What to think when you invest in S&P 500 Index fund?

- I am an owner of the 500 largest companies in the United States.
- The price/book ratio of the index is 2.8 so my underlying value of the investment is $427.50 based on the today’s closing price of 1197.62.
- The index is expected to earn $75.26 (operating earnings) this year, so those are my earnings.
- Considering 5% earnings growth each year for the next 5 years, my businesses will earn me following amounts:
- In 2006, I will earn $79.02.
- My pocket will have $82.97 from the S&P index earnings in 2007.
- $87.12 from 2008.
- $91.47 from 2009.
- $96.05 from 2010.
- The total expected amount I will earn for the next 5 years will be about $79.02 + $82.97 + $87.12 + $91.47 + $96.05 = $436.63.
- My current book value plus my expected earnings for the next 5 years will be a solid $864.13 ($427.50 + $436.63).
- If the market sets the price of the S&P 500 at 15 times the operating earnings at the end of 2010 then my holding will have market value of $96.05 * 15 = 1440.17.

## 1 comment:

If the market sets the price of the S&P 500 at 15 times the operating earnings at the end of 2010 then my holding will have market value of $96.05 * 15 = 1440.17.If the price is 1197.62 today and you expect it will be 1440.17 in 5 years, that works out to a 3.57% average rate of return per year. Of course that's not counting dividends.

JLP

AllThingsFinancial

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