One thing to keep in mind is that valuation increases in markets don't happen overnight. The US market started at roughly the same CAPE as the world around the GFC in 2010 and for the preceding decade. Slowly overtime that has seen a divergence where CAPE in the US has received a large premium.No problem. I'm not making a value judgment about someone using Shiller PE or any other market factor as a prognostic indicator of where they believe markets are heading in the near or the distant future. I was just perplexed by the conflict between the original statement about not using CAPE to time the market but using it to change AA. As a definitional matter, that just struck me as timing the market.Well even if it is market timing, is that necessarily bad? Is allocating based on what the market landscapes present “market timing”?But if you change your asset allocation in response to a market factor, rather than in response to a personal change in need or circumstance, isn't that the very definition of market timing? Does it make a difference whether you believe the market factor will effect stock prices in coming years/decades versus coming days/weeks/months? I'm not offering an opinion on whether shifting one's stock allocation in response to the Shiller PE is a good idea or not, I'm just curious as to how this isn't market timing even if it's based on "long term expectations."No, because on short horizons PE is not very useful, but it’s one of the better indicators for setting long term expectations
Aren't these two statements contradictory?
If my investment statement says I expect 4-6% real returns on stocks, and a CAPE metric used in an overall model (like Vanguard’s) expects 1% for US TSM, why can’t I aggressively shift into assets with higher expected returns (like value or international) and patiently wait for over a decade?
If the market corrects and valuations come down, you can rebalance back into the new market reality.
It’s not like you’re going all into cash; you’re still in equity, just a gradual shift to riskier equities with higher discount rates
For my part, I'll continue to base my AA solely on my own personal needs and circumstances primarily because I'm convinced that I'll never have the insight, time, confidence, or depth of knowledge to do otherwise. Even if I fully understood the prognostic nuances of CAPE, there's probably myriad other important variables that I'd miss. Many people on this forum, however, have much greater expertise than me, and their more reactive market timing approaches and other strategies may very well outperform me. They should, of course, follow their own informed judgment.
So one may have just gradually shifted over this period to lower valued assets, but not fully abandoned the US market. Just gradually allocated more to other assets. What may have started as 60-70% US TSM may have drifted to much lower than that as CAPE as risen, but not done so in one dramatic rebalancing shift.
Valuations on the way down, however, can be swift in the case of a large bear market. One does not need to act upon Valuations, though my belief is that you CAN (in a reasonable way), and the odds may be in your favor if you hold for a very long time, but obviously nothing is guaranteed.
I only look to exUS markets in 1990, or the US during the dot-com era, to know that hyped market valuations often disappoint and the correction can either be one of moderately lessened returns (US dot com bubble till today) or one of greatly reduced returns (Japan exUS bubble to today).
Statistics: Posted by Nathan Drake — Sun Oct 06, 2024 10:12 pm — Replies 88 — Views 6353