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As for the 7.2% annual return in the next 30 years, I presume this is after inflation is backed out, right?

My bad for not elaborating, it's actually the smallest nominal rate of return for any time horizon > 30 years (happens at 45 years.) The worst worst case for any 30...87 year period. Assuming a 3% average inflation over any long period, that would be 4.2% real return.

OK, got it. I think one could rightfully be accused of excessive pessimism, to take the worst 30-year return as the expected return going forward. The average return seems a more fair expectation, unless you think (as I do) that today's values are unusually high. I suspect that average 30-yr return starting at a year with valuations as high as today's is probably much lower than the 9.6% nominal average.

I agree with the points you make. However... why do you think 40% is the "full" correction? Based on P/E, CAPE, profit margins (ROS), ... ?

Hussman thinks 50%, or a bit more, would be a 'full' correction, using a number of factors such as the ones you mention. I just picked 40% as a wild guess, to see how much such a correction would affect the 87-yr return. I actually expected it to be less of an impact, but it takes the 87-yr return from 9.6% to 9.0%, or just under 6% adjusted for inflation. And since that correction hasn't happened yet, it obviously would hurt forward 30-yr returns just as badly, bringing them down from 6% to about 4%.

The real, one-time adjustment from today's values should maybe be more or less than 40%, depending on how permanent you think companies' present high levels of profitability turn out to be. But an adjustment that big makes a fairly big difference, both because it influences the historical 87-yr average return, and because it even more heavily influences the forward 30-yr return.

Regards, DTB
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