Hi Tom,
Doing a rough calculation using the modified equation:
Lets view a period of 5 years, using a portfolio with 70% equity and 30% cash:
1 - earnings growth 8%, P/E constant so price will grow 8% per year. So 5 years give 46.9% growth.
2 - dividend % 2%, after 5 years 10.4% growth.
3 - P/E change. Assuming T bills are at 0.5 % and using the Relative valuation formula, P/E should be at 20.5% max. P/E's currently are at 25-26, so we have a 20% draw down threat minimum.
4 - Volatility capture at 20% gains from a buy to a sell, returns 1% to the portfolio. Assuming 1 capture per year, we have 5 captures = 5% volatility capture.
5 - Interest on cash is 0.5%, over 5 years is 2.5%
So equity returns are (46.9+10.4-20+5)*0.7 = 29.6% plus 2.5%*0.3= 0.75%.
Total is 29.6+0.75 = 30.35% over 5 years, yearly 5.4% return max.
More draw down could diminish the yearly return.
Best,K
