3 Simple Math Equations All Investors Should Know

By Susie Poppick

Whether you love to buy and sell stocks or barely understand what’s going on in your retirement account, there’s a good chance you could benefit from learning more about the math behind the stock market.

Here are three fundamental equations that the savviest investors know. Relatively easy to understand, they will help you choose the right stocks and funds and, most important, keep your expectations about future returns grounded in reality.

Equation 1

S&P 500 dividend yield + about 4.5% = the expected long-term return on stocks

This formula, known as the Gordon equation, assumes stocks get their ultimate value from being able to one day return earnings to investors. (That’s true whether or not a company currently pays a dividend or reinvests in the business.) Anything above or below that is a result of investor sentiment.

You can look up the current S&P 500 dividend yield, which is about 5% now, at multpl.com; the 4.5% is how much you can expect dividends to grow based on the past. So today the expected long-run return is 9.5%. Adviser and author William Bernstein says thinking about this number brings you down to earth in boom years, and can reassure you when the market is …read more

Source:: Money.CNN.com

      

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