Dr. Shiller's Portfolio is Tilted Toward Europe and Emerging Markets

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Shikoku
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Dr. Shiller's Portfolio is Tilted Toward Europe and Emerging Markets

Post by Shikoku » Sat Nov 04, 2017 9:43 pm

Some Bogleheads might have seen a recent MarketWatch article titled Opinion: Don't Get Spooked by 'Overvalued' Stocks - They're Here to Stay which can be found at https://www.marketwatch.com/story/dont- ... 2017-10-04.

The article states: "Shiller tells me he's still got money in the U.S. markets, though he has been tilting toward Europe and emerging markets, in part, because they look cheaper." Is this an indication that even Nobel Laureates in Economics try to time the market?

I have done some versions of this over the years. To be precise, I have an asset allocation but I allow it to tilt or move in any direction by no more than 20%. For example, my goal of 35% allocation in TIAA Traditional can be changed to as low as 28% (i.e., 35-0.2x35%) and as high as 42% (i.e., 35+0.2x35%) based on my perception of the market. During the past one year, I have increased my allocation to TIAA Traditional from 28% to 36% as I feel the market is overvalued. When crud oil price was $30/barrel in winter 2016, I moved 20% of my U.S. equity allocation (i.e., about 5% of my total portfolio) to an energy sector fund and sold them when oil recovered to $48/barrel. In a related note, I bought our first home in winter 2009 during foreclosure crisis which have been appreciated by about 70% since then.

I cannot resist the temptation but I keep changes in my portfolio within the range mentioned above. Am I acting irrationally? I will appreciate feedback from the forum members.
Last edited by Shikoku on Sun Nov 05, 2017 12:42 am, edited 8 times in total.
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Ron Scott
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Re: Dr. Shiller's Portfolio is Tlited Toward Europe and Emerging Markets

Post by Ron Scott » Sat Nov 04, 2017 10:20 pm

The general thinking here is that articles like the one you cite are more "noise" than substance, allowing asset allocations to shift by 20% or so isn't ideal (5% or annually would be better), changing allocations based on your current perception of the market is "timing" (verboten), and investing in and out of sector funds or commodities based on public price swings is dangerous. While the forum's namesake isn't a big fan of international equity investing it's viewed favorably here by most, although I'm not sure you'd get a quorum for emerging markets.

Regarding the proposition about overvalued stocks, i.e., that they're here to stay, I would disagree. The speculative component of a stock's price will vary for sure but the price will eventually revert to real value too. As a general rule I would not make bets that the market price of anything will "stay" above it's real value for a long time.

It is good that you're thinking about these issues. Here's a couple books that address all this and more:

https://www.amazon.com/Little-Book-Comm ... =boglehead
https://www.amazon.com/Bogleheads-Guide ... =boglehead

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Re: Dr. Shiller's Portfolio is Tlited Toward Europe and Emerging Markets

Post by AlohaJoe » Sat Nov 04, 2017 10:39 pm

Shikoku wrote:
Sat Nov 04, 2017 9:43 pm
Is this an indication that even Nobel Laureates in Economics try to time the market?
Shiller's entire academic career including his Nobel Prize is built on the idea that markets are not efficient. So why do you assume that Shiller thinks one can't time the market?

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Re: Dr. Shiller's Portfolio is Tlited Toward Europe and Emerging Markets

Post by SimpleGift » Sun Nov 05, 2017 12:06 am

Shikoku wrote:
Sat Nov 04, 2017 9:43 pm
The article states: "Shiller tells me he's still got money in the U.S. markets, though he has been tilting toward Europe and emerging markets, in part, because they look cheaper." Is this an indication that even Nobel Laureates in Economics try to time the market?

I have done some versions of this over the years. To be precise, I have an asset allocation but I allow it to tilt or move in any direction by no more than 20%....based on my perception of the market.
Over the years, there's been numerous studies of professionally-managed "tactical asset allocation" funds — all of which, like yourself, shift their allocations between market segments based on valuations, quantitative screens, or their perceptions of the market. In each of these comparative studies, the percentage of tactical allocation funds that have outperformed the static Vanguard Balanced Index Fund (VBIAX) is very low. Here's the most recent study results I've seen:
If professional tactical managers — with their proprietary market research, generous funding and computing power — consistently underperform a balanced index fund by such a wide margin, why do amateur investors think they can succeed at this game?
Cordially, Todd

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Re: Dr. Shiller's Portfolio is Tlited Toward Europe and Emerging Markets

Post by in_reality » Sun Nov 05, 2017 12:26 am

AlohaJoe wrote:
Sat Nov 04, 2017 10:39 pm
Shikoku wrote:
Sat Nov 04, 2017 9:43 pm
Is this an indication that even Nobel Laureates in Economics try to time the market?
Shiller's entire academic career including his Nobel Prize is built on the idea that markets are not efficient. So why do you assume that Shiller thinks one can't time the market?
Some question whether investing on valuation measures are in fact market timing.

For instance, they say "Inexperienced or Amateur Investors Sometimes Confuse Valuation-Driven Decisions with Market Timing When They Have Nothing In Common".
Market Timing: With market timing, the portfolio manager or investor is speculating that the price, rather than value (the two can diverge temporarily, sometimes for extended periods of time that lasts for years), will increase or decrease. He or she then attempts to make a profit by predicting what other people will do rather than based on the underlying cash flows and other relevant variables you see in the valuation approach.
To some degree my portfolio decisions are based on valuations.
Shikoku wrote:
Sat Nov 04, 2017 9:43 pm
When crud oil price was $30/barrel in winter 2016, I moved 20% of my U.S. equity allocation (i.e., about 5% of my total portfolio) to an energy sector fund and sold them when oil recovered to $48/barrel.
Several of the funds I use also increased energy allocation substantially as it fell - much higher than typical value funds. I am not sure I would want to make that decision myself and think a consistent methodology is best and wouldn't want to base things on my perception of the market.
Shikoku wrote:
Sat Nov 04, 2017 9:43 pm
In a related note, I bought our first home in winter 2009 during foreclosure crisis which have been appreciated by about 70% since then.
I guess you can call it timing, but it's really a valuation based decision isn't it? Were you really buying thinking that the recovery is imminent and prices will recover or buying because the price was favorable (meaning you weren't paying too much even if it doesn't rebound).

Anyway, when TIPs dropped in 2008, many here bought as they were good values. Bogle took a look at valuations and changed his holding due to indefensible positions.

As far as using valuations in a tactical allocation timing scheme, some say they have a formula (https://alphaarchitect.com/2015/07/21/e ... ight-work/) but given that the relationship between valuations and returns only holds long term.

Kites for instance points out that the "Nobel Prize committee gave its award jointly to Shiller for his work on how stock returns can be predicted in the long run, while simultaneously giving it to Eugene Fama for his efficient markets research showing that stock returns cannot be effectively predicted in the short run!", and that "Shiller CAPE shows its strongest correlation to nominal returns over an 8-year time horizon, and is actually most predictive of real returns over an *18* year time horizon"

https://www.kitces.com/blog/shiller-cap ... -planning/

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Re: Dr. Shiller's Portfolio is Tilted Toward Europe and Emerging Markets

Post by Noobvestor » Sun Nov 05, 2017 1:34 am

I don't know when he started tilting EU/EM, but if it was at the start of this year, he's doing pretty well for himself!

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

I am tempted but not planning to tilt from a neutral 50/50 toward more international. I couldn't tell from your post how much you're allocated to US versus international, but if you're severely tilted toward US, now's as good a time as any to consider a more balanced approach.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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Re: Dr. Shiller's Portfolio is Tlited Toward Europe and Emerging Markets

Post by Shikoku » Sun Nov 05, 2017 11:33 am

Ron Scott wrote:
Sat Nov 04, 2017 10:20 pm
Regarding the proposition about overvalued stocks, i.e., that they're here to stay, I would disagree. The speculative component of a stock's price will vary for sure but the price will eventually revert to real value too. As a general rule I would not make bets that the market price of anything will "stay" above it's real value for a long time.
Ron: That is certainly a good insight based on fundamental theory of mean reversion.
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Re: Dr. Shiller's Portfolio is Tilted Toward Europe and Emerging Markets

Post by Shikoku » Sun Nov 05, 2017 11:38 am

AlohaJoe wrote:
Sat Nov 04, 2017 10:39 pm
Shikoku wrote:
Sat Nov 04, 2017 9:43 pm
Is this an indication that even Nobel Laureates in Economics try to time the market?
Shiller's entire academic career including his Nobel Prize is built on the idea that markets are not efficient. So why do you assume that Shiller thinks one can't time the market?
Very good point. May be some genius is good at timing the market but it is not for everyone.
"I don't worry too much about pointing fingers at the past. I operate on the theory that every saint has a past, every sinner has a future." -- Warren Buffett

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Re: Dr. Shiller's Portfolio is Tilted Toward Europe and Emerging Markets

Post by Levett » Sun Nov 05, 2017 11:52 am

SimpleGift's post is quite enough for me. :thumbsup

Lev

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Re: Dr. Shiller's Portfolio is Tilted Toward Europe and Emerging Markets

Post by Shikoku » Sun Nov 05, 2017 2:32 pm

SimpleGift wrote:
Sun Nov 05, 2017 12:06 am
Shikoku wrote:
Sat Nov 04, 2017 9:43 pm
The article states: "Shiller tells me he's still got money in the U.S. markets, though he has been tilting toward Europe and emerging markets, in part, because they look cheaper." Is this an indication that even Nobel Laureates in Economics try to time the market?

I have done some versions of this over the years. To be precise, I have an asset allocation but I allow it to tilt or move in any direction by no more than 20%....based on my perception of the market.
If professional tactical managers — with their proprietary market research, generous funding and computing power — consistently underperform a balanced index fund by such a wide margin, why do amateur investors think they can succeed at this game?
Thank you, SimpleGift. I agree and will try to resist the temptation when opportunities like crud price falling to $30/barrel happen again.
"I don't worry too much about pointing fingers at the past. I operate on the theory that every saint has a past, every sinner has a future." -- Warren Buffett

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Re: Dr. Shiller's Portfolio is Tilted Toward Europe and Emerging Markets

Post by Shikoku » Sun Nov 05, 2017 2:48 pm

in_reality wrote:
Sun Nov 05, 2017 12:26 am
Shikoku wrote:
Sat Nov 04, 2017 9:43 pm
In a related note, I bought our first home in winter 2009 during foreclosure crisis which have been appreciated by about 70% since then.
I guess you can call it timing, but it's really a valuation based decision isn't it? Were you really buying thinking that the recovery is imminent and prices will recover or buying because the price was favorable (meaning you weren't paying too much even if it doesn't rebound).
I agree; the decision I made when buying home was based on valuation. When I moved 5% of my portfolio to energy sector fund, it was also a decision based on valuation. However, I concede that someone can argue I was speculating.
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Re: Dr. Shiller's Portfolio is Tilted Toward Europe and Emerging Markets

Post by SimpleGift » Sun Nov 05, 2017 3:19 pm

Shikoku wrote:
Sun Nov 05, 2017 2:32 pm
Thank you, SimpleGift. I agree and will try to resist the temptation when opportunities like crude price falling to $30/barrel happen again.
At extremes of valuation, it is possible to get lucky now and again with tactical asset allocation. However, the problem comes when an investor confuses this luck with skill, and starts to believe that their "perceptions of the market" are somehow superior.

Whenever I am tempted to time the market or tactically shift allocations, I try to recall that professional tactical managers have failed at this endeavor time and again* — so why should I think I'm any more skillful? It's dangerous to confuse luck with skill.

* An interesting historical note: Vanguard ran a professionally-managed Asset Allocation Fund starting in 1987, that shifted its allocations between S&P 500 Index, Long-term Treasuries and Treasury bills, according to various proprietary models. After years of sub-par performance, this fund was finally shut down in 2012 and merged into Vanguard's Balanced Index Fund.
Cordially, Todd

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Re: Dr. Shiller's Portfolio is Tilted Toward Europe and Emerging Markets

Post by nedsaid » Sun Nov 05, 2017 4:49 pm

Shikoku wrote:
Sat Nov 04, 2017 9:43 pm
Some Bogleheads might have seen a recent MarketWatch article titled Opinion: Don't Get Spooked by 'Overvalued' Stocks - They're Here to Stay which can be found at https://www.marketwatch.com/story/dont- ... 2017-10-04.

The article states: "Shiller tells me he's still got money in the U.S. markets, though he has been tilting toward Europe and emerging markets, in part, because they look cheaper." Is this an indication that even Nobel Laureates in Economics try to time the market?

I have done some versions of this over the years. To be precise, I have an asset allocation but I allow it to tilt or move in any direction by no more than 20%. For example, my goal of 35% allocation in TIAA Traditional can be changed to as low as 28% (i.e., 35-0.2x35%) and as high as 42% (i.e., 35+0.2x35%) based on my perception of the market. During the past one year, I have increased my allocation to TIAA Traditional from 28% to 36% as I feel the market is overvalued. When crud oil price was $30/barrel in winter 2016, I moved 20% of my U.S. equity allocation (i.e., about 5% of my total portfolio) to an energy sector fund and sold them when oil recovered to $48/barrel. In a related note, I bought our first home in winter 2009 during foreclosure crisis which have been appreciated by about 70% since then.

I cannot resist the temptation but I keep changes in my portfolio within the range mentioned above. Am I acting irrationally? I will appreciate feedback from the forum members.
Shikoku, this is music to my ears. What you are doing is attempting to buy cheap assets. You also are limiting your shifts to 20% of your portfolio. John Bogle, the Boglemeister himself has advocated such shifts during times of extremes in valuations. You are more aggressive than what Mr. Bogle would probably be himself but you are within the parameters of Bogleheadism. You have to understand that this doesn't always work and you can experience the "right but right too early" problem.

I would rather have you chase cheap assets rather than performance chasing or chasing expensive assets. Over long periods of time, cheap beats expensive. I have done similar things myself, but such shifts for me are rather rare. I try to think 2-3 years ahead and look for opportunities to pounce. What you are doing is okay but don't get carried away with it. So far you have been right. Someday you will get it wrong or be right too early. I do like that you are thinking, that is a good thing.
A fool and his money are good for business.

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Re: Dr. Shiller's Portfolio is Tlited Toward Europe and Emerging Markets

Post by TheNightsToCome » Sun Nov 05, 2017 5:01 pm

in_reality wrote:
Sun Nov 05, 2017 12:26 am
AlohaJoe wrote:
Sat Nov 04, 2017 10:39 pm
Shikoku wrote:
Sat Nov 04, 2017 9:43 pm
Is this an indication that even Nobel Laureates in Economics try to time the market?
Shiller's entire academic career including his Nobel Prize is built on the idea that markets are not efficient. So why do you assume that Shiller thinks one can't time the market?
Some question whether investing on valuation measures are in fact market timing.

For instance, they say "Inexperienced or Amateur Investors Sometimes Confuse Valuation-Driven Decisions with Market Timing When They Have Nothing In Common".
Market Timing: With market timing, the portfolio manager or investor is speculating that the price, rather than value (the two can diverge temporarily, sometimes for extended periods of time that lasts for years), will increase or decrease. He or she then attempts to make a profit by predicting what other people will do rather than based on the underlying cash flows and other relevant variables you see in the valuation approach.
To some degree my portfolio decisions are based on valuations.
Shikoku wrote:
Sat Nov 04, 2017 9:43 pm
When crud oil price was $30/barrel in winter 2016, I moved 20% of my U.S. equity allocation (i.e., about 5% of my total portfolio) to an energy sector fund and sold them when oil recovered to $48/barrel.
Several of the funds I use also increased energy allocation substantially as it fell - much higher than typical value funds. I am not sure I would want to make that decision myself and think a consistent methodology is best and wouldn't want to base things on my perception of the market.
Shikoku wrote:
Sat Nov 04, 2017 9:43 pm
In a related note, I bought our first home in winter 2009 during foreclosure crisis which have been appreciated by about 70% since then.
I guess you can call it timing, but it's really a valuation based decision isn't it? Were you really buying thinking that the recovery is imminent and prices will recover or buying because the price was favorable (meaning you weren't paying too much even if it doesn't rebound).

Anyway, when TIPs dropped in 2008, many here bought as they were good values. Bogle took a look at valuations and changed his holding due to indefensible positions.

As far as using valuations in a tactical allocation timing scheme, some say they have a formula (https://alphaarchitect.com/2015/07/21/e ... ight-work/) but given that the relationship between valuations and returns only holds long term.

Kites for instance points out that the "Nobel Prize committee gave its award jointly to Shiller for his work on how stock returns can be predicted in the long run, while simultaneously giving it to Eugene Fama for his efficient markets research showing that stock returns cannot be effectively predicted in the short run!", and that "Shiller CAPE shows its strongest correlation to nominal returns over an 8-year time horizon, and is actually most predictive of real returns over an *18* year time horizon"

https://www.kitces.com/blog/shiller-cap ... -planning/
+1

Valuing an asset is not market-timing. You may or may not have the skill to value an asset properly, but the attempt does not make you a market-timer.

If you buy an asset without regard to valuation because you "think it is about to go up," then you are a market-timer.

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Re: Dr. Shiller's Portfolio is Tilted Toward Europe and Emerging Markets

Post by Shikoku » Sun Nov 05, 2017 9:47 pm

nedsaid wrote:
Sun Nov 05, 2017 4:49 pm
What you are doing is attempting to buy cheap assets. ... John Bogle, the Boglemeister himself has advocated such shifts during times of extremes in valuations.
Nedsaid: I am wondering if you could possibly cite some source as I am interested in knowing more about Bogle's suggestions. You are absolutely correct, this cannot be done correctly again and again. I will probably be wrong next time. Therefore, even if I try to shift allocation based on valuation, I will do it only on rare circumstances and use only a small part of my portfolio.
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Re: Dr. Shiller's Portfolio is Tilted Toward Europe and Emerging Markets

Post by nedsaid » Mon Nov 06, 2017 10:52 am

Shikoku wrote:
Sun Nov 05, 2017 9:47 pm
nedsaid wrote:
Sun Nov 05, 2017 4:49 pm
What you are doing is attempting to buy cheap assets. ... John Bogle, the Boglemeister himself has advocated such shifts during times of extremes in valuations.
Nedsaid: I am wondering if you could possibly cite some source as I am interested in knowing more about Bogle's suggestions. You are absolutely correct, this cannot be done correctly again and again. I will probably be wrong next time. Therefore, even if I try to shift allocation based on valuation, I will do it only on rare circumstances and use only a small part of my portfolio.
There are YouTube videos where Bogle discusses this. In the very late 1990's, Mr. Bogle noticed that stocks were very, very expensive and that bonds were the "steal of the century." As I recall, he calculated the future expected returns of stocks to be about 2% or so over the next decade and bonds were yielding about 6% at the time. He was not far off. He wondered if he should be in stocks at all. He also discussed reducing equities to 30% of his portfolio but he actually went to 50% stocks/50% bonds as I recall and even that he did that gradually. This is all from memory.

Bogle said that if you were uncomfortable with very high stock valuations that you could reallocate maybe 15% to 20% of your portfolio from stocks to bonds. Again, you might find this on YouTube or on Morningstar.

I have discussed this before. There was an article in Motley Fool where Bogle discussed drastically reducing his holdings in the stock market. His bark was worse than his bite, he reduced his holdings gradually and much less than he discussed in the article. I found this, posted the link after getting challenged by Taylor Larimore.

The thing is, Bogle says all kinds of surprising things. He likes to think aloud, so he sounds like he departs from his own philosophy more than he really does. In practice, he has been remarkably consistent in his philosophy and in the handling of his own monies.
A fool and his money are good for business.

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Re: Dr. Shiller's Portfolio is Tilted Toward Europe and Emerging Markets

Post by asif408 » Mon Nov 06, 2017 11:29 am

I think one area some of us here give Jack Bogle a hard time about is his insistence on US only investing. Emerging markets valuations were much lower from the late 1990s to early 2000s by a significant amount compared to US and ex-US developed markets:
https://www.researchaffiliates.com/cont ... VERLAY.jpg.

Even though EM fell just as much, if not more during the tech bubble and financial crisis, they recovered more quickly and outperformed US stocks dramatically going forward. So shifting any amount of equities from US to emerging markets wouldn't have helped you avoid the tech bubble fall or the financial crisis drops, but would have definitely helped your long term returns more than shifting to bonds. So even investing at the peak of the tech bubble in EM, you still did much better in EM over the next 10 years than in US only stocks: https://www.portfoliovisualizer.com/bac ... tion3_3=50

So I don't really see any issues with what Professor Shiller is doing. If you really believe no one market has a monopoly on high returns over other markets, a rational investing would assume some reversion to a more historical mean for returns. The problem is most people using valuation measures like the Shiller CAPE use it over shorter time periods and seem to think it can help them move from stocks to bonds at the right time. Shiller said five years ago that European valuations looked good, but it's only really been in the past year or so that they have started to significantly outperform US stocks.

The most beneficial way I see of using valuation measures like CAPE is to shift among equities and look at it over 5, 10, and 15+ year periods. Even though EM valuations were lower in 2000, if you invested in March 2000 you had to wait 3 years for EM to start to outperform, as they were essentially no benefit between 2000 and early 2003, and they actually fell harder and faster. The biggest issue nowadays is information is so much more quickly and readily available that the emotional difficulties are much greater trying to avoid the noise and punditry, so I don't have faith that most people would use CAPE, or any other long-term strategy for that matter, correctly. I think most of the strategies that require long holding periods and patience with years of underperformance will always have some edge because they simple take advantage of the emotionally weaker investors and the pension funds/institutional investors that can't wait many years for a strategy to work before the managers of those funds get fired and replaced. Maybe one day that will not be true, but I do not see any evidence of a major, long-term, permanent shift in investor behavior. And that is a benefit for those of us who don't fall into that category.

So OP, you're not irrational in your thinking, but you would be irrational if you expect to work in a matter of months or even a few years.
Last edited by asif408 on Mon Nov 06, 2017 4:06 pm, edited 1 time in total.

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Re: Dr. Shiller's Portfolio is Tilted Toward Europe and Emerging Markets

Post by nisiprius » Mon Nov 06, 2017 11:32 am

I think it is a big mistake to translate "this is what I do myself" into "this is my recommendation for others."
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Re: Dr. Shiller's Portfolio is Tilted Toward Europe and Emerging Markets

Post by jginseattle » Mon Nov 06, 2017 7:45 pm

This is what I do myself. I have been very slowly increasing my allocation in these areas. I admit I was early in this. But, as we all know, you can't time the markets. I have no regrets.

Shortly before he exited the forum, Larry Swedroe was recommending a 50/50 domestic/international split. That's where I'm at presently and where I plan to remain.

Actually, when I think about it, I don't consider 50/50 to be a tilt.

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Re: Dr. Shiller's Portfolio is Tlited Toward Europe and Emerging Markets

Post by AlohaJoe » Mon Nov 06, 2017 7:56 pm

in_reality wrote:
Sun Nov 05, 2017 12:26 am
AlohaJoe wrote:
Sat Nov 04, 2017 10:39 pm
Shikoku wrote:
Sat Nov 04, 2017 9:43 pm
Is this an indication that even Nobel Laureates in Economics try to time the market?
Shiller's entire academic career including his Nobel Prize is built on the idea that markets are not efficient. So why do you assume that Shiller thinks one can't time the market?
Some question whether investing on valuation measures are in fact market timing.

For instance, they say "Inexperienced or Amateur Investors Sometimes Confuse Valuation-Driven Decisions with Market Timing When They Have Nothing In Common".
On the other hand, Investopedia (the #1 google hit for "market timing") says
Market timing is the act of moving in and out of the market or switching between asset classes based on using predictive methods.
which clearly includes using valuations. But I agree with you that many people don't consider using valuations as market timing. Part of the problem is that there is no World Police of Naming who have decided what is and isn't market timing. And many considering "anything that other people do" as market timing where as "anything that I do" is just "taking valuations into consideration" or "strategic asset allocation" or... :D

In this particular case, the OP clearly meant "market timing" to include "shifting asset allocations based on valuations" and seemed surprised that any academic would do it. Given Shiller's academic track record I would be surprised if he didn't shift his asset allocation based on valuations relative to a historical average; I kinda expect him to have the conviction to follow at least some of the research he's produced in the past 40 years.

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