month Close of 11,892: The Dow is up 334 points (2.8%)
From December/EOY Close of 11,578: Up 649 points (5.6%)
From Recent Low of 9986 on August 26, 2010: Up 2241 points (22.4%)
From 52-Week Low of 9686 on July 2, 2010: Up 2540 points (26.2%)
From Crash Low

Borrowing Returns from the Future

2011-02-15T15:35:00.001-06:00

This post suggests that the price of extraordinary current stock market performance may be decreased future returns.

Starting P/E Ratio vs. 10-Year Stock Market Returns clearly suggested that high initial P/E ratios have a negative impact on subsequent 10-year returns. This post takes the analysis a step further in an attempt to see what we can learn from the "outliers" -- the historical results that are least consistent with the trend line.

Initial P/E Ratio vs. 10-Year Stock Market Performance Revisited

Each marker in the chart above (click to expand) represents a year between 1901 and 2010. The placement of the marker indicates the Dow's normalized P/E ratio at the end of that year, and the annualized market return over the ensuing 10 years. The green trend line shows that, in general, every time the P/E ratio increased by 5, the annualized 10-year returns decreased by about 3% per year. (For a more complete explanation of the basic chart, see note at end of post and this post.)

In my experience, it is always helpful to look at the exceptions. So, in this version of the chart, I've addedRead more »

The Importance of Avoiding Large Stock Market Losses

2011-02-08T09:50:00.071-06:00

During the recent crash, the stock market fell 54%; since then, it is up over 80% (as of February 1). Why am I still "underwater"? Seems like a reasonable question to ask.

In a recent post, I observed that since the market low of 6547 in March of 2009, the DJIA (Dow Jones Industrial Average) was up over 80%! Yet, it was still more than 15%, and more than 2000 points, below the all-time high of 14,164. How can an 80% gain be less than a 54% loss? Read on....

Gains Needed to Offset Stock Market Losses

The Impact of Large Stock Market Losses

The above chart (click to expand) shows the gain required to offset losses from 0% to 90%. I wanted to go even beyond a 90% loss, but if you want to see what happens beyond that,Read more »

February 2011 Stock Market Update

2011-02-01T11:25:00.083-06:00

January & Recovery-To-Date Review
Note: click here for February data

The market is off to an auspicious start -- which usually bodes well for the year. In January, the market again set not only a new 52-week high, but a multi-year high as well. The DJIA (Dow Jones Industrial Average) closed January at 11,891.93, just below its high for the month of 11,989.83 set on January 27th. That peak appears to be the highest close since June 17, 2008 -- the last time the market closed above 12,000.

The market is going full speed ahead. It spent the end of January knocking at the door of 12,000. For five days in a row, the market peaked above 12,000 only to fall back before the close. Here's how the January close stacks up against some benchmark earlier closes:

From December/EOY Close of 11,578: The Dow is up 314 point (2.7%)
From Recent Low of 9986 on August 26, 2010: Up 1906 points (19.1%)
From 52-Week Low of 9686 on July 2, 2010: Up 2205 points (22.8%)!
From Crash Low

Starting P/E Ratio vs. 10-Year Stock Market Returns

2011-01-20T10:20:00.031-06:00

One of the most dependable predictors of long-term stock market performance is the initial normalized price/earnings (P/E) ratio. This post uses a scatter graph to demonstrate the relationship that has existed between P/E and future returns over the past century.

Note: if you find the graph below difficult to understand, see Initial P/E and 10-Year Rolling Returns first.

Scatter Diagram: Starting P/E Ratio vs. 10-Year Stock Market Returns

The above scatter plot (click on image to expand) shows the historical relationship between the P/E ratio of the stock market at the time of purchase and the typical investor's return over the next 10 years. We've looked at this relationship before; for example, Rolling Returns vs Initial P/E Ratios looked at the relationship of initial P/E and subsequent returns over time -- that is, with time as the horizontal axis. However, this time we're going to take time out of the equation; it's just starting P/E ratio vs. 10-year return -- "man to man" so to speak.

In the chart, each dot represents a hypothetical Read more »

Stock Market Returns through 2009

2011-01-07T12:05:00.006-06:00

In case you haven't noticed, this blog takes a strategic, very-long-term view of just about everything. Most of the analysis and graphs deal with a century of data. In my view, another year or two of data is, in most cases, unnecessary. Generally, the message is the same whether you look at results through 2008, e.g., or through 2010. In those few cases where I think it most important, I will update posts/graphs annually; others will be updated much less frequently.

Since I only update a few key graphs annually, I thought it might prove useful to preserve last year's version of the "Market Returns Since 19xx" post for those readers who feel compelled to put the last dot on every chart. If the information below is not sufficient, the supporting data for all stock market related charts is available in my stock market analysis models on Google Docs.

Results Through 2009

The average yearly total return (i.e., including dividends) for the stock market for periods of 25 years or longer has been around 9-10%. Following are the results for some key periods ending at year-end 2009:

The average total yearly return of the Dow Index from 1900 (end-of-year 1899) through 2009 was approximately 9.4% -- 4.7% price appreciation, plus approx 4.7% in dividends.
The return from 1929 (End-of-year 1928 -- i.e., before the crash) was 8.8% (4.5%, plus 4.3%)
From end-of-year 1932 (i.e., after the crash) - 2009: 11.1% (6.9%, plus 4.2%)
For the last twenty-five calendar years, the annual return was 11.9% (9.0%, plus 2.9%)
For the last 20 years, 9.4% (6.9%, plus 2.5%)
For the last 10 years, 1.3% (-1.0%, plus 2.3%)
For the last 5 years, 1.9% (-0.7%, plus 2.6%)
For 2009 the stock market (Dow/DJIA) total return was 22.0% (18.8% plus 3.2%)
2009 Year-end Dividend Yield was 2.7%
For comparable results for similar periods ending the following year, see
Average Stock Market Returns: 19xx thru 2010.

**For lists of other popular posts, and a complete index of all stock market posts by subject area, see the sidebar on the left.**

In all cases above, the returns are from year-end to year-end. In addition, by "stock market" I mean the DJIA (Dow Jones Industrial Average). The results would be essentially the same for the S&P 500. Note: dividends prior to 1929 have been estimated based upon another stock market index.

This work is licensed under a Creative Commons Attribution 3.0 unported license. Last modified: n/a

Key Posts, Charts Updated Through 2010

2011-01-06T16:52:00.091-06:00

It just occurred to me that readers following this blog via the normal feeds (Google Reader, Newsgator, etc.) are only notified of new posts/comments. For readers not following Observations on Twitter (www.twitter.com/obsandnotes), where I announce not only new posts but key updates, following are a couple of Observations posts that have recently been updated to reflect stock market results through year-end 2010.

Stock Market Annual Performance Chart: The graph now includes 1929 through 2010
Average Stock Market Total Return: Now includes results for key periods from 19xx through 2010 (e.g., 1, 5 & 10 years, since 1900, 1929, etc.)

In addition, as you know, 2010 End-of-Year Stock Market Update includes shorter-term results such as for December, the fourth quarter, and since recent lows -- plus some key stats for the S&P 500 and NASDAQ. It also includes an update to the graph in 100 Years of Stock Market History.

Finally, the Stock Market Analysis Models have been updated to include 2010 closing prices and dividends. I'll have additional updates when earnings become available around the end of this quarter.

For lists of other popular posts and an index of stock market posts, by subject area, see the sidebar to the left. This work is licensed under a Creative Commons Attribution 3.0 unported license. Last modified: n/a

2010 End-of-Year Stock Market Update

2011-01-01T08:15:00.133-06:00

100-Year Stock Market Chart through 2010
Note: For 2011, see 2011 End-of-Year Stock Market Update.

December, 4th Quarter, Year-To-Date & Recovery-To-Date Review

The market ended the year with a bang, tacking on almost as many points in December as it had from January through November. In the process, it set not only a new 52-week high, but a multi-year high. The DJIA (Dow Jones Industrial Average) ended the year at 11,577.51, after peaking at 11,585 on December 29th. That peak was the highest close since August, 28, 2008 when the financial/credit crisis started the market on its stomach-churning crash to 6,547. At year-end, the dividend yield was 2.48%.

Almost no matter how you look at it, we're on a roll. Here's how the December close stacks up against some earlier closes:

From Prior Month Close of 11,007: The Dow is up 571 point (5.2%)!
From 3rd Quarter Close of 10,788: Up 789 points (7.3%)
From 2009 Close of

A More Effective Alternative to New Year's Resolutions

2010-12-26T07:00:00.015-06:00

It's getting close to New Year's Resolution Time. As a result, I'm seeing a significant increase in traffic to my Personal Strategic Planning posts. Personally, I think strategic plans are more effective than New Year's resolutions -- partly because they force to you think through not only what you'd like to accomplish, but also how to go about it. However, my sense is that some people are not yet ready to commit to developing a full-blown personal strategic plan. If you’re one of those people, consider taking just 30 minutes to do a mini- plan instead.

Creating a Mini-Personal Strategic Plan

The process for creating a mini-personal strategic plan is the same as the process for creating a full-blown plan that I described in my earlier posts -- except that it addresses only one of your dreams. In short, you:

Describe your dream (what you want to accomplish)
Identify your strengths,

How Much Will a $10,000 Investment Grow to in 10 Years?

2010-12-20T15:55:00.025-06:00

What will $10,000 invested in the stock market be worth in 10 years? No one knows. However, the graph below shows the frequency of outcomes in the past. That's the best guide we have to the future. (Note: if you want to know what $10,000 will be worth invested at a fixed rate of return (e.g., in Treasury Notes/Bonds or a CD), or NOT invested, see "Related Posts" at the end.)

This post explores the inherent variability of stock market returns, and especially the impact that variability has on retirement planning. Understanding the risks your retirement plan is subject to is the first step in managing those risks.

Results of Investing $10,000 in the Stock Market: What Will $10,000 be Worth in 10 Years?

The graph above (click on image to expand), shows the historical results of investing $10,000 in the stock market for 10 years. The horizontal axis shows possible values of the portfolio at the end of the 10 years assuming dividends have been reinvested. The lines and bars reflect the frequency of various outcomes for 100 10-year periods beginning year-end 1899. (Note: to calculate ending portfolio values for an initial investment of $1,000, divide by 10. To calculate the results for n thousand dollars, multiply the results for $1,000 by n. For example, for a $100,000 investment, multiply the results for $1,000 by 100.) Following are some questions this chart can help you answer.

How Often Will My Ending Portfolio Be Between, For Example, $5,000 and $10,000(!!)?

U.S. 10-Year Treasury Note Real Return History

2010-12-12T10:57:00.020-06:00

This post graphs the history of "real" (i.e., inflation-adjusted) returns for investors in U.S. Treasury 10-Year Notes beginning in 1900.

100 Years of Treasury Note Interest Rate History documents monthly U.S. interest rates over the past century based upon the rates in effect at the "time of issue" -- the "coupon rate." For buy and hold bond investors, that was also the investor's nominal rate of return. However, because of inflation, the investor's real return is almost always less than the coupon rate. For short maturities, the investor's return is very close to that coupon rate -- again, assuming he holds to maturity. However, over a 10-year period, inflation can have a significant impact. In this post, we'll evaluate that impact.

10-Year Treasury Note Real Returns: The Impact of Inflation

The above graph uses Robert Shiller's Irrational Exuberance data to approximate the historical "real" returns of investors in 10-year Treasury Notes (seeRead more »

December 2010 Stock Market Update

2010-12-02T11:30:00.002-06:00

November, Year-To-Date & Recovery-To-Date Review
Note: click here for December/End-of-year data

After advancing more than 1,000 points in the prior two months, the market set a new 52-week high of 11,444 early in the month, then took a breather. The DJIA (Dow Jones Industrial Average) closed November at 11,006.92.

There is both good news and bad news, depending on your perspective. If you like good news, here's how the November close stacks up against some earlier benchmarks:

From 3rd Quarter Close of 10,788: Up 219 points (2.0%)
From 2009 Close of 10,428: Up 579 points (5.6%)
From Recent Low of 9986 on August 26: Up 1021 points (10.2%)
From 52-Week Low of 9686 on

Analyzing Treasury Bond Interest Rate History since 1900

2010-11-30T18:10:00.158-06:00

The chart below of bond interest rate history has negative implications not just for some bonds, but potentially for stocks & housing as well. This post complements 100 Years of Treasury Note Interest Rate History, the previous post which graphed the month-by-month rates.

Together, the two posts make it clear that we are currently experiencing historically low yields. That suggests a future of rising interest rates. Rising rates have negative implications not only for many bond investors, but potentially for the stock market and housing market as well.

Treasury Bond Interest Rate History: Yearly Frequency Histogram

The above histogram/frequency distribution of treasury yields is based on the same data as the chart in the previous post (click on image to expand). From 1953 onward, the source data isRead more »

100 Years of Treasury Bond Interest Rate History (thru 2011)

2010-11-17T16:05:00.221-06:00

Investors expecting bond funds to perform as well in the next 10 years as they have in the last 10 will be disappointed. Bonds can play an important role in investor portfolios, reducing volatility and increasing the predictability of returns. However, the stellar performance of bond funds -- especially longer-term funds -- as yields have declined over the last 30 years will not be repeated anytime soon. Not only that, there is even the risk of negative returns.

U.S Treasury Bond Interest Rate History Since 1900

The graph above (click on image to expand) shows U.S. interest rates beginning in 1900. From 1953 onward, the rates are Read more »

November 2010 Stock Market Update

2010-11-01T03:00:00.065-05:00

October, Year-To-Date & Recovery-To-Date Review
Note: click here for November data

The market is on a tear. The DJIA (Dow Jones Industrial Average) closed the month of October at 11,118.49. Partially in anticipation of additional quantitative easing from the Fed, the market continued the advance from its recent low in August. Here's a summary of the extent of the advances:

From Prior Month Close of 10788: Up 330 (3.1%)
From 2009 Close of 10428: Up 690 points (6.6%)
From Recent Low of 9986 on August 26: Up 1133 points (11.3%)
From 52-Week Low of 9686 on

The Composition of 10 Year Stock Market Returns

2010-10-19T15:00:00.179-05:00

Analysis of the contribution of dividends, earnings growth and valuation to past returns raises some red flags regarding the next 10 years. Near-all-time-low dividends are providing less protection than dividends have historically provided for investors. In addition, after two decades of steadily increasing p/e ratios, the chances of valuation making a negative contribution to returns appear to be increasing.

Components of 10-Year Stock Market Returns

Contribution to 10-Year Stock Market Returns

Above is a graph of 10-year returns of the Read more »

Retirement Planning: Variability of 20-Year Stock Market Returns, in Dollars

2010-10-12T10:00:00.139-05:00

Does your retirement plan assume that you will earn average returns on your investments? If so, your plan may be at risk. This post explains why. It is certainly possible that you will earn average returns. However, that is only one of the possible outcomes -- many of which are significantly worse than average. Unless you have an understanding of the variability of stock market returns, you will likely overestimate the likelihood that your retirement plan will work.

In this post, I am again taking the viewpoint of an investor planning for retirement. We'll assume the same situation we assumed in Don't Plan Retirement Assuming Average Stock Market Returns. That is, we have a 45 year old who wants to retire at age 65. He has received a $100,000 inheritance, and wants to accumulate $670,000 in the 20 years remaining before he retires. It turns out if he receives the average 20-year percentage return in my Dow history database, his ending portfolio will be about $670,000. Do you think if he invests the $100,000 in the stock market at age 45 then all of his retirement planning problems are solved? Think again.

The Growth of $100,000: What Will $100,000 be Worth Invested in the Stock Market for 20 Years?

(Note: if you want to know what $100,000 will be worth invested at a fixed rate of return (e.g., in Treasury Notes/Bonds or a CD), or NOT invested, see footnote.)

The Variability & Distribution of 20-Year Stock Market Results

In Range of Stock Market Returns in Dollars, we looked at the increasing gap between the best and worst outcomes as the holding period went from 10 to 100 years. From the high-low bars in that chart, we saw that Read more »

The Importance of Bond Duration

2010-10-04T05:30:00.021-05:00

Duration is a way to measure interest rate risk; it is a more precise measure than maturity alone.

The Impact of Duration on Sensitivity to Rate Changes

The graph above demonstrates the impact that duration has on the sensitivity of bond prices to interest rate changes. This post explains how duration is calculated and Read more »

October 2010 Stock Market Update

2010-10-01T15:17:00.020-05:00

100 Year Dow Chart with 25-Year Moving Average

Dow 25 Year Moving Average

Above is a very long-term chart of the DJIA (Dow Jones Industrial Average), including the 25-year moving average (click chart to expand); it uses this past month's close for this year's close. It shows that the market rarely falls very far below its 25-year moving average.

September, Year-To-Date & Recovery-To-Date Review
Note: click here for October data

In early March 2009, I posted Dow At 25-Year Moving Average. The Dow continued lower for several more days before bottoming at 6547 on March 9 --
Read more »

Yield to Maturity (YTM) & Interest Rate Risk

2010-09-23T15:01:00.161-05:00

This post introduces YTM, and explains why rising interest rates result in falling bond prices.

Bond Price and YTM/Interest Rates

The above graph summarizes the relationship between the two; the post helps explain why this is so.

Calculating a Bond's Yield to Maturity
In the fundamentals of investment valuation post, we introduced the concept of present value, and arrived at
Read more »

Houston Texans 2010 Kickoff

2010-09-08T17:32:00.127-05:00

Texans' 2009 Accomplishments

The Texans finished the 2009 National Football League season with a 9-7 record, and came within a tiebreaker of making their first trip to the playoffs. Along the way, they accumulated some impressive offensive statistics -- for example, number one in passing, and fourth in total yards (league-wide).

After a horrible 0-3 start with the defense giving up an average of over 200 yards/game rushing, the team was 9-4 over the final 13 games. During that 13-game stretch, the Texans were second in the NFL in rushing defense and fourth in overall defense.

Average Offensive/Defensive Rank & Net Yardage Differential

Over the final 13 games, therefore, you could argue that the Texans were Read more »

September 2010 Stock Market Update

2010-09-01T13:26:00.005-05:00

100 Year Dow Chart with 25-Year Moving Average

Dow 25-Year Moving Average

Above is a very long-term chart of the Dow, including the 25-year moving average (click chart to expand); it uses this past month's close for this year's close. It shows that the market rarely falls very far below its 25-year moving average.

August, Year-To-Date & Recovery-To-Date Review
Note: click here for September data

In early March 2009, I posted Dow At 25-Year Moving Average. The Dow continued lower for several more days before bottoming at 6547 on March 9 --Read more »

Fundamentals of Investment Valuation

2010-08-24T12:08:00.093-05:00

As we saw in Bond Basics, a bond typically represents an obligation by the borrower to pay fixed amounts of interest on fixed dates, and to repay the principal amount when the bond matures. The relative certainty of the amounts and dates is the major advantage of bonds compared to other possible investments. Bond valuation, then, is assigning a value or price to this stream of payments.

Intro to Present Value: What is $105 a Year from Now Worth to You Now?

The key to pricing bonds is the concept of Present Value, or PV. Suppose you can earn 5% interest and you have $100. From the bond basics post we know that interest = principal x rate x time. So, in one year $100 will earn ($100 x 5% x 1 =) $5 in interest.

Therefore, a year from now you can have $105 -- your original $100, plus $5 in interest. It is in that sense that the "present value" of $105 a year from now is said to be $100; $105 a year from now is worth $100 today. Note that the Read more »

August 2010 Stock Market Update

2010-08-01T02:00:00.002-05:00

100 Year Dow Chart with 25-Year Moving Average

Dow 25-Year Moving Average

July, Year-To-Date & Recovery-To-Date Review

Note: click here for August Data

In early March 2009, I posted Dow At 25-Year Moving Average. The Dow continued lower for several more days before bottoming at 6547 on March 9 --Read more »

Bond Basics

2010-07-26T17:09:00.028-05:00

What Is a Bond?

A bond is a loan. When you buy a bond, you are lending money to the bond's issuer. Generally, the loan is for a fixed amount of money, the principal -- or face amount -- for a fixed length of time. At the end of that time, the bond is mature; the borrower pays off the loan by paying off the face amount. Most often, the loan is at a fixed rate of interest, the interest being due on a fixed schedule during the life of the loan (e.g., quarterly or yearly).

Technically, not all fixed income instruments are bonds. However, in this post I am using the term bond loosely to include not just bonds, but other fixed income instruments such as bills, notes and certificates of deposit as well.

Basic Bond Math: Calculating Interest

July 2010 Stock Market Update

2010-07-01T18:57:00.005-05:00

100 Year Dow Chart with 25-Year Moving Average

Dow 25 Year Moving Average

June, Year-To-Date & Recovery-To-Date Review
Note: click here for July Data

In early March 2009, I posted Dow At 25-Year Moving Average. The Dow continued lower for several more days before bottoming at 6547 on March 9 --Read more »

June 2010 Stock Market Update

2010-06-03T12:01:00.037-05:00

100 Year Dow Chart with 25-Year Moving Average

Dow 25-Year Moving Average

Note: For a more up-to-date version of the above chart see 2010 Year-end Stock Market Update.

Above is a very long-term chart of the Dow, including the 25-year moving average (click chart to expand); it uses this past month's close for this year's close. It shows that the market rarely falls very far below its 25-year moving average.

May, Year-To-Date & Recovery-To-Date Review
Click here for July update with June, 2010 stock market results

In early March 2009, I posted Dow At 25-Year Moving Average. The Dow continued lower for several more days before bottoming at 6547 on March 9 -- Read more »

The Best & Worst 35-Year Returns in Stock Market History

2010-05-26T15:35:00.055-05:00

35-Year Rolling Returns

Previously I have published graphs of 5, 10, 20 and 50-year rolling returns. Thirty-five years may seem like a strange choice for an addition to the series. However, I chose 35 years because I thought the results might provide useful benchmarks for those planning for, for example, ages 30-65, 65-100, etc. As always, because we are looking at rolling returns, we will look at not only the best and worst 35-year returns, but at all 35-year returns.

Stock Market Rolling 35-Year Returns Graph

Dow 35-Year Rolling Returns

Above is a chart of the 35-year total return of the DJIA (Dow Jones Industrial Average) beginning Read more »

May 2010 Stock Market Update

2010-05-04T13:14:00.002-05:00

100 Year Dow Chart with 25-Year Moving Average

Dow 25-Year Moving Average

Above is a very long-term chart of the Dow, including the 25-year moving average (click chart to expand); it uses this past month for this year's close. It shows that the market rarely falls very far below its 25-year moving average. When this graph was originally posted, I noted that the one big exception to the rule was the crash that preceeded the Great Depression.

April, Year-To-Date & Recovery-To-Date Review

In early March 2009, I posted Dow At 25-Year Moving Average. The Dow continued lower for several more days before bottoming at 6547 on March 9 -- Read more »

A Retirement Income & Spending Plan

2010-04-30T16:44:00.072-05:00

In the early stages of retirement planning, it makes sense to focus on accumulating sufficient assets to retire. However, when you're actually in retirement you'll find that the key is to have enough income each year to support your spending. This post adds the income calculation to the existing retirement model. (See link at the end of this post.)

Retirement Expense Graph

Retirement Spending Sources

The graph above (click to expand) shows the Read more »

April 2010 Stock Market Update

2010-04-04T13:57:00.005-05:00

100 Year Stock Market (Dow) Chart with 25-Year Moving Average

Dow 25-Year Moving Average

Note: for a more up-to-date version of the above graph, see 2010 Year-End Stock Market Update.

Above is the chart introduced and analyzed in 100 years of stock market (Dow Jones) history -- with the addition of the 25-year moving average (click chart to expand). As before, it begins around 1900; it uses this past month for this year's close. It shows that the market rarely falls very far below its 25-year moving average. When this was originally posted, I noted that the one big exception to the rule was the crash that preceeded the Great Depression. Since February '09, I have been updating this graph approximately once a month.

March, First Quarter/Year-To-Date & Recovery-To-Date Review

In early March 2009, I posted Dow At 25-Year Moving Average. The Dow continued lower for several more days before bottoming at 6547 on March 9 --
Read more »

Dow Price/Dividend Ratio and Dividend Yield History

2010-03-27T18:22:00.089-05:00

This post graphs stock market dividend yields since 1900 and shows that they are at historically low levels. Since the price/dividend ratio is the inverse of dividend yield, valuations based upon p/d ratio are at an all-time high. Historically, expensive markets such as these have produced disappointing long-term returns.

I've argued elsewhere that valuation is important -- it is important not to overpay for investments. A common basis for valuation is earnings; investors decide how expensive the market is based upon how much one has to pay for one dollar of earnings -- the price / earnings ratio. In this blog, I refine that a bit and look at normalized price/earnings ratios. (About Normalized P/E Ratios describes my normalization process.) However, this is not the only way to assess valuation. Another popular valuation metric is the price/dividend ratio -- how much must an investor pay for one dollar of dividends (or, conversely, what is the investor's dividend yield)?

100 Years of Stock Market Price/Dividend Ratio History

Dow Price/Dividend Ratio History

The above chart (click to expand) shows the 100-year history of
Read more »

The 10-Year Stock Market Projection

2010-03-10T14:12:00.037-06:00

This post presents projected stock market returns for the "next" 10 years -- beginning in January 2011. It also shows the actual results for the most recently completed 10-year period.

Projected 10-Year Stock Market Returns

The above graph (click to expand) shows my projected returns for the DJIA (Dow Jones Industrial Average) for 10-year periods beginning end-of-year 2000 through 2010. The dotted red line estimates the return that a hypothetical investor in the stock market would receive over the next ten years if heRead more »

March 2010 Stock Market Update

2010-03-02T16:39:00.012-06:00

100 Year Stock Market (Dow) Chart with 25-Year Moving Average

Above is the chart introduced and analyzed in 100 years of stock market (Dow Jones) history -- with the addition ofRead more »

Houston Rockets at All-Star Break

2010-02-19T16:55:00.105-06:00

The all-star break is a good time to review the Rockets' statistics. Early in the season would have been too early as the team was still in transition -- trying to redefine itself in the absence of both Yao Ming and Tracy McGrady. When I look at basketball stats, I prefer to analyze them on a per-minute, or per-40-minutes, basis. The three traditional stats -- points, rebounds and assists -- are presented on that basis in the table below for the Rockets' key, "rotation," players. (click to enlarge the table)

Houston Rockets 2009-2010 Production per 40 Minutes Played

Houston Rockets Per Minute Statistics

Carl Landry Tops in Production
Interestingly, the number one and two scorers, Read more »

Earnings & Dividends Determine Long-Term Stock Market Returns

2010-02-10T12:53:00.022-06:00

In the long term, the contribution of earnings growth and dividends to total return dominates the contribution made by changes in p/e ratio. We saw in an earlier post that changes in the price/earnings (p/e) ratio had a disproportionate impact on yearly stock market returns. In this post, we will see that over time earnings growth and dividends win out.

The Contribution of Earnings Growth and Dividends to 50-Year Stock Market (Dow) Total Returns

Contribution to 50-Year Stock Market Returns

The stacked bar chart above (click to expand) shows the market's annualized total return for 50-year periods beginning in 1920; the segments of the bar show Read more »

How the Stock Market Projection Model Works

2010-02-01T14:44:00.019-06:00

Is it possible to forecast the stock market return for the next 10 years? If so, how do you do it? In Projecting Stock Market Returns we saw the results of a simple forecasting model that seemed to produce promising results. Below is the resulting graph introduced and discussed in that post (click to expand). In this post, I'll describe how the model estimates future returns.

Projecting 10-Year Stock Market (Dow) Returns

Stock Market (DJIA) Forecast Methodology

We have consistently seen evidence that
Read more »

Investing: Subject Index

2010-01-30T23:05:00.170-06:00

TABLE OF CONTENTS

BONDS & BASICS

STOCK MARKET HISTORY/ANALYSIS

FORECASTS

BONDS & BASICS

Bonds/CDs

100 Years of Treasury Bond Interest Rate History: line graph
Treasury Bond Interest Rate History Since 1900: likelihood ofRead more »

Projecting Stock Market Returns

2010-01-26T10:42:00.021-06:00

What if We Could Predict Future Stock Market Returns?

Imagine that we could forecast whether our returns were going to be high, or low, before we invested. Imagine that we had an early warning system that warned us about upcoming bear markets or stock market crashes, and gave us a gentle heads-up when a bull market was imminent. This post is a step in that direction.

One important reason for doing analysis is to get insights that help us plan better. In the best cases, analysis results in an understanding so deep that you can predict the future -- or at least come very close under certain conditions. The obvious question is, can we use the results of the stock market analysis in the previous posts to help us make useful forecasts and plan our investments better? The graph below (click to expand) argues that we can.

Projecting 10-Year Stock Market (Dow) Returns

In the graph above, each point on the solid blue line representsRead more »

Retirement Planning: The Distribution/Variability of 10-Year Returns

2010-01-11T18:35:00.030-06:00

Another Look at the Risks of Planning Retirement Based Upon Average Stock Market Returns

In a recent post we reviewed the range/variability of stock market results over 20-year periods, and the likelihood market returns would fall above or below specific values. For example, how often have returns fallen below 6%? In this post, we'll do the same with 10-year returns.

Note: If you find the chart below difficult to digest, see the presentation in this post first

Historical Results of Investing in the Stock Market for 10 Years

Retirement Savings: Distribution/Variability of 10-Year Returns

The graph above (click to expand), illustrates the Read more »

Graph Graveyard

2010-01-08T15:22:00.009-06:00

I plan to update some of my graphs annually. At least for now, I'll keep old versions here -- otherwise I'm concerned I will have a bunch of inbound links from elsewhere on the internet that don't have anywhere to go.
Read more »

A Career Planning Approach

2009-12-28T12:47:00.018-06:00

An Approach to Career Planning

Developing a career plan can be a good way to get comfortable with the personal strategic planning process. For one thing, many people already have a clear picture of their "dream" job (the job they would like to have 5-10 years from now) -- so, the first step in the planning process has already been completed. For another, many people will find that some very useful work has already been done for them!

The approach presented here builds upon the process summarized in this overview of personal strategic planning. The primary steps in the process are covered in more detail in:

Discovering Your Vision (in this case, identifying your "dream" job),
Identifying Your SWOTs (identifying your strengths, weaknesses, opportunities & threats), and
Creating Your Personal Strategic Plan (developing goals & strategies to land your dream job).

If you are not familiar with this process, I suggest you review the above posts before developing your career plan.

What are the Requirements? A Useful Intermediate Step

Here's a useful step not included in the basic personal strategic planning process. After you have decided on your dream job, but before you start brainstorming your SWOTs, take the time toRead more »

Don't Plan Retirement Assuming Average Stock Market Returns

2009-12-15T20:53:00.040-06:00

Planning Your Retirement Assuming Average Stock Market Returns is Risky

In a recent post I warned that developing your retirement plan based solely upon the advertised average stock market returns may be hazardous to your financial health. When using a traditional retirement planning calculator, I consider not only the average but also the range of past outcomes, and the distribution/variability of returns between the best and worst outcomes.

Note: If you find the chart below difficult to digest, see the presentation in this post first.

Historical Results of Investing in the Stock Market for 20 Years

Retirement Savings: Distribution of 20-Year Returns

In the chart above (click on it to expand), we revisit the situation introduced in the previous post -- you receive a $100,000 inheritance at age 45 and plan to retire at age 65. (Note: to calculate results of a $10,000 inheritance, divide by 10.) The point of the chart is to give you a better feel for your potential results based upon the historical results in my database of DJIA (Dow Jones Industrial Average) stock market returns over the past 100 years or so. The interpretation of the "lines" is as follows:Read more »

Implications of Stock Market Dollar Returns on Retirement Planning

2009-12-02T18:06:00.012-06:00

Counting on Average Market Returns May be Hazardous to Your Health

Does your retirement plan assume you will earn average returns on your stock market investments? Are you assuming that because over the long run market returns don't seem to vary much from the average you are safe counting on average returns? If you assume average returns, you are going to be disappointed much of the time -- possibly dangerously disappointed. The average is a good place to start your analysis. However, in this post I hope to convince you that it's not a good place to stop.

In a post in May, we saw that for a theoretical buy and hold investor, the longer the holding period the closer the annual return converged on the long-term average stock market return of around 10% per year. However, in a recent post we saw that while the annualized percentage returns converge with time, stock market dollar returns diverge with time. In this post we'll take a first look at the impact this has on retirement planning.

Retirement Savings Assuming "Average" Returns

Planned Retirement Savings Assuming Average Returns

In the above graph (click to expand), we assume that you are a 45 year-old planning to retire at age 65, but somehow you haven't gotten around to saving anything yet. You've played around with a handy dandy simple retirement planner such as the retirement spreadsheet I introduced in October, and determined that "your number" is $673,000. That is, given your expected pension and social security income, on your retirement date you will need a $673,000 investment portfolio to supplement your guaranteed income. Further, assumeRead more »

Range of Stock Market Returns in Dollars: 10-100 Years

2009-11-14T13:07:00.033-06:00

A Common Retirement Planning Misunderstanding

Do you believe the longer you invest in the stock market the less risky it is? If so, your retirement plan may be riskier than you realize.

Graphs showing the range of returns over multi-year periods for the stock market as a whole usually look like an arrowhead (like the graph in this post). These graphs are easily misinterpreted. The difference between the best and worst rates of return gets smaller as the number of years increases; readers often assume that the difference between the best and worst outcomes as measured in dollars is also getting smaller. This is NOT the case -- as is clear from the graph below (click to expand).

Range of Returns for the Dow Jones Index (in Dollars, not Percentages)

Range of Stock Market Returns in Dollars

Viewed in Dollars, Time INCREASES Variability

The graph above is based upon exactly the same data as the graph in the earlier post, and shows the results for the same theoretical investor, starting with an initial investment of $10,000. However, instead of showing the maximum, average and minimum annual percentage return for each holding period, it shows the maximum, average and minimum dollar value of the portfolios at the end of the holding periods. No oneRead more »

Range of Stock Market Returns in Dollars: 1-10 Years

2009-11-07T11:01:00.021-06:00

Many investors think of stock market returns in terms of percentages -- e.g., Mutual Fund ABC returned 10.2%/year over the last 10 years. However, in my experience it is often useful to approach topics from multiple points of view. In this post, we'll look at historical stock market returns in terms of dollars; it's an especially important perspective when doing retirement planning.

Range of Stock Market Percentage Returns

In May, I posted a graph showing the historical range of DJIA (Dow Jones Industrial Average) returns for a variety of holding periods. That graph showed the results for a theoretical investor who bought and held the Dow for holding periods ranging from one to one hundred years, reinvesting dividends for the whole time. It seemed to show that the worst case got better with each passing year, and that historically the more years the investor held onto his investment the less likely he was to lose money.

Graphs like that one are often used to show investors that, while the stock market is very risky in the short term, the long-term investor faces much less risk. And that's true -- in a sense. It's especially true if the risk you are most concerned about is the risk of losing money (measured at the end of the holding period). Let's look again at exactly the same data, but from a different point of view.

Best and Worst Stock Market DOLLAR Returns for 1-10 Years

Range of Stock Market Returns in Dollars

The graph above shows the results for the same theoretical investor, starting with an initial investment of $10,000. However, instead of showing the maximum, average and minimum annual return for each holding period, it shows the maximum, average and minimum value of the portfolios at the end of the holding periods. It confirms some things we already knew from the earlier graph (you may find it helpful to look atRead more »

A Retirement Planning Calculator / Spreadsheet

2009-10-27T12:50:00.043-05:00

Putting it All Together

Retirement planning can be thought of as consisting of two phases:

The accumulation phase -- saving for retirement
The distribution phase -- living in retirement

In the previous two posts in this series, we looked first at establishing a target for the savings needed to cover expenses during the retirement years, and then at creating a savings plan to reach that target. In this post, we'll add some enhancements to our retirement planning Excel spreadsheet in order to create a consolidated accumulation and distribution plan -- we'll put it all together. This, in turn, will give us a foundation to do some additional analysis in future posts.

Note: To get a quicker, ballpark estimate of how much you'll need to save, see my Simple Retirement Savings Calculator/Spreadsheet.)

A Consolidated Retirement Accumulation & Distribution Plan

Consolidated Retirement Saviings Accumulation & Distribution Plan

The graph above shows a retirement plan for a 35 year old, Alex, who hopes to retire at age 65 and live to age 90 (click on graph to expand it. See the end of the post for a link to the spreadsheet). Alex has no savings yet, but is planning to save 13 percent of salary from now on. Alex plans to put 3% of pay into taxable accounts and split the remaining 10% equally betweenRead more »

Disclaimer

2009-10-25T08:29:00.005-05:00

Just so there is no misunderstanding.... My intent is not to give financial or legal advice to anyone; that would require detailed information about your specific situation. The information, tools and analysis provided on this site were initially developed for my own personal use. I hope it's obvious that I cannot guarantee their accuracy or applicability to your individual circumstances. I can assure you that I have found this material useful for me; I hope you will find it useful as well in doing your own analysis.

This work is licensed under a Creative Commons Attribution 3.0 unported license.

What Percent of Your Salary Should You Save For Retirement?

2009-10-17T17:27:00.024-05:00

"What percent of my salary should I save?" is a frequently asked question -- especially early in one's career. People often ask the question implicitly assuming there is a standard, magic percentage of your pay that works for everyone. I think the most honest answer is "it depends." In this post, we'll add some additional capabilities to my retirement calculator so that you can understand what the answer depends on and use the calculator to determine a percentage that works for you. (The download link is at the end of the post.)

Note: If you're looking for the quicker, ballpark estimate of how much you'll need to save, see my Simple Retirement Savings Calculator/Spreadsheet.)

Pat's Retirement Savings Plan

In How Much Money Will You Need To Retire?, we looked at a hypothetical 25 year old, Pat, who wants to retire at age 65 and have $45,000/year in today's dollars for after-tax living expenses (not income) during a 20 year retirement. The retirement calculator introduced in that post estimated thatRead more »

How Much Money Will You Need To Retire?

2009-10-01T09:58:00.029-05:00

How much in savings will you need to retire? A lot -- even many of you who are among the vanishing breed of employees who have traditional defined benefit pension plans. In this post I will introduce a spreadsheet to help you estimate the amount you need to save. I'll also provide a simple rule of thumb for those who prefer a shortcut.

Retirement Savings Needed vs Life Expectancy

This series of posts will not only help you estimate how much you will need to save, and help you develop a plan to save that much, it will also help you understand the whys. Understanding the issues, and the assumptions that retirement planning software packages typically make will, I hope, decrease the chances that you will misinterpret or misuse their results; this, in turn, will increase the chances of your living the retirement of your dreams.

How Much Will You Need in Retirement Savings?

For many people, the biggest savings challenge they will face isRead more »

What's Wrong With the Texans Defense?

2009-09-25T13:12:00.008-05:00

A critical Texans deficiency last year was defense on first down; the Texans were last in the National Football League (NFL). An important reason why I expect a better record this year is that I expect better performance on first down this year. Believe it or not, so far we're getting it; first down is not the problem.

IMHO, the first (and second) down defense is considerably improved. We're creating significantly more 3rd and longs than previous years. However, Sanchez killed us on 3rd down in week one. And, while the 3rd down efficiency was better against the Titans, two of the back-breaker plays were on 3rd and long.

So, the defense is indeed creating the 3rd and longs that have been missing for so long -- but not capitalizing on them. Why is that? Third and long means Read more »

Houston Texans 2009 Kickoff

2009-09-12T12:35:00.016-05:00

I'm ready for some football. This year, I'm comfortable including the words "Texans" and "playoffs" in the same sentence -- but not quite in the way I had hoped.

Houston Texans Deficiencies

The Texans ended last season with three obvious deficiencies:

Red zone offense: The Texans ranked third in the National Football League in total offense in 2009 and yet were only 17th in scoring. One of the best offenses in the NFL consistently bogged down in the red zone.
Turnover ratio: A season that began with reducing turnovers being a point of emphasis ended with the team giving up 10 more turnovers than it caused -- not exactly what coach Kubiak had in mind, and not playoff level performance.
Defense: The Texans were 22nd overall, a below average performance that must be improved if they are to become a playoff team.

The team's success in 2009 will hinge on how well they have addressed those deficiencies.

Texans Offensive Improvements

The improvements on offense will come from Read more »

Retirement Planning: Start to Invest When You're Young

2009-08-28T19:04:00.030-05:00

Is it really important that you start to plan for your retirement early in your career? Does it really make that much difference? Starting a saving and investing program when you're young is likely more important than you think. Take a look at the charts below.

Starting to Save & Invest for Retirement at Age 25 vs. 35 vs. 45

The solid blue line above shows the results for a hypothetical investor who begins saving and investing $3,600/year at age 25. If that investor earns 8% per year, at age 65 he will have about $1 million (that's actually why I picked $3600). Readers will not be surprised to see that the hypothetical investor who starts investing at age 25 has more money at age 65 than the investors who start at age 35 and 45. However, many readers will be surprised once they fully Read more »

Are You Having Trouble Downloading the Spreadsheets?

2009-08-24T18:57:00.017-05:00

This blog rarely gives advice, partly because I don't know the particulars of your specific situations. More often, I will share data and/or analytical tools with readers in order to help them make their own decisions, based upon their specific circumstances. Sharing my spreadsheets is an important part of this process. However, apparently some readers are having difficulties accessing the spreadsheets.

This post will provide a central forum where I address problems that I am informed of. If you are having a problem, PLEASE let me know; otherwise I probably won't fix it. However, it is best to leave your comment on the post where you encountered the problem. Otherwise, I won't know which spreadsheet is causing the problem.

Can't Download Spreadsheet

You can never download my spreadsheets by clicking on the image in the post; that's just a picture. Clicking on the picture will normally give you a larger, clearer version of the picture, but not download the associated spreadsheet. To download the spreadsheet, look for a link -- generally near the end of the post.

Google may deny access to Google Documents/Spreadsheets if you do not have a Google account. If you don't have one, go here (they're free). Let me know if you're having problems.

In some browsers (e.g., Internet Explorer) you'll see a dialog box asking you to either OPEN the spreadsheet, or SAVE it to your PC. In some other browsers (e.g., some versions of Chrome) you may need to click on a link that appears at the bottom of your browser screen -- or at the bottom of a new blank screen.

Note: In all cases you must have a spreadsheet program on your computer -- either Excel, or a program that can read Excel files.

Downloading From Google Documents/Spreadsheets

Some of the links take you to Google Documents/Spreadsheets. If you end up there, while in Google spreadsheets click on File - Download.

Can't Enter Data

To enter data you must actually download the associated spreadsheet; clicking on the screenshot will expand it, but not allow you to enter data. The link to download the spreadsheet and enter data is usually at the end of the post.

Multiple Worksheets

Many of the models are Excel workbooks containing multiple worksheets. To navigate between worksheets,Read more »

A Borderline Home Buyer as Benchmark: Can I Afford This House?

2009-07-31T17:16:00.030-05:00

Home Affordability "Benchmark"

This post discusses the "Borderline Buyer" column of the Planning to Buy a House Spreadsheet. The previous post covered the Proposed Purchase column. As you might guess, the Borderline Buyer column develops a profile of a borderline buyer for the property you are proposing to purchase.

My borderline buyer is pushing the typical debt load limits. As a result he should not thought of as a benchmark in the sense of being a buyer to be emulated. He is just barely able to afford this house! In my opinion, a buyer's objective should not be to get as close as he possibly can to the lender's limits; the closer he is to these limits, the closer he is to the limits of his ability to manage his debt (and the more he is at risk of ultimately losing his home). Still, this is a great buyer to compare yourself against.

Note: Click on the above screenshot to expand it. The link to download the spreadsheet is at the end of the post.

The Borderline Buyer Column

Above is a portion of the Excel spreadsheet (click to enlarge. The link to download is at the end of this post). The benchmark buyer column representsRead more »

Planning to Buy a House Spreadsheet

2009-07-19T19:37:00.065-05:00

Home Affordability Calculator: How Much House Can You Afford?

This spreadsheet can help you evaluate a proposed home purchasing plan for reasonability, and answer typical home purchase related questions such as, given your salary/income:

What price can I afford to pay for a house?
What size home mortgage loan can I qualify for? How much will I be able to borrow?
When will I be able to afford to buy?

Note: Click on the screenshot below to expand it. The link to download the spreadsheet is at the end of the post.

The spreadsheet will also help you overcome some of the issues raised in The Disadvantages of Buying a House and Planning to Buy a House by helping you to budget adequately for typical expenses and at the same time keep those expenses within standard established income & debt-load guidelines.

Buying a House Spreadsheet: Primary Inputs

The primary inputs (blue cells enclosed in black borders) to the model are:Read more »

Notice

2009-07-02T15:50:00.005-05:00

Until I finish recovering from surgery I will be posting less frequently than normal. I hope to be back to my normal "schedule" by the end of the month.

Finalizing & Implementing Your Personal Strategic Plan

2009-06-27T16:01:00.043-05:00

Following are some additional thoughts relevant to developing and implementing your personal strategic plan. For the most part, these are optional enhancements to the basic process as it was presented in

Developing Your Plan - General

Create SMART Goals and Strategies

Make your goals and strategies SMART: Stretching (challenging), Measurable (so that you know whether or not they have been achieved), Achievable, Relevant, and Time-bound (i.e., set target dates/deadlines). (Note: There are many variations of what SMART means, but all are similar. See, e.g., Wikipedia).

Additional Thoughts re Creating Personal Goals and Strategies

If you're having trouble organizing your SWOTs, here are someRead more »

Stock Market Normalized Earnings and Returns

2009-06-18T17:05:00.007-05:00

Cyclical Stock Market Returns

In the most recent stock market post, we looked at 10 Year Rolling Returns vs. the normalized P/E Ratio in an attempt to discover what was causing the very regular stock market cycles that we first observed in the 10 Year Rolling Returns post. The graph provided clear visual evidence of both the the cyclicality of (normalized) P/E ratios and the impact of those ratios on future returns. More specifically, it was clear that, as a general rule, investors who bought when the normalized P/E ratio was high experienced low 10-year returns; on the other hand, investors who bought when the normalized P/E ratio was low experienced high 10-year returns. (If you are not familiar with normalized earnings and P/E Ratios, see this post for a more detailed discussion.)

Stock Market Earnings

I think over the long run earnings are a more important determinant of stock market performance than price/earnings ratios. Therefore, it seemed reasonable to ask to what extent, if any, earnings contributed to the cyclicality that we observed in returns.

Over the long run, earnings can continue to go up indefinitely -- the P/E ratio cannot. The second chart in the Dow P/E Ratios since 1929 post shows that while the normalized P/E ratio has gone up and down, normalized earnings appear to have gone steadily upward. It turns out, that chart is somewhat misleading -- to me anyway. The increase in normalized earnings is not as steady as it appears in that chart.

Dow 10-Year Normalized Earnings Growth Rate

In the above chart (click to enlarge) the dotted line shows the same normalized earnings (NE) as in the P/E Ratios since 1929 post, again using a log scale. (For a discussion of log scale, see this post.) In addition, I've added Read more »

About P/E, Normalized Earnings and Normalized P/E Ratios

2009-06-09T13:15:00.018-05:00

Valuation

How do you determine whether something is cheap or expensive? Often, valuation is expressed in terms of price per unit. For bananas, you calculate the price/pound; for homes, price/square foot; and so forth.

When you own a share of stock, you own a portion of a company. As a result, you own a portion of its earnings. Therefore, stock market valuation is often measured by the price the market is willing to pay for a dollar of yearly earnings -- that is, by the price/earnings (P/E) ratio. To calculate the ratio, you divide the price of a company's stock by that company's earnings (per share) for one year. If the result is, say, 17, your broker might tell you Company X has a P/E of 17, or Company X is selling at 17 times earnings. The P/E is also referred to as the earnings multiple.

Similarly, since you also own a portion of the company's dividends, valuation is sometimes measured by the price/dividend ratio -- i.e., how much the market is willing to pay for each dollar of yearly dividends (per share). Other methods of valuation include price/cash flow and price/book value (the accounting, or "book," value of the company's assets).

Normalized Earnings (NE)

When evaluating the earning power of a business as of some point in time, what earnings should you Read more »

The 10 Best NBA Players Ever

2009-06-03T17:30:00.031-05:00

Who Were the Greatest NBA Players of All-Time?

In my last basketball post, I looked at "Total" Production per-Minute -- a rough measure that I use to evaluate the performance of the players on "my" team, the Houston Rockets. At the time, the Rockets were battling the Lakers for the right to go to the NBA (National Basketball Association) Western Conference Finals, so I threw Kobe Bryant into the mix to see how our best player, Yao Ming, compared to the Lakers' best player. Kobe won.

But, that got me thinking.... Using this measure, who were the best NBA players ever? Who were the best of the best, the greatest of the many great NBA players I have seen over the past more-than-half-century? The table below shows you how it came out (click to expand).

Best NBA Players Ever?

Best NBA Players of All-Time?

First, let me remind you, who's "best" depends on your evaluation criteria. These are not the only possible criteria. What this methodology has going for it is:Read more »

Creating A Personal Strategic Plan

2009-05-26T11:40:00.052-05:00

Creating Your Personal Strategic Plan

This post will help you create the document that could change your life -- your first personal strategic plan! Based on earlier posts, you've already described your dream/ideal future; your SWOTs have documented the obstacles that must be overcome to realize that dream, and the skills & resources you possess to overcome those obstacles. Now it's time to analyze your SWOTs and create a roadmap to the future you've dreamed of.

Note: This is one of a series of posts on personal strategic planning. If you are new to strategic planning, see a sample personal strategic plan

Your completed plan will be an indented outline of dreams, goals and strategies. It will contain all of the critical goals that you need to achieve in order to realize your dreams. Not only that, it will remind you of the steps you need to take in order to achieve each goal -- what you need to start and stop doing, and by when. Finally, it will make clear why you need to take each step by linking each step to a goal and a dream. For example, you need to track all your expenditures for one month (strategy), so that you can develop an annual budget that saves 10% of your salary (goal), so that you can have a sound long-term strategy for managing your financial affairs and retiring with $1,000,000 (dream). (See A Personal Strategic Plan Example for additional examples.)

SWOT Analysis

To get started, organize your SWOTs into groups, starting with one Read more »

Stock Market Rolling Returns vs. Price/Earnings (P/E) Ratio Graphs

2009-05-20T09:07:00.042-05:00

In this post, we are going to continue our investigation of stock market rolling returns. In previous posts, we have looked at the range of stock market returns over periods of from one to 100 years, and drilled down to look at "rolling" returns from two to 50 years. The rolling returns series was fascinating, to me anyway, because I was surprised by the cyclicality -- especially by the regularity of the 10-year rolling returns cyclicality. In addition, I expected the cyclicality to wash out by the time we got to 50-year rolling returns. It did not.

The obvious question is what is causing the cyclicality?

Stock Market 10-Year Rolling Returns vs. Price-to-Earnings (P/E) Ratio Graph

Dow Rolling 10-Year Returns vs. P/E

Above is a graph (click to expand) of the 10-year total return of the DJIA (Dow Jones Industrial Average) compared to the normalized P/E ratio. If there is a chart that I find even more fascinating than the 10-year rolling returns chart, it's this one. Each point on the rolling return graph representsRead more »

A Personal Strategic Plan Example

2009-05-14T18:16:00.084-05:00

Personal Strategic Planning Can Change Your Life

Not many years ago, a friend confided that she was less than thrilled with her life -- especially with her career. This came as a surprise to me since she was a young, up-and-coming professional earning a good salary. However, she confessed, her real dream was to become a doctor. This is probably not a career her college science professors would have recommended; she had not done well in their classes.

Three years later, after completing the required pre-med science courses (going to school at night), she was in med school. Four years after that, she was a doctor. She is now living her dream.

Why was she successful? She had a compelling dream; she worked hard; and, she had a personal strategic plan.

Example of Personal 5-Year Strategic Plan (high-level view)

Sample Personal Strategic Plan

In this post, I will sketch out the beginnings of a personal strategic plan to give you at least a general idea of what your completed plan might look like. That will make it easier for you to understand the purpose of each step in the planning process. The partially completed strategic life plan above is for an individual; however, the process works equally well for a family.

The above diagram was produced using SmartDraw (click on diagram to expand it); it supplements the discussion below. Here's the same plan using a more traditional format. (again, click to expand.)

Personal Strategic Planning Starts with Your Dreams

Let's assume that as you dream about the future you'd like to create 5 years from now, you decide thatRead more »

Observations

"Too Big to Fail" Assures Bigness - and Failure Guest post by Tom Evslin

The Houston Texans Strategy is Paying Off

The Vision: Sustainable Excellence

Stock Market Total Returns through 2010

Stock Market Total Return Results Through 2010

2011 End-of-Year Stock Market Update

Monthly Stock Market Closes for 2011

December, 4th Quarter, Year-To-Date & Recovery-To-Date Review

My SIMPLE Retirement Saving Calculator /Spreadsheet

The Observations Back-of-the-Envelope Retirement Savings Calculator

How Much Money Will You Need to Retire?

Mission, Vision & Values: Building a Stronger Foundation for Your Personal Strategic Plan

Building a Stronger Foundation for Your Personal/Family Strategic Plan

November 2011 Stock Market Update

Volatility Continues

Fire Kubiak!

Gary Kubiak is Too Soft!

If You Had Invested $1 in the Stock Market in 19xx (graph)

What If You Had Invested $1 in 19xx?

October 2011 Stock Market Update

Turnaround

Comparing Housing vs. Stock Market Growth

U.S. Housing vs. Stock Market Price Growth

Real World Expenses Reduce Published Market Returns

Market or Index Returns

September 2011 Stock Market Update

All-Time Low Treasury Interest Rates

A Look at the Houston Texans' Draft Record

Houston Texans Draft Picks: 2006 through 2008

August 2011 Stock Market Update

S&P Downgrades U.S. Debt

Houston Texans Right to Let Vonta Leach Go

Leach's Impact Not as Great as Fans Think

How Much Would $1 Invested in the Stock Market in 19xx be Worth Now?

The Observations Stock Market (Dow Index) Compound Growth Calculator/Spreadsheet

$1 Invested in the Stock Market (Dow) in 1929 is Worth How Much Today?

The 2010 10-Year Stock Market Projection

Expected Return for the Next 10 Years

Projected 10-Year Stock Market Returns

Projected Dow 10-Year Annual Returns

The Best & Worst Years in Stock Market History

The Best Dow Yearly Returns since 1900

July 2011 Stock Market Update

Sovereign Debt Concerns

100 Years of Inflation-Adjusted Housing Price History

Real, Inflation-Adjusted, Housing Prices Since 1900

What Will My Bond or CD be Worth in 5 Years?

Approximates Results from the Calculator/Spreadsheet

What Will my Bond or CD be Worth in 5 Years?

June 2011 Stock Market Update

June, 2nd Quarter, Year-To-Date & Recovery-To-Date Review

Why Investing in the Stock Market for Less Than 5 Years is Risky

What will a $20,000 Stock Market Investment be Worth in 5 Years?

100-Year Housing Price Index History

100-Year Housing Price Index Graph

May 2011 Stock Market Update

May, Quarter-To-Date, Year-To-Date & Recovery-To-Date Review

The Impact of Starting P/E Ratio on 20-Year Stock Market Returns

Scatter Diagram: Starting P/E Ratio vs. 20-Year Stock Market Returns

What Would $10,000 in 19xx be Equivalent to Today?

What Was a Dollar in 19xx Worth vs. Today? e.g., What Was $10,000 in 1900 Equivalent to in2011?

End of April 2011 Stock Market Update

April, Quarter-To-Date, Year-To-Date & Recovery-To-Date Review

What Will $10,000 be Worth in 10 Years? (CDs, Bonds, Dollars...)

Approximates Results From the Calculator/Spreadsheet

What Will a $10,000 Bond/CD be Worth in 10 Years?

The Decrease in Purchasing Power of the U.S. Dollar Since 1900

Decreasing Purchasing Power of the U.S. Dollar: What's $10,000 in 1900 Worth Today?

The Cumulative Impact of Inflation on Retirement Planning

The Observations Inflation Calculator/Spreadsheet

What is that in today's dollars?

The Observations Inflation Calculator/Spreadsheet

What Was the Inflation Rate Between 1900 and 2010?

Navigation Instructions Using the Graphical Navigator

Basic Navigation in the Snapshot View

March 2011 Stock Market Update

March, Year-To-Date & Recovery-To-Date ReviewNote: Click here for April 2011 stock market results

Fukushima-Daiichi Nuclear Plant Incident

100-Years of Inflation-Adjusted Stock Market History

March, Year-To-Date & Recovery-To-Date Review
Note: Click here for April 2011 stock market results

February, Year-To-Date & Recovery-To-Date Review
Note: Click here for April update with March 2011 stock market results

January & Recovery-To-Date Review
Note: click here for February data

**For lists of other popular posts, and a complete index of all stock market posts by subject area, see the sidebar on the left.**

November, Year-To-Date & Recovery-To-Date Review
Note: click here for December/End-of-year data

October, Year-To-Date & Recovery-To-Date Review
Note: click here for November data

September, Year-To-Date & Recovery-To-Date Review
Note: click here for October data

August, Year-To-Date & Recovery-To-Date Review
Note: click here for September data

June, Year-To-Date & Recovery-To-Date Review
Note: click here for July Data