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Bubble or Not, U.S. Stocks Are Priced to Deliver Dismal Long-Term Returns

cyniconomics.com / by ffwiley / January 11, 2014

If you’ve ever sought advice from a financial advisor, you probably asked the question: “How much of my portfolio should I hold in stocks?”

Somewhere in the answer, you were probably offered long-term return estimates.

These estimates probably placed stock returns at approximately inflation plus 5 or 6%.

But what if standard estimates are too optimistic, as they were in the 1990s when advisors typically predicted double-digit long-term returns? Shouldn’t this change your investment allocations?

We’ll argue that the usual estimates are overoptimistic, and that investment allocations should be based on more realistic expectations.

Worse still, the discrepancy has reached enormous proportions. By projecting earnings forward over the next decade, we’ll show that stocks are now priced to barely outpace inflation at best.

Here’s a chart that demonstrates our approach:

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