Future return depends on your entry level

I saw a study by Plexus Asset Managmeent. It looked at the P/E ratios of the S&P 500 index for each year from 1871 to 2006 and calculates the average ten-year forward real return.

Here is the findings

Average     Average 
P/E ratio   10 year return
8.5          11.0% p.a
12.0          8.1% p.a
15.0          6.1% p.a.
17.6          5.7% p.a.
21.6          3.2% p.a.

Lesson: Your future return depends on your entry level. If you invest in the stockmarket now (at P/E ratio of about 18 times), the likely real return over the next 10 years is 5.7% p.a. (and not the high return of past years).