Value Averaging – The Safe and Easy Strategy for Higher Investment Returns : [PDF Download]

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“The expected return on the market will be the center around which our random outcomes will be designed to fall. In Chapter 1, we took a look at historical returns and found that over the 66 years of data analyzed, the rate of return on the stock market was about 7% higher than the return on long-term government bonds.

It may be reasonable to project this relationship into long-term expectations for the future. With long-term interest rates currently at about 7–8%, we calculated the expected return on the market currently to be about 14–15% (we’ll use 15%).

Even though we can never know if this educated guess is correct, it is certainly a more reasonable number than 10% (which is too low no sophisticated investor would invest in risky stocks) or 20% (I wish!). Over good future periods, of course, returns will be well over 15% annually; for bad future times, returns will be less.

But if we don’t have a copy of next year’s newspaper, the best we can do is make a reasoned estimate of what we expect based on familiar relationships. We’ll use 1.25%4 as the center of our monthly returns in the simulation.”

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