Note: if you find the graph below difficult to understand, see Initial P/E and 10-Year Rolling Returns first.
Scatter Diagram: Starting P/E Ratio vs. 10-Year Stock Market Returns
The above scatter plot (click on image to expand) shows the historical relationship between the P/E ratio of the stock market at the time of purchase and the typical investor's return over the next 10 years. We've looked at this relationship before; for example, Rolling Returns vs Initial P/E Ratios looked at the relationship of initial P/E and subsequent returns over time -- that is, with time as the horizontal axis. However, this time we're going to take time out of the equation; it's just starting P/E ratio vs. 10-year return -- "man to man" so to speak.
In the chart, each dot represents a hypothetical