Forecasting stock returns

October 25, 2012

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Investors are presented with a variety of measures to use in formulating expectations for future stock returns. But, which of these measures have a significant correlation with actual returns? According to a new Vanguard research paper, Forecasting stock returns: What signals matter, and what do they say now?, only valuation metrics, such as price/earnings ratios, demonstrate some predictive ability.

Authors Joseph Davis, Roger Aliaga-Díaz, and Charles Thomas, of Vanguard Investment Strategy Group, examine 15 commonly cited metrics to see how well they would have predicted realized stock returns since 1926. Their findings underscore Vanguard's belief that the future is difficult to predict and that long-term return expectations are best stated in terms of a range of probabilities rather than specific returns at a particular point in time.


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