Citation :
The method consisted of adding together the ‘three easy pieces’ of 1) the market’s current dividend yield, plus, 2) expected real dividend growth, plus, 3) an adjustment for any forecast change in stock market valuation.
For roughly 90% of the 1,120 monthly forecasts, the forecast was within 1.5% of the outcome, and 99% of the time, the forecast was within 2.5% of the realized outcome. This is more than twice as accurate as using historical returns to forecast future returns or using a constant 5% real return as the forecast. Not bad for such a simple forecasting method.
As you’d expect, the shorter the time horizon, the less accurate the forecasts from this simple cash-flow based approach. For horizons of less than 25 years, we need the mythical crystal ball, while for longer horizons a pencil and the back of a small envelope will do the job.
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