INFINITY Information Bureau News: Value investment professionals analyze! What kind of returns can you expect in the current market? Learn smart investment strategies! #InvestmentStrategy #StockMarket #ExpectedReturns
Video explanation
What is the "expected return" of the stock market? A simple explanation for beginners!
Hello, I'm John! There are a lot of difficult terms when it comes to money and health, and it can be hard to know where to start. In this blog, I'll explain even the most complicated topics in an easy-to-understand way so that I can solve all your problems!
Well, today's theme is "Expected returns in the stock market." There are probably many people who are thinking about starting to invest, and those who have already started but are wondering "What will happen from now on?" When you hear "expected returns," it sounds difficult, but it's actually a very important way of thinking for the future, just like planning your household finances. Let's take a look at it together!
What is "expected return" anyway?
"Expected return" is, in simple terms, "approximately how much profit can I expect from investing?"Prediction of future rate of return (rate at which your money will grow)You read it right!
Of course, this is just a prediction, so it doesn't mean that it will definitely happen. Just as weather forecasts can sometimes be wrong, expected returns can also change. However, there are some benefits to knowing this.
- It's easier to plan for the future: It serves as a guideline for determining how much you should save each month toward a target amount, such as funds for retirement or a down payment on a home.
- Be able to make calm decisions: Even if the market temporarily declines, you will be able to respond calmly, knowing that "in the long run, we can expect this much growth."
- Have realistic expectations: "Increasing your assets tenfold in one year!" is like winning the lottery. By knowing realistic returns, you can find a reasonable investment style.
Expected returns are like a guidepost for investing.
What is the famous "Bogle expected return formula"?
There are many ways to predict future returns, but today we will look at one of the most popular methods:"Bogle's Expected Return Formula"I would like to touch on
"Mr. Bogle" is John C. Bogle, a famous American investor. He is known for popularizing "index investing" (a method of investing in the entire market), a low-cost, long-term method of building assets. If you choose investment trusts through "Tsumitate NISA", which is also popular in Japan, you may be indirectly indebted to him.
The formula for calculating expected returns that Bogle came up with consists of three main elements. It's like imagining the future taste (return) of a dish using a number of ingredients, like a recipe.
1. Current dividend yield (%)
this is,It's like a "pocket money" that companies pay to their shareholders.When you own stocks, you may receive a portion of the company's profits as dividends. The percentage of this dividend relative to the amount invested is the dividend yield.
For example, if you invest 100 million yen and receive 3 yen in dividends per year, your dividend yield is 3%. This is considered a relatively stable portion of the return you can expect.
2. Prospects for corporate profit growth
this is,How likely is the company to grow and make more profits in the future?If a company grows and its profits increase, its stock price is more likely to rise and dividends may also increase.
This profit growth is driven by the overall economic growth and the development of new technologies. In the long term, economies tend to grow slowly, so this is also an important factor when considering expected returns.
3. Changes in PER (price-earnings ratio)
"PER" stands for price-earnings ratio.An indicator of whether the current stock price is undervalued or overvalued compared to the company's profitsThis is a bit difficult to understand, but think of it as a kind of "stock popularity meter."
It is said that when the overall market mood is optimistic, the PER tends to rise (stocks tend to be popular and overpriced), and when it is pessimistic, the PER tends to fall (stocks tend to be unpopular and underpriced). How this PER will change in the future is also influenced by people's psychology, so it is more difficult to predict than the above two. It is sometimes called "speculative return."
Bogle believed that the first two (dividend yield and earnings growth) would account for the majority of returns, especially for long-term investments.Hold stocks of companies that are steadily profitable and growing for a long time while receiving reasonable dividendsIt seems that this classic style is important.
So, what should we think now?
In the original article, the Bogle formula was used to analyze "What is the expected return of the current stock market?" I won't go into the specific numbers here, but the important thing is that"There's a way to think about predicting future returns."It is important to know this.
Even if experts say that future expected returns may be a little lower than in the past, there is no need to be discouraged, because what we as individual investors can do remains the same throughout the ages.
- Use time to your advantage: Investing is like a marathon. Don't get too excited or upset about short-term fluctuations, but stay calm and take a long-term approach.
- Keep on working hard: Even if it's a small amount, "accumulation investment" where you save a fixed amount every month can help you diversify your investment over time and reduce risk. This is called dollar cost averaging (a method of buying the same amount each time, so that you can buy less when prices are high and more when prices are low).
- Be cost conscious: Hidden costs such as investment trust fees also affect returns, so it is wise to choose products with as low a cost as possible.
- Diversify your investments: Rather than putting all your eggs in one basket, invest in a variety of different assets, which increases the chances that if one fails you will be able to make up for it with the others.
Regardless of your expected returns, John believes that adhering to these fundamentals is the fastest way to build wealth in the future.
A word from the author (John)
"Expected return" sounds like an exciting phrase, doesn't it? But a prediction is still just a prediction. I think the important thing is to not get swayed by numbers, but to steadily build up your assets with an investment style that suits you. With the help of wisdom from wise men like Bogle, you too can find your own "guiding light" and enjoy a fun financial life!
This article is based on the following original articles and is summarized from the author's perspective:
Expected Returns in the Stock Market