Part IV: A Practical Guide for Random Walkers and Other Investors

Exercise 1: Have a regular savings program.

Start investing early because compound interest and time are you greatest resource.

What determines the returns from stocks and bonds?

A stock buyer expects a growing stream of dividends. If the company re-invests its profits, the stock buyer expects more rapidly growing dividends in the future, or a lucrative stock buyback.

Long-run Equity Return = Initial Dividend Yield + Growth Rate

In the short run (e.g. a year) the changes in price/dividend or price/earnings multiples determine returns. In optimistic times, e.g. March 2000, P/E > 30 and P/D > 80. In times of pessimism, e.g. 1982, P/E > 8 and P/D > 17

5 Asset Allocation Principles

History shows that higher risk bears high reward

From 1926 to 2017:

The risk of investing in stocks and bonds depends on the hold duration

From 1950 to 2017, the S&P averaged 10% per year. However, there were +52% and -37% on some years.