(MoneyWatch) PIMCO founder Bill Gross’s recent missive about the death of stocks may have been off the mark in several areas, but he was right about one thing: You shouldn’t rely on historical returns to predict future returns. Here’s one way to look at what investors can expect on stock returns.
Studies have found that relying on past returns when predicting future returns is likely a mistake. In fact, New York University finance professor Aswath Damodaran examined the period 1960-2011 and found that if past returns were higher than average, future returns were more likely to be lower, and vice versa. However, Damodaran did find that forward-looking metrics like the earnings-to-price ratio (the inverse of the price-to-earnings ratio) actually had predictive value.