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Old 01-14-2010, 02:39 PM   #41
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With regards to reducing equity exposure, one of my concerns is that both equities and bonds currently appear to be high risk vs. return.
I see it the same way. I also see no problem with market timing. I've been doing it since 1972.

Ha
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Old 01-14-2010, 02:45 PM   #42
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I see it the same way. I also see no problem with market timing. I've been doing it since 1972.

Ha
Do you use the monkey of the darts ;-)
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Old 01-14-2010, 02:55 PM   #43
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Do you use the monkey of the darts ;-)
Chicken guts.
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Old 01-14-2010, 03:57 PM   #44
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The market got absolutely crushed over the past year, and what makes me chuckle is that the chart shows it almost got to fair value. Yet, some people wouldn't touch the market with a 10' pole. Others are diving right in. There needs to be an adjustment made, and it seems thats what PE10 was trying to do, but, it doesn't seem to have worked to fairly evaluate whether it's a buying or selling opportunity.

How does M* do it's evaluation? http://www.morningstar.com/cover/market-fair-value.aspx

-CC
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Old 01-14-2010, 04:21 PM   #45
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The only reason that I am harping on this (which I realize that I am doing) is because of the practical reasons that keep me from radically and temporarily reducing my equity allocation. So I am trying to deal with my cognitive dissonance by seeing what counter arguments others put forth.

Ha
Perhaps adding a hedge of some sort would be in order. Problem solved!
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Old 01-15-2010, 08:11 AM   #46
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A sidenote on the fact that PE10 is currently slightly above the 80th percentile is that a move to the 90thP would be a 15% gain. A move to the median would be a 24% loss.

Since by definition the median is right in the middle of data values, and P.9 is within 10% of the top that looks to me like a poor bet staring at us.
This assumes that these measures correctly reflect valuation levels.

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The arguments that it is instead a good bet resolve to two types: this time it is different(for example because of different features of the current environment that you cite); or none of this matters anyway because none of it matters anyway. In other words, faith based investing-Bogle, Malkiel, whoever.
I can think of other arguments: first, that the PE10 and Tobin Q have no predictive value, also they do not measure potential future value, second, they don’t consider the money being pumped into the financial system by the Fed, third, they are focused on domestic profits but the largest (by cap) companies are global competitors with access to capital to finance global growth, fourth, equity investment is not limited to US markets, and last, there is no current viable alternative to equity investments. Investment managers judged on relative performance cannot take the risk of cash due to its low yield – exactly the outcome the Fed intends.

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The only reason that I am harping on this (which I realize that I am doing) is because of the practical reasons that keep me from radically and temporarily reducing my equity allocation. So I am trying to deal with my cognitive dissonance by seeing what counter arguments others put forth.
HFWR suggestion is best – use a short fund or options to hedge equity exposure if selling is not possible.
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Old 01-15-2010, 09:54 AM   #47
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What to do

I sold a big chunk of short and intermediate corporate bonds and all GNMA in December when it appeared they were going to to keep losing NAV...

Of course they recovered right after that But I did lock in enough gains that I feel comfortable letting it sit in cash for the time being

I put some of that $$$ to work in utilities, consumer staples, energy, telcom, and financials...

Except for utilities so far so good, but I plan to lighten financials soon...

Yesterday I sold 4% of equities for a nice gain

Im now at 53/31/16 stocks/bonds/cash... 80/20 domestic/international 1/2 ETF's, 30% TIPS/11% High Yield Corporate, and the rest of the bonds in the hands of Wellesley/Wellington... I plan to hold these bonds for a long time...

Hopefully sometime before the end of the month I can sell off another 10% of stocks and raise more cash...

That would be at least 5 years of cash in a MM fund.

I can see no good reason going forward to have short term cash in the bond market

When interest rates rise we should start to see at least a little bit of yield in MM funds...

I agree stocks are getting overvalued and Im going on defense
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Old 01-15-2010, 10:00 AM   #48
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Oh yea I gotta change my signature because as of today I have one less year to live and worry about funding my ER... Happy Birthday to mee
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Old 01-15-2010, 10:56 AM   #49
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I have been taking advantage of the upswelling to do some trimming and repositioning. Mostly have not been selling equiities, as my significant positions still appear reasonably priced and I think the economic recovery is for real. But have been gradually letting go of highly appreciated individual bonds that have littleroom for further gains. Proceeds are going to a short corporate CEF (FTF), commodities, merger arb and debt paydown. I don't see the markets as the huge bargain they were, but there are many gems to be plucked and the markets don't appear hugely expensive if you are of the opinion that we are in recovery mode.
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Old 01-16-2010, 09:36 AM   #50
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Brewer, how are you going about investing investing in commodities? Broad range? Specific areas?
Thanks
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Old 01-17-2010, 04:13 PM   #51
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But ignoring that, there is still the question of how much stock a portfolio dependent retired person, or one who really wants to retire soon, should own with the S&P at the 80th percentile.

It looks like there were about 8 discrete times when the S&P was at or above 20.79x PE10. Here are the 10-yr CAGRs following the first instance when the benchmark crossed the 20.79x threshold . . .

1898 9.1%
1901 7.2%
1928 (1.1)%
1936 4.4%
1961 7.2%
1969 3.7%
1993 8.4%
1995 11.2%

Still looks OK relative to a 3.7% 10 year treasury yield.

And with respect to the retiree, a 4% withdrawal rate and 60/40 asset allocation survived 30 years for every one of those starting periods except 1969.

I'll leave it to someone else to figure out how a higher bond allocation would have fared in those periods.
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