Market Valuations and Stock %?

[cyclone6]

Does anybody adjust allocation percentages based on stock market valuations? I am thinking of moving percentages up and down based on the PE10 - available for download from Yale each month - at each annual re-balancing. I know the general consensus here seems to be valuations don't matter, but my brain can't process that. Not after 2000 and 2008. And stocks being damn near flat over 13 years...

Does anybody use a metric other than PE10 for domestic markets? And then the tougher ones - foreign, emerging markets and REITs?

Seems to me we are in some completely uncharted waters here. Stocks at all time highs. Bonds at all time highs (with historically low yields). All FED and QE induced. Allocation to the market is a must. But if another 50% cut is coming, I would sure rather have 30% at stake instead of 80%...

And that 30% would still let me smile at night if the market continued to defy gravity and go up anyway...even if it makes no sense whatsover.

 

[panacea]

I don't do anything too scientific but I have generally followed a 70-30 allocation when the market (S&P 500) is average or on sale and 60-40 when the market becomes a bit overpriced (as compared to the average). I don't stray too far from that.

 

[David1961]

When I adjust my AA, it is more to rebalance due to recent gains and/or losses. Stocks have had a nice run recently and they account to a little more of my portfolio than I'd like.

 

[Midpack]

I don't, but I assume you've seen this Asset Allocation With A Market-Level Tilt - Seeking Alpha. Like others, rebalancing accomplishes the same thing, though probably not as drastically as the OP might prefer - and I understand the rationale. Not unlike studies on SWR vs PE10.

 

[ducky911]

Just read a few articles on that "seeking alpha" site....some are sell sell sell and than others are buy buy buy......think I will stay stay stay.

 

[brewer12345]

I think this individual spends a lot of time considering valuations in long term investing: A Rich Life

 

[REWahoo]

Gaaaakk!!!

 

[brewer12345]

Gaaaakk!!!

Would you have preferred I link to a goatse or lemonparty type site?

 

[FIREd]

I use stock valuations to determine my target asset allocation. My neutral AA is 50/50 when stocks are fairly valued, but I let the AA drift between 30/70 to 70/30 based on valuation.

 

[cyclone6]

I don't, but I assume you've seen this Asset Allocation With A Market-Level Tilt - Seeking Alpha. Like others, rebalancing accomplishes the same thing, though probably not as drastically as the OP might prefer - and I understand the rationale. Not unlike studies on SWR vs PE10.

Thanks Midpack! I found a couple of links that I will consider:

http://mpra.ub.uni-muenchen.de/29448/1/MPRA_paper_29448.pdf

Asset Allocation Central

I agree with you. Annual re-balancing sort of accomplishes the same thing. But adjusting stock percentages up or down should, theoretically, greatly amplify the effect, i.e., taking more money off the table when stocks get expensive. As they appear to be today. And should the market continue to go up, well, at least there is still some skin in the game and potential regret is reduced.

 

[cyclone6]

I use stock valuations to determine my target asset allocation. My neutral AA is 50/50 when stocks are fairly valued, but I let the AA drift between 30/70 to 70/30 based on valuation.

FIREd: What metric do you use? When you reduce your stock %, is it across the board (intl/domestic, small cap/mid cap) - or are there some metrics you use for different stock asset classes? The only one I know of is for the S&P 500, the Shiller PE.

Glad to see I'm not the only one...

 

[FIREd]

FIREd: What metric do you use? When you reduce your stock %, is it across the board (intl/domestic, small cap/mid cap) - or are there some metrics you use for different stock asset classes? The only one I know of is for the S&P 500, the Shiller PE.

Glad to see I'm not the only one...

I mostly invest in individual, US stocks (there are reasons to my madness but I won't expand on it here). I determine my aggregate portfolio's valuation using several metrics including Morningstar's fair value estimates and current P/E relative to historical means. By my estimates, my portfolio is currently slightly overvalued. But PE10 says the market is grossly overvalued, close to 1929 levels. It doesn't right seem to me, but who knows.

 

[Telly]

I think this individual spends a lot of time considering valuations in long term investing: A Rich Life

brewer, you devil you!

And to think that Dory36 was part of the Buy and Hold Mafia, and I never knew it!

Each time someone mentions PE10 on this website, I wonder how many more posts it could take before he-whose-name-shall-not-be-mentioned, IS! I may ponder that, because underneath Mount Palaver, I think there was a little kernel of truth. Just a little one. Though it would have been a Trial of Hercules to excavate Mt. Palaver, and what would we have done with the refuse?

 

[brewer12345]

brewer, you devil you!

And to think that Dory36 was part of the Buy and Hold Mafia, and I never knew it!

Each time someone mentions PE10 on this website, I wonder how many more posts it could take before he-whose-name-shall-not-be-mentioned, IS! I may ponder that, because underneath Mount Palaver, I think there was a little kernel of truth. Just a little one. Though it would have been a Trial of Hercules to excavate Mt. Palaver, and what would we have done with the refuse?

That dude appears to be mentally if, as far as I can tell. He is sort of a cautionary tale about what can go wrong when you ER.

 

[laurence]

Would you have preferred I link to a goatse or lemonparty type site?

Not everyone walks the darker alleys of the interwebs like us, Brewer! Too those who don't know - DO NOT GOOGLE THESE TERMS! NSFL! LOL!

 

[brewer12345]

Not everyone walks the darker alleys of the interwebs like us, Brewer! Too those who don't know - DO NOT GOOGLE THESE TERMS! NSFL! LOL!

You have something against goats? You don't like parties that involve lemons?

 

[audreyh1]

Thanks Midpack! I found a couple of links that I will consider:

http://mpra.ub.uni-muenchen.de/29448/1/MPRA_paper_29448.pdf

Asset Allocation Central

I agree with you. Annual re-balancing sort of accomplishes the same thing. But adjusting stock percentages up or down should, theoretically, greatly amplify the effect, i.e., taking more money off the table when stocks get expensive. As they appear to be today. And should the market continue to go up, well, at least there is still some skin in the game and potential regret is reduced.

How many times do people guess wrong? Seems fairly often - too early, or just flat wrong. They have to guess right more than 50% of the time to gain any advantage - it can just as easily be a drag. I've had plenty of times I expected X to happen, but it didn't. Markets don't always follow logic, or even the economy. I'm usually glad I stuck to my standard AA, because if I had changed it based on my perception of relative valuations, I would have been wrong!

 

[Hamlet]

I think any allocation strategy that varied by PE10 would need to take interest rates into account.

I'd rather own more stocks at a particular PE when interest rates are near zero than I would when interest rates are high.

 

[audreyh1]

That dude appears to be mentally if, as far as I can tell. He is sort of a cautionary tale about what can go wrong when you ER.

Brewer, I was really wondering WHY you linked us to that post!

 

[brewer12345]

Brewer, I was really wondering WHY you linked us to that post!

I am bored and figured that if I did a goatse or lemonparty link I would get in trouble.

 

[audreyh1]

I am bored and figured that if I did a goatse or lemonparty link I would get in trouble.

Oh, right I forgot. You don't actually have anything to DO at work. Weekend is almost here!

 

[brewer12345]

Oh, right I forgot. You don't actually have anything to DO at work. Weekend is almost here!

A year ago I was busy executing a workplan, two years ago I was moving halfway across the country, 4 years ago I was helping save the world. Now I am muzzled seven ways to sunday, I cannot crap in the men's room at the client site without getting it cleared by legal, and given the constant drumbeat about costcutting I can guess what that means for compensation. Anything I am actually supposed to be doing is make-work (at best). I have no incentive to do anything but procrastinate.