Valuation Informed Indexing

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alex123711
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Valuation Informed Indexing

Post by alex123711 »

Have been looking at this strategy lately, what are your thoughts? Edit: Talking about valuation informed indexing, not stock picking.
The primary benefit of indexing is that it provides an easy means to achieve a high level of diversification at low cost. That’s a powerful benefit. Those who suggest that indexing is the only rational way to invest (this includes John Bogle, founder of the Indexing Revolution) discredit indexing in the long-term by trying to make indexing something that it can never be.

Indexing is not the only rational way to invest. Picking individual stocks or investing in mutual funds makes all the sense in the world for investors with the time and skill needed to succeed at those investing approaches. Indexing is a great option for those of us who are not yet well-informed on what it takes to pick stocks or funds effectively or who just do not have the time to engage in the research work required to do so.
Edit:
There’s not a thing wrong with being a pure indexer your entire life.
The Valuation-Informed Indexer does not research stocks. He buys the S&P index (or some other broad index). How then does he avoid the terrible returns that the market as a whole has always dished out in the wild bear markets that inevitably follow in the wake of wild bull markets? He lowers his stock allocation at times of high valuations, putting the money into super-safe asset classes like Treasury Inflation-Protected Securities (TIPS), IBonds, or certificates of deposit (CDs)

http://www.passionsaving.com/how-to-of-investing.html

http://www.early-retirement-planning-in ... uator.html

http://www.early-retirement-planning-in ... ictor.html

http://www.early-retirement-planning-in ... eturn.html
Last edited by alex123711 on Fri Apr 05, 2019 9:25 pm, edited 2 times in total.
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Rick Ferri
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Re: Valuation Informed Indexing

Post by Rick Ferri »

Indexing is a great option for those of us who are not yet well-informed on what it takes to pick stocks or funds effectively or who just do not have the time to engage in the research work required to do so.
That's about 99% of investors. Even those who are "well informed" usually don't outperform the markets. It's possible, not probable.

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UpperNwGuy
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Re: Valuation Informed Indexing

Post by UpperNwGuy »

Thanks, but no thanks. I'm happy to invest only in low-cost total-market index funds. If I tried to pick stocks and narrowly-defined funds in an attempt to beat the market, the market would undoubtedly beat me.
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Re: Valuation Informed Indexing

Post by yohac »

The guy behind passionsaving.com is notable only for his constant trolling of the Bogleheads board at Morningstar, leading to the creation of this properly moderated board.
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Re: Valuation Informed Indexing

Post by arcticpineapplecorp. »

alex123711 wrote: Fri Apr 05, 2019 8:32 pm Indexing is not the only rational way to invest. Picking individual stocks or investing in mutual funds makes all the sense in the world for investors with the time and skill needed to succeed at those investing approaches. Indexing is a great option for those of us who are not yet well-informed on what it takes to pick stocks or funds effectively or who just do not have the time to engage in the research work required to do so.
lost me there. Picking individual stocks makes no sense in the world. Why?

GM investors lost everything when the company most recently went through bankruptcy in 2009...and yet the company stayed in business! Heads I win, tails you lose? source: https://seekingalpha.com/article/135638 ... areholders

only 4% of all the companies back to 1926 created all the value of the stock market since then...but there was no way to know which 4% would be the right companies to own. 50% of the other companies performed worse than a riskless treasury. How do you know which companies will be in the 4% going forward, or the 50% of the companies underperforming treasuries going forward?? There's no way to know. Own the haystack, don't search for the needle. Finally, the companies that might create all the value going forward may not even exist right now, so there's no way to invest in them.
Source: https://papers.ssrn.com/sol3/papers.cfm ... id=2900447
https://www.nytimes.com/2017/05/12/your ... -wont.html
https://www.nytimes.com/2017/09/22/busi ... tment.html

By the way, to make the assumption that the experts who have the time to engage in the research work do any better than the market, is to have missed the research that's been coming out for the past 3 decades which shows that only 20% of actively managed mutual funds beat the index in any given year. Unfortunately, these don't tend to be the same actively managed mutual funds year after year. So over time, active funds are average before costs. After costs, they will likely underperform the index. See for yourself:

https://us.spindices.com/spiva/#/reports

https://web.stanford.edu/~wfsharpe/art/ ... active.htm
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
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alex123711
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Re: Valuation Informed Indexing

Post by alex123711 »

UpperNwGuy wrote: Fri Apr 05, 2019 8:37 pm Thanks, but no thanks. I'm happy to invest only in low-cost total-market index funds. If I tried to pick stocks and narrowly-defined funds in an attempt to beat the market, the market would undoubtedly beat me.
I probably should have quoted more of the article, but the premise isn't stock picking its valuation informed indexing as in buying the index when the PE10 ratio is low, not high.
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Re: Valuation Informed Indexing

Post by jbranx »

alex123711 wrote: Fri Apr 05, 2019 9:19 pm
UpperNwGuy wrote: Fri Apr 05, 2019 8:37 pm Thanks, but no thanks. I'm happy to invest only in low-cost total-market index funds. If I tried to pick stocks and narrowly-defined funds in an attempt to beat the market, the market would undoubtedly beat me.
I probably should have quoted more of the article, but the premise isn't stock picking its valuation informed indexing as in buying the index when the PE10 ratio is low, not high.
I'm pretty convinced there is no valuation model that is a sure-fire way to win. The reason valuation informed indexing doesn't work is because of all the market participants who are doing valuation seeking stock picking. And then Bill Sharpe's "arithmetic" dictum kicks in: https://web.stanford.edu/~wfsharpe/art/ ... active.htm.

There are plenty of discussions on the forum about this topic. Here's a good one from the early days of 2007: viewtopic.php?t=8908. There are many more if you enter valuation in the search bar.

I'm old enough to remember when astounding valuation findings like "low p/e stocks outperform" were discovered. And then small. And next value and growth and Barra factors and then everybody who has a database to search factors, and fundamental and P/E 10 which was originally the Graham and Dodd 15 or something and all the excellent valuation work of Damodaran at NYU....I'll stop there, my fingers hurt. An easy search on this forum will show that one of the weakest valuation tools of recent history has been Shiller's CAPE.

Jack Bogle had it right and the BH guides to investing have it nailed. Most investment gimmicks are wrinkle cream; valuation-based indexing is wrinkle cream.
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Re: Valuation Informed Indexing

Post by pdavi21 »

The informed indexer would've lost money (EDIT: made less money) the last 5 years.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking
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Re: Valuation Informed Indexing

Post by UpperNwGuy »

alex123711 wrote: Fri Apr 05, 2019 9:19 pm
UpperNwGuy wrote: Fri Apr 05, 2019 8:37 pm Thanks, but no thanks. I'm happy to invest only in low-cost total-market index funds. If I tried to pick stocks and narrowly-defined funds in an attempt to beat the market, the market would undoubtedly beat me.
I probably should have quoted more of the article, but the premise isn't stock picking its valuation informed indexing as in buying the index when the PE10 ratio is low, not high.
I buy the index on the first day of each month when I receive my paycheck. I don’t want my money sitting around in cash equivalents while I wait for the PE10 ratio to be low enough to buy.
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alex123711
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Re: Valuation Informed Indexing

Post by alex123711 »

UpperNwGuy wrote: Sat Apr 06, 2019 1:28 am
alex123711 wrote: Fri Apr 05, 2019 9:19 pm
UpperNwGuy wrote: Fri Apr 05, 2019 8:37 pm Thanks, but no thanks. I'm happy to invest only in low-cost total-market index funds. If I tried to pick stocks and narrowly-defined funds in an attempt to beat the market, the market would undoubtedly beat me.
I probably should have quoted more of the article, but the premise isn't stock picking its valuation informed indexing as in buying the index when the PE10 ratio is low, not high.
I buy the index on the first day of each month when I receive my paycheck. I don’t want my money sitting around in cash equivalents while I wait for the PE10 ratio to be low enough to buy.
Are you aware the market has earned nothing or next to nothing over long periods of time in the past where you would have been better off with cash equivalents?
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Re: Valuation Informed Indexing

Post by yohac »

alex123711 wrote: Sat Apr 06, 2019 2:30 am Are you aware the market has earned nothing or next to nothing over long periods of time in the past where you would have been better off with cash equivalents?
CAPE has been "dangerously" high since the 1990s. Anyone avoiding stocks for that reason (like Bennett) has lost out big time. Shiller himself rarely even mentions CAPE, not since his 1996 paper predicted zero real returns over the next ten years. A blunder like that is pretty humbling.
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Re: Valuation Informed Indexing

Post by Gufomel »

Is the financial world’s assessment of the validity of “valuation informed indexing” not already priced into the market?

What secret empirical data do you or anyone else have that demonstrates that this strategy would beat the market over the long-term?
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Re: Valuation Informed Indexing

Post by snackdog »

Trying to time the market, even if just tiling/adjusting the index based on some logic, typically ends in tears.
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Re: Valuation Informed Indexing

Post by UpperNwGuy »

alex123711 wrote: Sat Apr 06, 2019 2:30 am
UpperNwGuy wrote: Sat Apr 06, 2019 1:28 am
alex123711 wrote: Fri Apr 05, 2019 9:19 pm
UpperNwGuy wrote: Fri Apr 05, 2019 8:37 pm Thanks, but no thanks. I'm happy to invest only in low-cost total-market index funds. If I tried to pick stocks and narrowly-defined funds in an attempt to beat the market, the market would undoubtedly beat me.
I probably should have quoted more of the article, but the premise isn't stock picking its valuation informed indexing as in buying the index when the PE10 ratio is low, not high.
I buy the index on the first day of each month when I receive my paycheck. I don’t want my money sitting around in cash equivalents while I wait for the PE10 ratio to be low enough to buy.
Are you aware the market has earned nothing or next to nothing over long periods of time in the past where you would have been better off with cash equivalents?
Yes, I am absolutely aware of that fact. I have an investment policy statement that says I will invest on the first of each month, and I plan to stick to that approach rather than increase my overall risk by engaging in market timing.
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Re: Valuation Informed Indexing

Post by packer16 »

One of the main issues with adjusting asset allocation based upon valuation is the implicit assumption of expected returns & the alternatives you have to invest in at the time. Bond expected returns are pretty easy, their current yield. The alternatives to stocks are primarily bonds so you have factor in the opportunity cost of the difference between the bond & stock returns. So IMO one way to look at it is to determine the bond return and if premium for stocks is positive & greater than 2-3% then stay with allocation you are comfortable with in terms of risk. Once the difference gets smaller than 2 to 3% then stocks are being bid up & what to do about it depends upon your holding period. If you have a long enough holding period (10 years +), then the answer is nothing. If it is a shorter period, then you may want to adjust to a higher bond allocation. Aswath Damodaran tracks the bond/stock premium (called the implied ERP) and currently there is a 5 to 5.5% implied premium.

The key risk you have is when your initial withdraw period coincides with one of these narrow ERP time periods. If that is the case, then it does make sense to reduce your stock allocation until the ERP increases, which it typically does within the next 5 to 10 years. Once the ERP is closer to 5% then it makes sense to switch back to your risk-based allocation.

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Re: Valuation Informed Indexing

Post by livesoft »

alex123711 wrote: Fri Apr 05, 2019 9:19 pmI probably should have quoted more of the article, but the premise isn't stock picking its valuation informed indexing as in buying the index when the PE10 ratio is low, not high.
I didn't read the article, but have a question on the above words:

What's the difference between what you are writing about and rebalancing? That is, when your allocation to equities goes up that also means PE10 has gone up. And when your allocation to equities has dropped because they lost money that also means PE10 has gone down.

I think it is true that many people will not buy more equities when equities have lost value such as when PE10 ratio is low.

I am all for finding and publishing rebalancing triggers that work, but that people don't or won't use.
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Re: Valuation Informed Indexing

Post by David Jay »

Alex:

Simple question: What do you - personally - know about future valuations that tens of thousands of professionals on Wall Street do not already know?
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Re: Valuation Informed Indexing

Post by zaboomafoozarg »

yohac wrote: Fri Apr 05, 2019 8:50 pm The guy behind passionsaving.com is notable only for his constant trolling of the Bogleheads board at Morningstar, leading to the creation of this properly moderated board.
Shoot, I forgot all about hocus. The guy's posts are long and strange and often incoherent. And he takes disagreement very personally.
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Re: Valuation Informed Indexing

Post by CarpeDiem22 »

The Nifty Fifty bubble was caused by buy-and-hold investors who did not pay attention to valuations while investing. I don't see why Bogleheads won't give rise to another such bubble, given that most Bogleheads recommend ignoring valuations while investing (although rebalancing proponents seem to check that somewhat).

Even Jack Bogle advised to change equity allocation by 15% tactically when stock valuations seem extreme. To be sure, having purchased equity last 27 months consecutively, I'm currently at my peak equity allocation but have decided to stop at this level till sanity returns. About 20% below my usual target equity allocation. I'm ok with erring on the conservative side, given that this is important money for me.
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Re: Valuation Informed Indexing

Post by nisiprius »

The simple answer is that variations on this idea are hardly new, and has constantly been debated in and out of this forum. It is a kinder, gentler form of market timing. It sure sounds like it ought to work, but, like so many other seeming slam-dunks, I know of no real-world attempts to put it into practice that have succeeded. Of course, all promoters say "yes, none of those worked, but mine is different and mine works."

One name for this is "tactical asset allocation."

During the 1980s, tactical asset allocation funds were extremely popular, even mainstream. Rather than holding, say, a rigid 60/40 allocation, 60/40 was simply the "neutral point" around which managers would adjust allocation based on valuations and other market conditions. These funds all but died out, due to conspicuous failure to outperform fixed allocations.

For many years, Vanguard's LifeStrategy funds included a tactical asset allocation component, in the form of the Vanguard Asset Allocation Fund, which used a "proprietary quantitative method" to adjust allocations. They gave up around 2011 or so and just froze all the LifeStrategy funds at what had been their neutral points.

The Fidelity Asset Manager 50% fund, FASMX, Fidelity's fund in this category, has done worse than a 50/50 allocation to an S&P 500 ETF, SPY, and Fidelity's bond index fund, FBIDX, by almost every measure. Lower return. Higher volatility (standard deviation). Yes, better best year, but only slightly. Worse worst year. Worse maximum drawdown. Lower risk-adjusted return measured by the Sharpe and Sortino ratios.

Blue, portfolio 1, FASMX
Red, portfolio 2, 50% SPY, 50% FBIDX
https://www.portfoliovisualizer.com/bac ... =50]Source'

Image

GTAA was a global tactical asset allocation ETF, managed by Mebane Faber, who for some reason is often mentioned in this forum. It's hard to know what to compare it to, and the ETF is now dead so it's hard to get new comparisons, but here's how it did (orange) compared to the Vanguard LifeStrategy Conservative fund (blue).

Image

And so it goes. As I say, it is really hard to believe that it wouldn't be better to ease off on stocks when valuations are high. Surely you wouldn't even have to do it perfectly. Surely anything would be better than just sitting there in a fixed allocation, and surely the professional managers of mutual funds ought to be able to.

And yet, real-world attempts to do this--whether by intuition or "proprietary quantitative methods"--have failed.
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Re: Valuation Informed Indexing

Post by vineviz »

CarpeDiem22 wrote: Sat Apr 06, 2019 8:37 am The Nifty Fifty bubble was caused by buy-and-hold investors who did not pay attention to valuations while investing.
Was it?

Are you SURE this was the cause?

I think if you look back with a closer eye to the evidence you'll find something else.
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Re: Valuation Informed Indexing

Post by CarpeDiem22 »

vineviz wrote: Sat Apr 06, 2019 9:37 am Was it?

Are you SURE this was the cause?

I think if you look back with a closer eye to the evidence you'll find something else.
If this wasn't, what was? If you don't mind me pointing to the evidence, I'll look for that something else.
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Re: Valuation Informed Indexing

Post by arcticpineapplecorp. »

alex123711 wrote: Sat Apr 06, 2019 2:30 am Are you aware the market has earned nothing or next to nothing over long periods of time in the past where you would have been better off with cash equivalents?
easy to know in hindsight. impossible to know beforehand. If everyone knew this beforehand, everyone would have taken all their money out of the market, wouldn't they have?

Since you say there are times when it's better to hold cash than be in the market, could you please tell us all when the next time period will be when this will be true?

didn't think so.
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Re: Valuation Informed Indexing

Post by Chris42163 »

Why doesn't anyone question the idea of investing in stock regardless of their valuation? That seems pretty stupid to me. I mean, staying invested at 90th percentile valuations, maybe the smart play. Staying invested above the 99th percentile seems ridiculous.
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Re: Valuation Informed Indexing

Post by Chris42163 »

I just came across this article:
https://pensionpartners.com/just-how-ov ... -equities/

I think it's a great bit of analysis on valuation informed investing. Some of the charts aren't clearly explained, but I think the rows indicate top decile valuations using a CAPE/10, CAPE/9, CAPE/8, etc... The columns seem to indicate returns or correlation over the specified time period of the column.

So, top decile would include all valuations in the top 10% in CAPE history. Right now, the market is at the ~96%.

The interesting take away to me is that in the top decile of the CAPE/10, maximum annualized returns was 8.4% over a 10 year horizon. Minimum annualized returns was -8.3%. This would indicate an equally wide distribution. It's clearly not a 50/50 shot, because the correlation of the CAPE/10 appears to be -0.71 with respect to market returns. In any case, for valuation based timing, this would push me towards choosing something more extreme than the top decile for converting AA away from stocks.
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alex123711
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Re: Valuation Informed Indexing

Post by alex123711 »

arcticpineapplecorp. wrote: Sat Apr 06, 2019 12:36 pm
alex123711 wrote: Sat Apr 06, 2019 2:30 am Are you aware the market has earned nothing or next to nothing over long periods of time in the past where you would have been better off with cash equivalents?
easy to know in hindsight. impossible to know beforehand. If everyone knew this beforehand, everyone would have taken all their money out of the market, wouldn't they have?

Since you say there are times when it's better to hold cash than be in the market, could you please tell us all when the next time period will be when this will be true?

didn't think so.
I said there has been times when its better, not that I know.

Aren't you using hindsight by investing in the index in the first place? By saying that it always goes up over the long term, based on hindsight. Also ignoring hingsight and the fact that this is not true in every market, had you invested in Japan or many other markets and just stayed in the market long term your returns would not be anywhere near U.S market returns.
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Re: Valuation Informed Indexing

Post by arcticpineapplecorp. »

alex123711 wrote: Sat Apr 06, 2019 7:21 pm
arcticpineapplecorp. wrote: Sat Apr 06, 2019 12:36 pm
alex123711 wrote: Sat Apr 06, 2019 2:30 am Are you aware the market has earned nothing or next to nothing over long periods of time in the past where you would have been better off with cash equivalents?
easy to know in hindsight. impossible to know beforehand. If everyone knew this beforehand, everyone would have taken all their money out of the market, wouldn't they have?

Since you say there are times when it's better to hold cash than be in the market, could you please tell us all when the next time period will be when this will be true?

didn't think so.
I said there has been times when its better, not that I know.

Aren't you using hindsight by investing in the index in the first place? By saying that it always goes up over the long term, based on hindsight. Also ignoring hingsight and the fact that this is not true in every market, had you invested in Japan or many other markets and just stayed in the market long term your returns would not be anywhere near U.S market returns.
no. you can determine the expected return of stocks based on the gordon equation. Not exact science, but using these estimates shows the expected returns for international stocks should be higher because of their lower present purchase price.

Regarding Japan, you're picking one country. I invest in 40+ countries. So I'm not sure you're making an apples to apples comparison. You're saying certain countries have done poorly for decades. Ok, but I don't just invest in one country; I invest in 40+ countries, so that destroys the argument of possibly investing in a single country that underperforms for a long time. If anything, that could be said of the U.S. who's expected return is said to be lower going forward. So your U.S. investments could be your next Japan. Investing in the U.S. solely from 2000-2009 was less profitable than any additional percentage of international (links below from 2000-2009 and others). So again, the argument for diversification is as recent as 2000-2009 or 2017 if you will.

Funny how people forget there are years or time periods in which international did better than U.S. and when the combination of any amount of international would have improved returns (and lowered volatility). Three such recent examples:


2003-2007
https://quotes.morningstar.com/chart/fu ... A%5B%5D%7D

2000-2009
https://quotes.morningstar.com/chart/fu ... A%5B%5D%7D

2017
https://quotes.morningstar.com/chart/fu ... A%5B%5D%7D

Point being the long term return of international and U.S. has been roughly similar (not the recent returns, the long term). If the two continue to have long term returns in the same range albeit at different points, you'd want to have investments in both to always have an opportunity to buy that which has gone down (or is cheaper relative to the other) and to sell that which has gone up (or is more expensive relative to the other).

Cash may do better than stocks over a short time period because stocks lose so much value so quickly, but cash is an asset which is guaranteed to lose purchasing power to inflation the longer it's held.
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
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Re: Valuation Informed Indexing

Post by heyyou »

alex123711 wrote: ↑
Are you aware the market has earned nothing or next to nothing over long periods of time in the past where you would have been better off with cash equivalents?
We only need good enough returns to reach our goals of a comfortable retirement relative to our work incomes. Blindly buying small quantities of index stock funds for 25-30 years will reach that goal. Being greedy for more than that, often leads to having less than those with more patience.

During any long period, there are price fluctuations both directions so the start of a new bull market, is not obvious for awhile. Those staid, un-clever buy and hold investors are actually buying at low prices while others are storing their savings in cash equivalents. Safety has high costs.

I know that I don't know, and the Fama? quote was "the stock market can stay irrational longer than you can stay rational" so my best option was to just buy and hold. It worked very well except for the stress, so I seldom checked my balances.

Others are welcome to try whatever they think will do best for them.
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Re: Valuation Informed Indexing

Post by whodidntante »

livesoft wrote: Sat Apr 06, 2019 8:04 am
alex123711 wrote: Fri Apr 05, 2019 9:19 pmI probably should have quoted more of the article, but the premise isn't stock picking its valuation informed indexing as in buying the index when the PE10 ratio is low, not high.
I didn't read the article, but have a question on the above words:

What's the difference between what you are writing about and rebalancing? That is, when your allocation to equities goes up that also means PE10 has gone up. And when your allocation to equities has dropped because they lost money that also means PE10 has gone down.

I think it is true that many people will not buy more equities when equities have lost value such as when PE10 ratio is low.

I am all for finding and publishing rebalancing triggers that work, but that people don't or won't use.
Rebalancing looks at price at a snapshot in time. Valuations are more concerned with P/E multiple expansion or other ways of determining cheap vs expensive.
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Re: Valuation Informed Indexing

Post by dkturner »

pdavi21 wrote: Fri Apr 05, 2019 11:17 pm The informed indexer would've lost money (EDIT: made less money) the last 5 years.
How can you be so sure?

We do most of the stuff mentioned in the article and, according to the Vanguard Personal Performance Report, our 50/50 portfolio had an annualized return of 5.2% for the last 5 calendar years, compared to only 4.4% from a comparably weighted portfolio of Vanguard total market funds. That represents a total return that is 17.5% greater than the return of a portfolio of comparably weighted Vanguard total market funds.

We’re not exceptional investors. I suspect that there are lots of people who pay attention to relative asset class valuations and make periodic adjustments to their portfolios.
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Re: Valuation Informed Indexing

Post by zaboomafoozarg »

dkturner wrote: Sun Apr 07, 2019 7:35 amWe’re not exceptional investors. I suspect that there are lots of people who pay attention to relative asset class valuations and make periodic adjustments to their portfolios.
I'll admit that valuation is partially what moved me from 66/33 US/international to 60/40 over the past few years. It wasn't solely valuation though, actual market cap was also a factor.

But so far it hasn't really worked out in my favor. My CAGR and Sharpe ratio would've been higher had I just stayed with my original AA.
pdavi21
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Re: Valuation Informed Indexing

Post by pdavi21 »

dkturner wrote: Sun Apr 07, 2019 7:35 am
pdavi21 wrote: Fri Apr 05, 2019 11:17 pm The informed indexer would've lost money (EDIT: made less money) the last 5 years.
How can you be so sure?

We do most of the stuff mentioned in the article and, according to the Vanguard Personal Performance Report, our 50/50 portfolio had an annualized return of 5.2% for the last 5 calendar years, compared to only 4.4% from a comparably weighted portfolio of Vanguard total market funds. That represents a total return that is 17.5% greater than the return of a portfolio of comparably weighted Vanguard total market funds.

We’re not exceptional investors. I suspect that there are lots of people who pay attention to relative asset class valuations and make periodic adjustments to their portfolios.
The relative valuations have favored INTL for the last five years, and INTL has underperformed.

Without posting your average holdings in VTI or equivalent and VXUS or equivalent over the time period, a comparison to VT is useless. Anyone who held 60% plus in VTI beat VT probably.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking
dkturner
Posts: 1612
Joined: Sun Feb 25, 2007 7:58 pm

Re: Valuation Informed Indexing

Post by dkturner »

pdavi21 wrote: Sun Apr 07, 2019 10:35 am
dkturner wrote: Sun Apr 07, 2019 7:35 am
pdavi21 wrote: Fri Apr 05, 2019 11:17 pm The informed indexer would've lost money (EDIT: made less money) the last 5 years.
How can you be so sure?

We do most of the stuff mentioned in the article and, according to the Vanguard Personal Performance Report, our 50/50 portfolio had an annualized return of 5.2% for the last 5 calendar years, compared to only 4.4% from a comparably weighted portfolio of Vanguard total market funds. That represents a total return that is 17.5% greater than the return of a portfolio of comparably weighted Vanguard total market funds.

We’re not exceptional investors. I suspect that there are lots of people who pay attention to relative asset class valuations and make periodic adjustments to their portfolios.
The relative valuations have favored INTL for the last five years, and INTL has underperformed.

Without posting your average holdings in VTI or equivalent and VXUS or equivalent over the time period, a comparison to VT is useless. Anyone who held 60% plus in VTI beat VT probably.
My bad. In mentioning a 50/50 portfolio allocation I should have said 50/50 equity/fixed income. We compare our Vanguard calculated return against a return of Vanguard total market index funds. Our chosen, neutral, asset allocation is 37.5% U.S TSM, 12.5% TISM and 50% TBM, which is where we have been for the last 2 years. Until early 2017 our international equity allocation had been only about 6.5% for several years and we increased our U.S. equities to 42.5%. We had also decreased our holdings of U.S government securities, in favor of corporate bonds, for the last 10 years. Minor, infrequent, changes like those can have a meaningful impact on investment performance.

We are competitive people by nature and are unwilling to hold a static index portfolio when there are opportunities to improve performance by taking advantage of the variations in asset class valuations that occur from time to time. We don’t make changes very often.

Each to his/her own.
pdavi21
Posts: 1296
Joined: Sat Jan 30, 2016 4:04 pm

Re: Valuation Informed Indexing

Post by pdavi21 »

dkturner wrote: Sun Apr 07, 2019 11:22 am
pdavi21 wrote: Sun Apr 07, 2019 10:35 am
dkturner wrote: Sun Apr 07, 2019 7:35 am
pdavi21 wrote: Fri Apr 05, 2019 11:17 pm The informed indexer would've lost money (EDIT: made less money) the last 5 years.
How can you be so sure?

We do most of the stuff mentioned in the article and, according to the Vanguard Personal Performance Report, our 50/50 portfolio had an annualized return of 5.2% for the last 5 calendar years, compared to only 4.4% from a comparably weighted portfolio of Vanguard total market funds. That represents a total return that is 17.5% greater than the return of a portfolio of comparably weighted Vanguard total market funds.

We’re not exceptional investors. I suspect that there are lots of people who pay attention to relative asset class valuations and make periodic adjustments to their portfolios.
The relative valuations have favored INTL for the last five years, and INTL has underperformed.

Without posting your average holdings in VTI or equivalent and VXUS or equivalent over the time period, a comparison to VT is useless. Anyone who held 60% plus in VTI beat VT probably.
My bad. In mentioning a 50/50 portfolio allocation I should have said 50/50 equity/fixed income. We compare our Vanguard calculated return against a return of Vanguard total market index funds. Our chosen, neutral, asset allocation is 37.5% U.S TSM, 12.5% TISM and 50% TBM, which is where we have been for the last 2 years. Until early 2017 our international equity allocation had been only about 6.5% for several years and we increased our U.S. equities to 42.5%. We had also decreased our holdings of U.S government securities, in favor of corporate bonds, for the last 10 years. Minor, infrequent, changes like those can have a meaningful impact on investment performance.

We are competitive people by nature and are unwilling to hold a static index portfolio when there are opportunities to improve performance by taking advantage of the variations in asset class valuations that occur from time to time. We don’t make changes very often.

Each to his/her own.
You held over 55% US. US had higher everything multiples during that time. Your strategy does not make sense. An index fund with your weightings would have outperformed your portfolio.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking
dkturner
Posts: 1612
Joined: Sun Feb 25, 2007 7:58 pm

Re: Valuation Informed Indexing

Post by dkturner »

pdavi21 wrote: Sun Apr 07, 2019 12:01 pm
dkturner wrote: Sun Apr 07, 2019 11:22 am
pdavi21 wrote: Sun Apr 07, 2019 10:35 am
dkturner wrote: Sun Apr 07, 2019 7:35 am
pdavi21 wrote: Fri Apr 05, 2019 11:17 pm The informed indexer would've lost money (EDIT: made less money) the last 5 years.
How can you be so sure?

We do most of the stuff mentioned in the article and, according to the Vanguard Personal Performance Report, our 50/50 portfolio had an annualized return of 5.2% for the last 5 calendar years, compared to only 4.4% from a comparably weighted portfolio of Vanguard total market funds. That represents a total return that is 17.5% greater than the return of a portfolio of comparably weighted Vanguard total market funds.

We’re not exceptional investors. I suspect that there are lots of people who pay attention to relative asset class valuations and make periodic adjustments to their portfolios.
The relative valuations have favored INTL for the last five years, and INTL has underperformed.

Without posting your average holdings in VTI or equivalent and VXUS or equivalent over the time period, a comparison to VT is useless. Anyone who held 60% plus in VTI beat VT probably.
My bad. In mentioning a 50/50 portfolio allocation I should have said 50/50 equity/fixed income. We compare our Vanguard calculated return against a return of Vanguard total market index funds. Our chosen, neutral, asset allocation is 37.5% U.S TSM, 12.5% TISM and 50% TBM, which is where we have been for the last 2 years. Until early 2017 our international equity allocation had been only about 6.5% for several years and we increased our U.S. equities to 42.5%. We had also decreased our holdings of U.S government securities, in favor of corporate bonds, for the last 10 years. Minor, infrequent, changes like those can have a meaningful impact on investment performance.

We are competitive people by nature and are unwilling to hold a static index portfolio when there are opportunities to improve performance by taking advantage of the variations in asset class valuations that occur from time to time. We don’t make changes very often.

Each to his/her own.
You held over 55% US. US had higher everything multiples during that time. Your strategy does not make sense. An index fund with your weightings would have outperformed your portfolio.
?

For the last 5 years our total equity exposure averaged about 50%. For three of the years about 13% of our equities were international and 87% domestic. For two of the years it was about 25% international equities and 75% domestic. I don’t know how you are doing your math. Over the last 5 years have held a portfolio that has averaged about 50% equity and 50% fixed income. We never had more than 50% in TOTAL equity. Where did you come up with “over 55% U.S.”? FWIW, most of our excess return was attributable to something as simple as holding a fixed income allocation that averaged about 85% high quality corporate bonds. The international vs. U.S. equity breakdown was only a side show.
pdavi21
Posts: 1296
Joined: Sat Jan 30, 2016 4:04 pm

Re: Valuation Informed Indexing

Post by pdavi21 »

dkturner wrote: Sun Apr 07, 2019 1:48 pm
pdavi21 wrote: Sun Apr 07, 2019 12:01 pm
dkturner wrote: Sun Apr 07, 2019 11:22 am
pdavi21 wrote: Sun Apr 07, 2019 10:35 am
dkturner wrote: Sun Apr 07, 2019 7:35 am

How can you be so sure?

We do most of the stuff mentioned in the article and, according to the Vanguard Personal Performance Report, our 50/50 portfolio had an annualized return of 5.2% for the last 5 calendar years, compared to only 4.4% from a comparably weighted portfolio of Vanguard total market funds. That represents a total return that is 17.5% greater than the return of a portfolio of comparably weighted Vanguard total market funds.

We’re not exceptional investors. I suspect that there are lots of people who pay attention to relative asset class valuations and make periodic adjustments to their portfolios.
The relative valuations have favored INTL for the last five years, and INTL has underperformed.

Without posting your average holdings in VTI or equivalent and VXUS or equivalent over the time period, a comparison to VT is useless. Anyone who held 60% plus in VTI beat VT probably.
My bad. In mentioning a 50/50 portfolio allocation I should have said 50/50 equity/fixed income. We compare our Vanguard calculated return against a return of Vanguard total market index funds. Our chosen, neutral, asset allocation is 37.5% U.S TSM, 12.5% TISM and 50% TBM, which is where we have been for the last 2 years. Until early 2017 our international equity allocation had been only about 6.5% for several years and we increased our U.S. equities to 42.5%. We had also decreased our holdings of U.S government securities, in favor of corporate bonds, for the last 10 years. Minor, infrequent, changes like those can have a meaningful impact on investment performance.

We are competitive people by nature and are unwilling to hold a static index portfolio when there are opportunities to improve performance by taking advantage of the variations in asset class valuations that occur from time to time. We don’t make changes very often.

Each to his/her own.
You held over 55% US. US had higher everything multiples during that time. Your strategy does not make sense. An index fund with your weightings would have outperformed your portfolio.
?

For the last 5 years our total equity exposure averaged about 50%. For three of the years about 13% of our equities were international and 87% domestic. For two of the years it was about 25% international equities and 75% domestic. I don’t know how you are doing your math. Over the last 5 years have held a portfolio that has averaged about 50% equity and 50% fixed income. We never had more than 50% in TOTAL equity. Where did you come up with “over 55% U.S.”? FWIW, most of our excess return was attributable to something as simple as holding a fixed income allocation that averaged about 85% high quality corporate bonds. The international vs. U.S. equity breakdown was only a side show.
I simply plugged VTI 37.5 VXUS 12.5 and BND 50% for March 2014-2019 into portfolio visualizer, and it returned 5.61% with annual rebalancing.

EDIT: 50/50 VT/BND returned 4.77%, but valuation based investing should not have overweighted US anytime in the past decade. It makes no sense. US stocks looked overvalued for the last 10 years in every category and still do.

[OT comment removed by admin LadyGeek]
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking
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Re: Valuation Informed Indexing

Post by LadyGeek »

I removed an off-topic comment. As a reminder, see: General Etiquette
At all times we must conduct ourselves in a respectful manner to other posters.
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dkturner
Posts: 1612
Joined: Sun Feb 25, 2007 7:58 pm

Re: Valuation Informed Indexing

Post by dkturner »

pdavi21 wrote: Sun Apr 07, 2019 3:55 pm
dkturner wrote: Sun Apr 07, 2019 1:48 pm
pdavi21 wrote: Sun Apr 07, 2019 12:01 pm
dkturner wrote: Sun Apr 07, 2019 11:22 am
pdavi21 wrote: Sun Apr 07, 2019 10:35 am

The relative valuations have favored INTL for the last five years, and INTL has underperformed.

Without posting your average holdings in VTI or equivalent and VXUS or equivalent over the time period, a comparison to VT is useless. Anyone who held 60% plus in VTI beat VT probably.
My bad. In mentioning a 50/50 portfolio allocation I should have said 50/50 equity/fixed income. We compare our Vanguard calculated return against a return of Vanguard total market index funds. Our chosen, neutral, asset allocation is 37.5% U.S TSM, 12.5% TISM and 50% TBM, which is where we have been for the last 2 years. Until early 2017 our international equity allocation had been only about 6.5% for several years and we increased our U.S. equities to 42.5%. We had also decreased our holdings of U.S government securities, in favor of corporate bonds, for the last 10 years. Minor, infrequent, changes like those can have a meaningful impact on investment performance.

We are competitive people by nature and are unwilling to hold a static index portfolio when there are opportunities to improve performance by taking advantage of the variations in asset class valuations that occur from time to time. We don’t make changes very often.

Each to his/her own.
You held over 55% US. US had higher everything multiples during that time. Your strategy does not make sense. An index fund with your weightings would have outperformed your portfolio.
?

For the last 5 years our total equity exposure averaged about 50%. For three of the years about 13% of our equities were international and 87% domestic. For two of the years it was about 25% international equities and 75% domestic. I don’t know how you are doing your math. Over the last 5 years have held a portfolio that has averaged about 50% equity and 50% fixed income. We never had more than 50% in TOTAL equity. Where did you come up with “over 55% U.S.”? FWIW, most of our excess return was attributable to something as simple as holding a fixed income allocation that averaged about 85% high quality corporate bonds. The international vs. U.S. equity breakdown was only a side show.
I simply plugged VTI 37.5 VXUS 12.5 and BND 50% for March 2014-2019 into portfolio visualizer, and it returned 5.61% with annual rebalancing.

EDIT: 50/50 VT/BND returned 4.77%, but valuation based investing should not have overweighted US anytime in the past decade. It makes no sense. US stocks looked overvalued for the last 10 years in every category and still do.

[OT comment removed by admin LadyGeek]
You seem to be having trouble reading what I actually posted. More than once it appears. I reported the performance of our portfolios, and the benchmark we use for comparison, for THE LAST 5 CALENDAR YEARS. Please reread my original post on this thread. If you use the dates I listed when running the portfolio Visualizer for the benchmarks we use you will see that the annualized return for our benchmarks, for calendar years 2014-2018, is 4.43%. I rounded the number to the nearest 1/10th in my original post, to 4.4%.

It appears that collegial communication is becoming dying art around here :(
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