I’ve posted a Guest Blog Entry at the Barbara Friedberg Personal Finance blog titled Predicting Stock Returns for Fun and Profit.
Juicy Excerpt: My guess is that most people don’t bother trying to make long-term predictions because they assume it would take a lot of work to pull them off. Nothing could be farther from the truth. Every factor that affects the price of a broad stock index is reflected in the price of that index. So you don’t need to worry about inflation or productivity or consumer confidence or anything else. There’s only one exception to that general rule. Overvaluation and undervaluation are never reflected in the nominal (not adjusted for inflation) market price because these two factors are by definition indicative of mispricings. Look at the nominal price of an index, make an adjustment for the overvaluation or undervaluation that will be disappearing over the course of the next 10 years (it is an “Iron Law” of stock investing that prices are always in the process of reverting to the mean, according to Vanguard Founder John Bogle) and you have a ballpark number for where stock prices will stand in 10 years.
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