The document provides guidance on monitoring the stock market over the long term. It recommends identifying investment goals and sticking to a basic investment plan. Key factors to monitor include GDP, corporate profits, dividends, and price-to-earnings (P/E) ratios. Investors should calculate average P/E ratios over 10 years and compare to current levels to assess market valuation. The document advises maintaining a balanced portfolio across asset classes and adjusting based on whether market prices are high or low relative to long-term averages.

1. Investing 202:
How To Monitor the Market

2. How To Monitor the Market
• First Step: Identify
your end-game and
NEVER forget it!
– Retirement is your
end-game
• Retirement goals
– Focus on longer term
• Investment horizon
– Stick with your Basic
Plan
• An Investment Policy
Statement helps you
remember

3. How To Monitor the Market
• First, the basic “deal”:
– Cash (checking account, savings, money markets,
etc.): You deposit dollars, they contractually agree to
give them back, sometimes with interest
– Bonds (bond mutual funds): You purchase debt issued
by some entity, they have a contractual obligation to
return those dollars at some point in the future, and
usually pay interest during the life of the bond
– Stocks (stock mutual funds): You purchase a right to a
portion of the earnings and dividends generated by a
company, but they have NO obligation to make those
earnings, or pay dividends if they do.

4. How To Monitor the Market
• Terms to know
– GDP: The monetary value of all the finished goods and
services produced within a country's borders
– Profits (Earnings): A company’s net income after adjusting
for inventory adjustments and corporate taxes
– Dividends: Payments to shareholders from a company’s
net profits
– P/E: The price investors are willing to pay for a company’s
stock divided by the profits that company generates
– The “Market”: Aggregate of companies grouped by under
certain parameters, eg. S&P500

5. How To Monitor the Market
• Long term Market
Drivers Dividends
– True value of stock
derived from dividends
Profits
received
– Dividends are paid out
of profits
Sales
– Profits are made from
sales

6. How To Monitor the Market
• Sales are driven by
the economy
• Long term market
values fluctuate
according to value
investors place in all:
– Sales
– Profits
– Dividends

7. How To Monitor the Market
• Nominal GDP (Real economic
growth plus inflation) has stayed
below long term trends for
almost twenty years now.

8. How To Monitor the Market
• Dividends (brown)
and earnings (blue)
are the major
components, and
have been
declining along
with GDP
• P/E swings (green
and red) are what
cause our
heartburn

9. How to Monitor the Market
• How do you know if
investors are correctly
valuing sales, profits,
dividends, etc?

10. How to Monitor the Market
• 10 experts =
10 answers

11. How to Monitor the Market
DIY – Do It Yourself
• Use PE Ratio
– Price / Earnings
• Calculate average
PE Ratio for latest
10 years
• Compare with
current PE Ratio
of market
www.mutpl.com

12. How to Monitor the Market
DIY – Do It Yourself
• Use PE Ratio
– Price / Earnings
• Calculate average
PE Ratio for latest
10 years
• Compare with
current PE Ratio of
market
www.multpl.com

13. How to Monitor the Market
16.42 Mean
÷ 22.83 Current
≈ 29% higher than
long term mean

14. How to Monitor the Market
Starting Points Matter! www.passionsaving.com
• From today’s starting point, your
“most likely” return over ten years is
2.14% plus inflation.

15. How to Monitor the Market
Starting Points Matter! www.passionsaving.com
• From the historical mean, projected
ten year returns are more than 2-1/2
percentage points higher.

16. How to Monitor the Market
What should all this
mean to my investment
plan?

17. How to Monitor the Market
Have a long term
commitment to a certain
Domestic
asset allocation. Intl Stocks
Stocks
Cash
Stocks: x% to y% US
Chocolate
Treasury
Domestic Corp Bonds
Bonds
Intl
other
Bonds: xy% to yz%
Corp
Gov

18. How to Monitor the Market
You can then adjust
according to prices
• High prices =
caution
• Low prices =
aggressive

19. How to Monitor the Market
From Passionsaving.com
• P/E10 value of 20 is The Red-Alert
Danger Zone.
• Hedge your bets. Maintain a small stock
allocation (perhaps 30 percent) even
when prices are at absurd highs.
www.mutpl.com

20. How to Monitor the Market
From Passionsaving.com
• P/E10 value of 20 is The Red-Alert
Danger Zone.
• Hedge your bets. Maintain a small stock
allocation (perhaps 30 percent) even
when prices are at absurd highs.
• Hold back from going with 100 percent
stocks even when prices are at mouth-
wateringly low levels (any P/E10 value
below 12 is mouth-watering).
www.mutpl.com

21. How to Monitor the Market
From Passionsaving.com
• P/E10 value of 20 is The Red-Alert
Danger Zone.
• Hedge your bets. Maintain a small stock
allocation (perhaps 30 percent) even
when prices are at absurd highs.
• Hold back from going with 100 percent
stocks even when prices are at mouth-
wateringly low levels (any P/E10 value
below 12 is mouth-watering).
• I can see making an exception when the
P/E10 level goes above 30 or below 8.
It’s important to keep in mind, though,
that short-term price moves are
unpredictable.
www.mutpl.com

22. Thank You
Schedule your personal consultation now!
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Contact us at (616) 871-0751 or (888) 738-8780
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www.passionsaving.com