nedsaid wrote: ↑
Mon Jan 08, 2018 8:49 pm
The US Stock Market was essentially flat from early 2000 until maybe 2012. It appears 2013 was the time the market broke out. Before that, from the early 2000 peak two 50% down markets and two recoveries that brought you have to even over a 12 year period. Valuations really do matter.
And just to illustrate, here is the return of the US stock market vs. other equities that are potential diversifiers (international, emerging markets, REITs, Precious Metals Equities, Energy) between 2000 and 2010: http://quotes.morningstar.com/chart/fun ... 2%3A955%7D
. The dark green line is US stocks. All of the diversifiers performed better over that time period, some dramatically, particularly emerging markets, REITs, and the stocks of commodities producers. And not surprisingly, their valuations were lower (in the case of emerging markets, significantly lower) than US equities in 2000.
Being diversified over the "lost decade" in US stocks into other areas of the market with lower valuations did help over the decade. During the 2000-2002 bear market, REITs, PME, and Energy had positive returns while US, International, and Emerging were all down 40%+. An although International and Emerging markets fell with US stocks during this time, they recovered more quickly and outperformed in the 8 following years. In 2007-2009 none of those diversifiers helped. But all valuations were high in 2007.
So it appears valuations do matter, less so for younger investors but more so if you are nearing retirement or do not have a long term investment period. And the biggest benefit to CAPE is not moving from stocks to bonds, but moving among stocks. Diversification appears to be most beneficial when valuations are significantly different among asset classes (2000-2002) and not so helpful when everything is expensive (2007). Of course, over the last 5-7 years these diversifiers have performed worse, and their valuations are lower: http://quotes.morningstar.com/chart/fun ... 2%3A955%7D
So if history repeats itself at some point the diversifiers with lower valuations should provide some benefit. In 2000, an investor who shifted into emerging markets, REITs, PMEs, and energy benefitted greatly. Now, in 2018, most of those asset classes (with the exception of REITs) also have lower valuations.