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Strategic Asset Allocation
Old 07-27-2005, 10:54 AM   #1
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Strategic Asset Allocation

Hi all,

I was wondering if anyone uses any particular metric for deciding if its the right time to invest in an asset class. Something like P/E vs historical P/E or PEG, P/B, ROE, ROA, whatever. There is an interesting article posted here that shows most classes are right in the middle range or high end of a "yield" metric.

Does anyone have a good place to find these measures? I can usually find most of the metrics on ETFs right in yahoo or M* relatively easily, but its hard to get a "historical" to compare against...

This is what striked my interest, as I am planning on investing a lump sum into a diversified portfolio.

http://www.etfinvestor.com/2005/06/valuing_asset_c.html

But some asset classes I might wait on until they hit a more comfortable level. Yes, I know I risk it going higher...

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Re: Strategic Asset Allocation
Old 07-27-2005, 11:22 AM   #2
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Re: Strategic Asset Allocation

Hi Olav,

I don't use any metric to decide what to invest in. I simply spread my money around per something like a 1/N strategy. I find it's much easier to handle and takes out the chances of any bad analysis on my part.*

See also MODELS OF STOCK MARKET PREDICTABILITY by Burton Malkiel.

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Re: Strategic Asset Allocation
Old 07-27-2005, 01:22 PM   #3
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Re: Strategic Asset Allocation

I also use the 1/N strategy, but am currently putting all new money and some divs to cash. All this talk of SP500 dropping to 300-400 creates a quandary: bail out, or hope diversification works..................
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Re: Strategic Asset Allocation
Old 07-27-2005, 01:33 PM   #4
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Re: Strategic Asset Allocation

Olav23, You ask a fantastic question (or group of q's) which I've struggled with for over a decade.

IMO it's not just historical data that's at issue, but good quality current data, and the ability to compare data, such as across countries.

I don't have a good answer for you, but here's a few tips. I'd be glad to hear more.


-Which metric is a matter of opinion. I like P/B, P/CF, Yield, P/E. Ideally, one would use all data and insight to determine intrinsic value... Sometimes you can find someone else's opinion on that, but it will probably be a biased one.

-Sometimes the valuations seem extreme, and you can make a choice even with limited data. For example, in 1999, you may not have had good historical data, but current data was available for smallcap vs largecap, and showed a huge disparity.
In other words, if you don't have historical data, try comparing asset classes to find the cheap ones relative to each other. (Much harder to do today.)

-As you've noted, Morningstar has valuation data for many mutual funds, including index funds. If you can find a fund for an asset class you're considering buying (even if not the same fund you plan to buy) you can see if M* has current valuation data for it. Beware the quality of the data though, it can be very spotty. For example, VEIEX EM equity has shown absurd P/E numbers many times, such as 1.8.

-Like above, but go directly to the mutual fund company (such as Vanguard or Ishares) for their current valuation data. If they don't have a website, go to Edgar and look at their latest report, which may have current data.

-GMO.com has Geremy Grantham's commentary and valuations-based forcasts. He's a value investor who has gained a lot of respect and assets. Some great nuggets of info and insight here. Often there's a historical perspective.

-Thanks to Peteyperson: http://www.globalindices.standardand...ntal?index=BMI
for current valuation data. Again, beware quality issues, such as do you really beleive Venesuala stock index yields 6.77%, P/B of 1.17, and P/CF of 3.32?

-Commentary sections of annual&quarterly reports of good mutual funds sometimes have good info or opinions in them. For example, Bridgeway's Montgomery has commented on when he has thought microcaps were over or undervalued, and IIRC gave a little data on it.

-I haven't got round to it yet, but your library may have a copy of Stocks,Bonds,Bills,and Inflation, from Ibbotson. Current and historical, I believe.

-If you live near New York, you should be able to get from the library:
Title: MSCI blue book. Developed markets.
Alternate title: Morgan Stanley Capital International blue book.
Publisher: New York, NY : Morgan Stanley Capital International, c2001-
There's also a red book for EM. Has current valuation data by country--at least it used to when I last saw it and it was called Morgan Stanley Capital International Perspective.

-Forums like this one. Rick Ferri has published data on historical valuations over the last few decades, and linked to it at the diehards forum.

-Financial magazines--mostly garbage, but occasionally there's interesting historical data or commentary.

-OECD website has PurchasingPowerParity data to help indicate if a currency is over or undervalued--tho that's just one indicator. If anyone finds the graph of PPP vs per capita GDP, please let me know.

-With a lot of work, you can use broad data sources to learn about economies around the world, like the CIA world fact book, World Bank, IMF, etc.
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Re: Strategic Asset Allocation
Old 07-27-2005, 04:06 PM   #5
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Re: Strategic Asset Allocation

This is an interesting idea. I have thought of looking at 2-5 year returns (or something like that) to determine which ones have had their runs and reallocate to the dogs, maybe. Anybody think of something like that.
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Re: Strategic Asset Allocation
Old 07-27-2005, 11:51 PM   #6
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Re: Strategic Asset Allocation

Everyone,

Thank you SO MUCH for all the info. I spent the good part of 6-7 hours today going over all the information you provided me. Lazyday, especially, thanks so much for spending such an amount of time relaying this information which I am sure is useful to a lot more then just me... I actually live in NYC so I can probably get access to the books you specified.

The GMO website and S&P was particularly very interesting!

All i can say is wow. I'm blown away. The problem, I guess, is that even armed with all this data and knowledge of mean-reversion, monte carlo, and MVO, academia shows that the best way is the ol' monkey with the dart, or to be less dramatic and intellectualize it. the "1/N" technique seems the most efficient.

So I guess it comes down to the fact that I have to stop worrying as far as timing the market and just put the lump into play. Perhaps I'll start with Emerging Markets+Intl+Commodities portion of my 1/N as I have a non-technical, non-rational "feeling" that REITS and US Equities (both large and small) are overvalued. Though, from a purely spot checked valuation perspective on the S&P link, both value and growth of US doesn't look too far out of whack! It looks almost as if Emerging markets are a bit on the "expensive" side...
I question the data as do you.

One thing I came across on my websearches, M* apparently changed their valuation mathematics a year or so ago. So P/B and P/E are much lower then they should be. I can re-dig it up if anyone is interested..

Thank you so much again. I find it almost hard to believe what an amount of intelligence and willingness to help live on this message board!!!
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Re: Strategic Asset Allocation
Old 07-28-2005, 01:48 AM   #7
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Re: Strategic Asset Allocation

Equal allocation (10x10%) to asset classes here too - just makes so much more sense to me as I have NO idea what will perform best in the future. (but EM and commodities would be my guess too!).

Reits are a good example!; after 5 winning years in a row, with 2003 and 2004 giving more than 30% each almost EVERYBODY said that they were selling out (as many said in 2001-2003 also) - it is now my biggest gainer YTD up 12% :.

Cheers!
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Re: Strategic Asset Allocation
Old 07-28-2005, 01:51 AM   #8
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Re: Strategic Asset Allocation

Thanks Olav23, I'm glad you appreciate my post.

I'm sure there must be other sources of info... was hoping others would chime in.
Or maybe there aren't many other free sources, or I might have run into them by now.

I got access to the Morgan Stanley data by going to the main reference library in NYC (around 40th and 5th ave?) and going to a reference desk, and they gave me a yellow card with the name of the book I wanted, which let me get into the NYU library (around the West Village area, I think). I could then stay in the NYU libe as long as I wanted, perusing the business section, which had some things the NYPL doesn't. Like the Morgan Stanely periodical. I'd then photocopy the one or two pages which showed valuation data by country.

(Procedures may have changed, I last did this in 1998 or maybe 2000.)
Also, it's probably only one page now, even if it used to be two. Since they split into two books for developed and EM, and I think NYU only has the developed market book.

I'd sure love to have those one or two pages snailmailed to me twice a year... maybe could return the favor somehow.
Or, perhaps at least a posting or emailing of all the valuation numbers for USA, Japan, SouthKorea, and Europe. (Data is also provided for regions, so you could see the P/B for all Europe for example, IIRC. There are only about 5 numbers for each country, like P/B, P/CE, P/E, yield, and maybe P/Sales. But I think their numbers are high quality, especially in terms of being comparable across countries.)

In terms of asset allocation... I think there are good arguments for sticking to specific % allocations. It seems that's what many of the smarter people on the boards try to do. William Bernstein seems to favor this approach in The Four Pillars of Investing, and IIRC Gibson even more so, in Asset Allocation.
There's also an argument (perhaps Templeton or recent Peter Bernstein) for adjusting allocations based on valuations, especially if one does so in moderation. For instance, one might have decided on a 10% allocation to Europe largecap. Later, if one decides that asset class has become badly overvalued relative to other asset classes, a slight adjustment might be made to perhaps 9% or 8%. This will probably be after Europe has outperformed other assets, and gone up in price. So, you sell not just to bring back to 10%, but overshoot down to 9% if you're convinced it's the right thing to do.

For most of my investing history, I've gone to extremes in allocating based on my perceptions of valuation. Extreme extremes.
Now that it is less clear to me where the values are, I'm allocated closer to what the market is, and plan to get a little closer early January, when the new tax year starts.

I haven't read much on the 1/N strategy. Not sure how good it is. Another starting point might be where one allocates based on the % of the actual worldwide markets. In other words, if 12% of the world's investments are in Japan equity, you could start with 12% there, and then adjust it, for example by lowering it if your expenses aren't in Yen, or changing it towards the % it would have in a 1/N strategy, or towards what you think is the % on the efficient frontier.

Please don't take too much from the last paragraph, as my knowledge of asset allocation, MPT, and efficient frontier is minimal. My own asset allocation is very unscientific...
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Re: Strategic Asset Allocation
Old 07-28-2005, 06:26 AM   #9
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Re: Strategic Asset Allocation

I think Ben makes good points and I think I would just keep a certain asset allocation and not worry about "pricing" a fund since people cant time the market.
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Re: Strategic Asset Allocation
Old 07-28-2005, 07:41 AM   #10
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Re: Strategic Asset Allocation

http://moneycentral.communities.msn....Message=125831

has a message (#6) wherein a poster describes how he determines if a particular asset class is over/under-valued relative to other asset classes.* Search for the string:
Quote:
At the end of every month, I have a program that runs a calculation that essentially tells me the average gain of every 6 year period of each of the 7 sectors.
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Re: Strategic Asset Allocation
Old 07-28-2005, 08:17 AM   #11
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Re: Strategic Asset Allocation

Quote:
Originally Posted by ben
Equal allocation (10x10%) to asset classes here too - just makes so much more sense to me as I have NO idea what will perform best in the future. (but EM and commodities would be my guess too!).

Reits are a good example!; after 5 winning years in a row, with 2003 and 2004 giving more than 30% each almost EVERYBODY said that they were selling out (as many said in 2001-2003 also) - it is now my biggest gainer YTD up 12% :.

Cheers!
Right on, Ben. My Vanguard REIT Index keeps going up. It's the big winner this year.
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Re: Strategic Asset Allocation
Old 07-28-2005, 12:18 PM   #12
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Re: Strategic Asset Allocation

Quote:
Originally Posted by LOL!
has a message (#6)
(you might need to hit "previous" to get to message 6.)

Thanks LOL for the link, interesting approach. I prefer using valuations, but I do also try to get a look at how much something has been going up lately vs long term. The approach in your link makes this much more scientific, in comparing where the price is today to where it would be today, if it kept going how it did in the long term. And making that comparison in terms of standard deviations. (I may not have that quite right, but it might give the basic idea--the link explains in more detail.)
If I weren't so lazy, I'd do some work on this, and maybe use it as a secondary consideration, especially for things hard to value, like commodity futures.
Has some weaknesses though. For example, I wonder how this approach would have worked on Japan equity, 5 or 10 years after the crash in that market. (In other words, about 10 or 5 years ago from today.) Valuations were still very high, but maybe this model would have indicated that Japan was cheap.

By the way, I'm not trying to talk anyone into using valuations to determine their asset allocation. I think that slice and dice and rebalance, with constant %, is probably the best method for most. But for someone who is interested in using valuations, it could be nice to share ideas.

William Bernstien does reluctantly "allow" one to change the %'s slightly. I don't recall if this is based on valuations, recent performance, or both. I think part of the reason he seems hesitant in mentioning this, is that most people go in the wrong direction, buying high and selling low. Using fixed % prevents that.

They say that going against the crowd is easier said than done. I believe it, especially seeing so many smart people in love with value indexes and small cap today. It's finally getting better the last month or two, at least in the posts I read, but I suspect there may be a lot of disappointed people in the next 5 or 10 years.
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GMO Current Strategy & 7-year market Forecast
Old 07-28-2005, 10:39 PM   #13
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GMO Current Strategy & 7-year market Forecast

Grantham, Mayo, Van Otterloo (GMO) says stay in cash
1. Continue to underweight equities in the U.S.
2. Maintain overweight positions in emerging equities
3. Overweight international equities
4. Include non-equity market exposures such as commodities and forestry.


7-year Asset Class Return Forecasts
US Large: 1.1%
US Small: 0.6%
Intl Large: 5.2%
Intl Small: 4.6%
Emerging: 9.9%

U.S Bond: 2%
Intl Bond: 1.9%
Emerging: 5.2%
TIPS: 1.0%
U.S. Treasury: 3.2%

REITs: 0.9%
Managed Timber: 8.0%
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Re: Strategic Asset Allocation
Old 07-29-2005, 06:52 AM   #14
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Re: Strategic Asset Allocation



I tend to overanalyze these things myself. For instance, I'm looking for exposure to precious metals. I have none currently. Thinking that the time to "get in" would be when equities are on the rise and inflation and interest rates are stable... like maybe now?

OTOH I've been left standing on the dock watching the ship sail away time and again. Since this is all long term investing, the best advice noted above, is just do it. Set your allocation and go fill the shopping list.

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Re: Strategic Asset Allocation
Old 07-29-2005, 04:19 PM   #15
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Re: Strategic Asset Allocation

I definitely fall into the overanalysis camp as well, almost to the point of paralysis. And BUM, to your comment, all I can say is "Amen." :P
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Re: Strategic Asset Allocation
Old 07-30-2005, 11:09 AM   #16
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Re: Strategic Asset Allocation

BUM; spot on! I felt the same - especially with metals and commodities actually, but when I finaly got started setting up my portfolio it was done in a couple of days. What I lost out on on some of the stuff I had to sell, I more than gained in other asset classes I had added.

But man, it was tough to put in some of those sell orders.... actually easier to make the buys!

Cheers!
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