Allocating Funds to Asset Classes based on Valuations

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pop77
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Allocating Funds to Asset Classes based on Valuations

Post by pop77 » Sun Dec 27, 2015 6:53 pm

I am trying to determine how to allocate the funds for the next year. I do this typically twice a year. Currently I am under allocated to Small Caps/Emerging Markets/International RE and Domestic RE. In 2015 I completely avoided allocated funds to SmallCap and Domestic RE based on their valuation. I am planning to do the same for 2016. Emerging Markets have been a bottomless pit so far to take my funds in 2015 and still managing to be under allocated!!. (I did add funds to the Total Bond Market in 2015 to ensure that I bump up my bond allocation as I get closer to retirement).

I am somewhat reluctant to put funds into VNQ with prospective P/E or 33 and VSCPX with a prospective P/E of 20.55. I am thinking of adding funds to the total bond market as a place holder and wait for VNQ and VSCPX reach a reasonable valuation. Though this sounds like market timing, do we really want to blindly add funds to an asset class totally ignoring valuation?

Thoughts??

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Maynard F. Speer
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Re: Allocating Funds to Asset Classes based on Valuations

Post by Maynard F. Speer » Sun Dec 27, 2015 7:15 pm

I think in terms of P/E ratios, the bond market looks even worse ..

I personally never buy or add to anything on high valuations - I've not held US stocks for a while (but I do hold some US listed private equity investments, so I'm still exposed to the economy)

My own feeling with EM is you need to work out a comfortable risk allocation - I've let my EM allocation drift up in the past, but I think you're better with a fixed allocation, and regular rebalancing ... The good thing with EM is you only need a few good surprises next year and it could display a lot of upside

There isn't much cheap at the moment ... I'm tempted to add a little more to Russia and E.Europe (knowing an oil reversal may be some time off ... It would be a long-term idea) ... I'm also tempted to buy a little more Italy)

Star Capital's CAPE ratios page is food for ideas
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NoRoboGuy
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Re: Allocating Funds to Asset Classes based on Valuations

Post by NoRoboGuy » Sun Dec 27, 2015 7:31 pm

Setting a fixed ratio for these slices is a step taken regardless of perceived valuation differences. Asset groups can stay over or under-valued for long periods. When setting the amounts for each slice, I know going in that some time in the future it will become evident and that some will have been over-valued and others will have been undervalued.

When I start to think I can predict the future valuations, I take a look at the Callan Periodic Table and that usually sets me on the right track.
Last edited by NoRoboGuy on Mon Dec 28, 2015 2:06 pm, edited 1 time in total.
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LadyGeek
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Re: Allocating Funds to Asset Classes based on Valuations

Post by LadyGeek » Sun Dec 27, 2015 8:01 pm

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Rodc
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Re: Allocating Funds to Asset Classes based on Valuations

Post by Rodc » Sun Dec 27, 2015 8:56 pm

If you have a fixed allocation you tend to buy what has lower valuation naturally. Indeed over a bull market where valuations are rising you tend to sell high to in turn buy something low. It is usually not a giant effect but at least you don't continue to buy high.
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pop77
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Re: Allocating Funds to Asset Classes based on Valuations

Post by pop77 » Mon Dec 28, 2015 8:26 am

Maynard F. Speer wrote:I think in terms of P/E ratios, the bond market looks even worse ..


Star Capital's CAPE ratios page is food for ideas
I agree but the bond market does not go down that much and I can use it to park funds and transfer it to small cap or emerging markets on really bad days. I used to use the money market fund that yields nothing but without knowing when the markets will correct, I now use total bond market to collect interest while I am waiting. Of course this is a bit risky but I know that getting into it.

Thanks for the information on Star Capital. I am saving that as a favorite.

Here is the link http://www.starcapital.de/research/stockmarketvaluation

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pop77
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Re: Allocating Funds to Asset Classes based on Valuations

Post by pop77 » Mon Dec 28, 2015 8:28 am

LadyGeek wrote:^^^ It's in the wiki: Callan periodic table of investment returns
Thank you. In this table I do not see alternate investments like REITS, Commodities, Emerging Markets Bond, International Real Estate etc. Is there a more comprehensive periodic table somewhere?

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LadyGeek
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Re: Allocating Funds to Asset Classes based on Valuations

Post by LadyGeek » Mon Dec 28, 2015 9:47 am

Callan Associates has a more comprehensive publication, but you need to register to view it. (The wiki only uses publicly available information.)

It may not answer your question, however.
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dc81584
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Re: Allocating Funds to Asset Classes based on Valuations

Post by dc81584 » Mon Dec 28, 2015 10:08 am

Why not just do it by market weight?

U.S. Stocks -- 50% of equity allocation (VTSMX)
International Stocks -- 50% of equity allocation (VGTSX)

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