The FTSE 100 Cyclically Adjusted PE Ratio (FTSE 100 CAPE or PE10) – November 2012 Update

This is the Retirement Investing Today monthly update for the FTSE 100 Cyclically Adjusted PE (FTSE 100 CAPE).  Last month’s update can be found here.

As always before we look at the CAPE let us first look at other key FTSE 100 metrics:

• The FTSE 100 Price is currently 5,819 which is flat against the 01 October 2012 Price of 5,820 and 7.3% above the 01 November 2011 Price of 5,422.
• The FTSE 100 Dividend Yield is currently 3.71% which is also flat against the 01 October 2012 yield of 3.72%.
• The FTSE 100 Price to Earnings (P/E) Ratio is currently 11.41.
• The Price and the P/E Ratio allows us to calculate the FTSE 100 As Reported Earnings (which are the last reported year’s earnings and are made up of the sum of the latest two half years earnings) as 510.  They are down 1.0% month on month and down 7.9 year on year.  The Earnings Yield is therefore 8.8%.

Is it really that novel, innovative and value adding a strategy?

Ok I’ll admit it.  I read the Investment Times which is a monthly publication issued by Hargreaves Lansdown.  It’s clearly a piece of marketing material aimed at keeping Hargreaves Lansdown fresh in your mind but I read it because occasionally I do find an interesting titbit that encourages me to go off and do some more research.  I’ve just received the December 2012 edition and within it there is a review of an actively managed fund called the Troy Trojan Fund.

Important: Before we get started, I must point out that what follows is not a recommendation to buy or sell anything, and is for educational purposes only. I am just an Average Joe and I am certainly not a Financial Planner.

I don’t normally comment on actively managed funds as I am a supporter of passive index funds however the Troy Trojan Fund promises a lot.  The manager “believes that sooner or later the inflationary effects of QE (Quantitative Easing) will take hold” however he also does not rule out the rule possibility of a ‘Little Ice Age’ of deflation beforehand”.  The fund manager has apparently prepared for both scenarios by building a portfolio around blue chip equities, index linked bonds, gold and cash.  The actual asset allocation is listed as:

• 11% UK Equities
• 20% Overseas Equities
• 17% Cash (including UK T-Bills)
• 7% Singapore T-Bills
• 12% Gold
• 6% Gold Shares
• 13% US Index Linked Bonds
• 14% UK Index Linked Bonds

A deeper look at UK Inflation - November 2012

Last week we had the Office for National Statistics (ONS) announce that annual inflation to October, according to the Retail Prices Index (RPI), increased at the rate of 3.2% and that the Consumer Price Index (CPI) increased at the rate of 2.7%  The main contributor to the CPI increase was apparently University tuition fees, food and non-alcoholic beverages.  The main contributor to the RPI increase was the same as the CPI plus the addition of housing.  The Bank of England continues with their stance (at least their public stance) that inflation will fall back to its 2% target.  They’ve now been wrong on that since December 2009, a period where in my own line of work I would have long been sacked for being so wrong.  A long run view of the UK RPI can be seen in my first chart today.

Click to enlarge

In the period January 2000 to the present day inflation has increased by 47.4%!  This means:

• if your earnings haven’t increased by this amount and your spending is in line with the RPI you have effectively taken a pay cut over that period;
• if you’re saving for retirement then unless your savings have increased by at least this amount you are now further from retirement than you were; and
• if you’re retired and your pension is in income drawdown then to just maintain your purchasing power your portfolio had to increase by at least this amount just to stand still.

The S&P 500 Cyclically Adjusted PE (aka S&P 500 or Shiller PE10 or CAPE) – November 2012 Update

This is the Retirement Investing Today monthly update for the S&P500 Cyclically Adjusted PE (S&P 500 CAPE).  Last month’s update can be found here.

As usual before we look at the CAPE let us first look at other key S&P 500 metrics:

• The S&P 500 Price is currently 1,360 which is a fall of 5.4% on last month’s Price of 1,438 and 10.9% above this time last year’s Price of 1,226.
• The S&P 500 Dividend Yield is currently 2.2%.
• The S&P As Reported Earnings (using a combination of actual and estimated earnings) are currently $88.20 for an Earnings Yield of 6.5%.
• The S&P 500 P/E Ratio is currently 15.4 which is down from last month’s 16.4.

The first chart below provides a historic view of the Real (inflation adjusted) S&P 500 Price and the S&P 500 P/E.  The second chart provides a historic view of the Real (after inflation) Earnings and Real (after inflation) Dividends for the S&P 500.

 

 Click to enlarge

KISS Investing for Retirement

Alright I’ll admit it.  Investing for retirement is my hobby.  This means that I continually run all sorts of detailed analysis, some of which I share on this site, to try and squeeze a little extra investment performance from my portfolio.  An added benefit of this particular hobby is that it’s a frugal type of activity which other than the cost of running this site really costs nothing at all other than an old laptop and an internet connection.  While this is my chosen behaviour I’m also the first to admit that I could probably remove 99% of the complexity and still get 99% of the result by following the Keep It Simple Stupid, KISS (bet you thought I was talking about an American Rock Band there for a while), rule.  Today let’s take a step back and look at what that effective 1% effort might entail to enable this 99% result.


Important: Before we get started, I must point out that what follows is not a recommendation to buy or sell anything, and is for educational purposes only. I am just an Average Joe and I am certainly not a Financial Planner.

1.    Start.  If you never decide to take control of your retirement planning then you will never achieve early retirement.  Instead you’ll retire when the government tells you to which sounds a bit depressing to me.

2.    Spend less than you earn.  Sounds obvious doesn’t it?  It mustn’t be because a lot of people fall at this hurdle by being in debt.  If you don’t spend less than you earn then you are never going to reach Early Retirement or even have a little extra than the State Pension provides if you retire at State Pension Age.  This I believe is a critical point as no matter what other decisions you make about your investments it all multiplies by the level of saving you are making.  The level of saving is I believe one of the key differences between Early Retirement Extreme, Early Retirement, Typical Retirement and Late Retirement.  You can start this saving lark long before you’ve completed any of the activities below, whether it be firstly paying down debt in readiness or simply saving it in a high interest savings account until you know what you want to do with it.