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Depending on your age and your lifestyle, you need to save a lot of money to be able to retire early. One of the most important factors that make a difference in how much money you need to save for early retirement is the rate of return that you will earn from your portfolio.
The emergence of ETFs in the past few years has allowed investors to make broad bets on entire baskets of stocks and bonds. Following are 2 sample portfolios with the same 6.8% potential annual return: one is a fixed income portfolio constructed using 4 populate ETFs; the other is Dow Jones 30 companies ((NYSEARCA:DIA)).
A 6.8% Yield Fixed Income Portfolio
If you put money equally into following 4 sample ETFs, the 12-month yield for this portfolio would be 6.8%:
Fund Name (Ticker)
Category
Yield
iShares iBoxx $ High Yield Corporate Bd (NYSEARCA:HYG)
High Yield Bond
9.05%
iShares S&P U.S. Preferred Stock Index (NYSEARCA:PFF)
Preferred
7.36%
iShares JPMorgan USD Emerg Mkt B (NYSEARCA:EMB)
Emer Mkt Bond
5.60%
iShares iBoxx $ Invest Grade Corp Bond (NYSEARCA:LQD)
Long-Term Bond
5.32%
Total
n/a
6.83%
Dow 12,300, a 6.8% Return?
Below are Dow Jones Industrial Average companies’ one year forward earnings:
Name (Symbol)
Forward P/E
Forward Earning
3M (NYSE:MMM)
14
6
Alcoa Inc. (NYSE:AA)
14
1
American Express (NYSE:AXP)
11
4
AT&T Inc. (NYSE:T)
12
3
Bank of America (NYSE:BAC)
9
1
Boeing (NYSE:BA)
14
5
Caterpillar, Inc. (NYSE:CAT)
16
6
Chevron Corporation (NYSE:CVX)
9
10
Cisco Systems, Inc. (NASDAQ:CSCO)
11
2
Coca-Cola (NYSE:KO)
17
4
E.I. du Pont de Nemours (NYSE:DD)
14
4
Exxon Mobil Corporation (NYSE:XOM)
11
6
General Electric (NYSE:GE)
14
1
Hewlett-Packard (NYSE:HPQ)
7
6
Home Depot (NYSE:HD)
16
2
Intel Corporation (NASDAQ:INTC)
11
2
IBM (NYSE:IBM)
12
13
Johnson & Johnson (NYSE:JNJ)
12
5
JP Morgan Chase & Co. (NYSE:JPM)
9
5
Kraft Foods Inc. (KFT)
14
2
McDonald's Corporation (NYSE:MCD)
15
5
Merck & , Inc. (NYSE:MRK)
10
4
Microsoft Corporation (NASDAQ:MSFT)
10
3
Pfizer, Inc. (NYSE:PFE)
8
2
Procter & Gamble (NYSE:PG)
15
4
The Travelers Companies (NYSE:TRV)
9
6
United Technologies (NYSE:UTX)
15
5
Verizon Communications (NYSE:VZ)
16
2
Wal-Mart Stores, Inc. (NYSE:WMT)
12
4
Walt Disney (NYSE:DIS)
13
3
Total
13
126
If we use P/E of 13, then the Dow will be 12,380 (126 * 13 / 0.1323). For more info regarding how to calculate Dow value, please refer to http://seekingalpha.com/article/196982-how-high-could-the-djia-go. Based on today’s Dow value, it would be a 6.8% return in 2011.
Conclusion
There are lots of reasons to worry about the market. The story of 2011 might be that hundreds of towns, cities, and states face massive budget shortfalls that have to be addressed and problems are billions worse than advertised.
Slowly ‘Dumb Money' returns to stocks. For now, this support could help the market extend its recent run. Yet it may also mean it is late in the rally game. Nevertheless, it is still worth jumping into the market, given the potential 6.8% return in 2011. Additionally, equity has the potential for both capital appreciation as well as income from dividends.
Note: Data is from Yahoo Finance and iShares.com is valid as of December 29, 2010.



Disclosure: I am long DIA, PFF.

Source: 2011 Investing Strategy: 6.8% Yield Fixed Income Portfolio vs. 6.8% Return on Equity