Plain English piece on PE/Valuations
Discussion
I thought this was a useful read especially with a lot of talk about high valuations and bubbles etc.
Wow, have you seen the stock market lately?
Plain English enough to be easy to understand IMO.
Wow, have you seen the stock market lately?
Plain English enough to be easy to understand IMO.
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hstewie said:
hstewie said: I thought this was a useful read especially with a lot of talk about high valuations and bubbles etc.
Wow, have you seen the stock market lately?
Plain English enough to be easy to understand IMO.
"The value of the S&P 500 index"Wow, have you seen the stock market lately?
Plain English enough to be easy to understand IMO.
This is not the stock market.
Comparing rental property with the stock market is IMO nonsense right off the starting line, whether or not it's in plain English.
In the stock market you probably don't give a toss whether you're receiving income or making capital gains so long as you're getting "better off". (Subject to any tax treatment differential, but if your investments are in an ISA or SIPP that's irrelevant.)
If your income from the stock market is £1,000 pcm but you "need" £1,500 a month all you need to do is sell a few shares/units to realise some of your capital gain.
On the other hand, if your income from a rental property is £1,000 pcm and you "need" £1,500 a month there's nothing you can do to realise part of your capital gain. It's locked up in a highly illiquid asset. The best you can manage is to borrow against the value of the property but then you'll effectively have to pay interest on the cash you've withdrawn. And you probably won't be able to do it in small chunks either.
In the stock market you probably don't give a toss whether you're receiving income or making capital gains so long as you're getting "better off". (Subject to any tax treatment differential, but if your investments are in an ISA or SIPP that's irrelevant.)
If your income from the stock market is £1,000 pcm but you "need" £1,500 a month all you need to do is sell a few shares/units to realise some of your capital gain.
On the other hand, if your income from a rental property is £1,000 pcm and you "need" £1,500 a month there's nothing you can do to realise part of your capital gain. It's locked up in a highly illiquid asset. The best you can manage is to borrow against the value of the property but then you'll effectively have to pay interest on the cash you've withdrawn. And you probably won't be able to do it in small chunks either.
The first part of the article rings very true for me, however I generally find MMM articles a bit waffly and unstructured and this is no exception.
Our retirement savings have had investment growth of 80% since 2019 which is half of the 157% mentioned in the article but this has been achieved with a current allocation of 66% global equity and the remainder in gilts and cash.
This has meant that my wife and I were able to stop work several years earlier than planned so we have been lucky with timing.
There have been a number of market commentators noting high market valuations of US equities and comparing the potential future returns to risk free assets. Some examples below.
https://youtu.be/VWSPm-qYV78?si=zq-i5QnkV2eAn8R-
https://youtu.be/Q76lIU3FSMQ?si=Vxc3kd9saiKWi-dD
My main concern is whether now is the time to reduce our equity allocation because we have in a sense 'won the game', especially with gilt yields currently higher than they've been for over 15 years.
For those who are still saving for retirement, the decision is much harder.
Our retirement savings have had investment growth of 80% since 2019 which is half of the 157% mentioned in the article but this has been achieved with a current allocation of 66% global equity and the remainder in gilts and cash.
This has meant that my wife and I were able to stop work several years earlier than planned so we have been lucky with timing.
There have been a number of market commentators noting high market valuations of US equities and comparing the potential future returns to risk free assets. Some examples below.
https://youtu.be/VWSPm-qYV78?si=zq-i5QnkV2eAn8R-
https://youtu.be/Q76lIU3FSMQ?si=Vxc3kd9saiKWi-dD
My main concern is whether now is the time to reduce our equity allocation because we have in a sense 'won the game', especially with gilt yields currently higher than they've been for over 15 years.
For those who are still saving for retirement, the decision is much harder.
LeoSayer said:
My main concern is whether now is the time to reduce our equity allocation because we have in a sense 'won the game', especially with gilt yields currently higher than they've been for over 15 years.
I'd say "probably not", because there's a level bet your returns from those gilts are negative to inflation and if you've retired early you could easily have an income requirement for 25 years or more. Cumulative inflation over the past 5 years has been truly shocking - hence so many taxpayers caught by "band creep", dragging them into higher tax rates without any increase in real income and therefore leaving them worse off.As mentioned above, you probably don't care much whether your return is Income or Capital Gain so long as you're getting "better off".
Panamax said:
Cumulative inflation over the past 5 years has been truly shocking
Depends what you are comparing to.According to this, it averaged 4.4% from 2019-2024
https://www.bankofengland.co.uk/monetary-policy/in...
From 1972-1977 it averaged 15.1%.
BarryGibb said:
LeoSayer said:
For those who are still saving for retirement, the decision is much harder.
For those holding a diversified portfolio, taking the appropriate level of risk and not getting distracted by watching/reading these types of articles, I'm not sure what is particularly hard. I was comfortable with 100% equities throughout my 30s and 40s and never let such articles influence me in the past.
LeoSayer said:
You make it sound like deciding on an appropriate level of risk is easy. I certainly don't find it to be so.
Very true. Having been 100% equities I switched to 70/30 and the 30% in bonds has been an unmitigated disaster. My "total return" from bonds over the past five years has been around 1% - uncomfortably negative to inflation and simply appalling compared with equity returns in the same period. Thanks to the combination of equity growth and switching back out of bonds they are now down at 15% but the pain is ongoing. Nonetheless they should (?) still be providing some balance in the portfolio.One of the problems in current turmoil is that IMO equities and bonds could both take a tumble at the same time, which wouldn't be comfortable at all.
Panamax said:
Comparing rental property with the stock market is IMO nonsense right off the starting line, whether or not it's in plain English.
In the stock market you probably don't give a toss whether you're receiving income or making capital gains so long as you're getting "better off". (Subject to any tax treatment differential, but if your investments are in an ISA or SIPP that's irrelevant.)
If your income from the stock market is £1,000 pcm but you "need" £1,500 a month all you need to do is sell a few shares/units to realise some of your capital gain.
On the other hand, if your income from a rental property is £1,000 pcm and you "need" £1,500 a month there's nothing you can do to realise part of your capital gain. It's locked up in a highly illiquid asset. The best you can manage is to borrow against the value of the property but then you'll effectively have to pay interest on the cash you've withdrawn. And you probably won't be able to do it in small chunks either.
It’s a stupid article and trying to explain P/E ratios in the context of rentals is just daft. The breadth of the property market that doesn’t value/trade on a PE basis makes it utter nonsense. In the stock market you probably don't give a toss whether you're receiving income or making capital gains so long as you're getting "better off". (Subject to any tax treatment differential, but if your investments are in an ISA or SIPP that's irrelevant.)
If your income from the stock market is £1,000 pcm but you "need" £1,500 a month all you need to do is sell a few shares/units to realise some of your capital gain.
On the other hand, if your income from a rental property is £1,000 pcm and you "need" £1,500 a month there's nothing you can do to realise part of your capital gain. It's locked up in a highly illiquid asset. The best you can manage is to borrow against the value of the property but then you'll effectively have to pay interest on the cash you've withdrawn. And you probably won't be able to do it in small chunks either.
As for the ongoing thing that PH seems to have about not being able to realise gains from property. It is really no different to equites/securities in that your flexibility is limited by the unit size…it’s just that the value of each unit is higher, and anyone serious about property as an asset class would take that into account when building their portfolio.
xeny said:
What was the yield when you bought them? With interest rates near zero at purchase, it's hard to see a scenario where you'd have got a decent "total return".
Such is the benefit of 20:20 hindsight. Regrettably that's not worth much when you have to make decisions into an unknowable future. Sure, I've made a fat wedge from the MAGA 7 (as I like to call them) but it would be high risk IMO to invest in those and nothing else.On the subject of bonds I'm quite convinced there are a lot of people nursing similar wounds to mine and keeping their heads firmly below the parapet. And at the same time I haven't noticed any of the IFA's on here jumping up and saying "well, of course, five years ago I advised my clients to steer well clear of bonds, and here's a link to what I said at the time".
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