Long-term, you don't care about reversion. Because long-term it reverts back.Nathan Drake wrote: ↑Sat Jul 17, 2021 12:28 pmHomerJ wrote: ↑Sat Jul 17, 2021 12:18 pmThey may be the "best" tool but they are still really bad tools at predicting the future. And long-term, so far, it doesn't matter.
I might need to pound in a nail and all I have is a screwdriver and some sandpaper.
Sure, someone can come along and say "the screwdriver is the BEST tool you have", and even write a bunch of PhD papers on it, but it still will be really poor at pounding in a nail.
If an asset class has high relative valuations, it has been best to allocate more towards assets with the same (or similar) long-term returns but where the valuations are at much lower levels.
Now, can you be sure that the reversion will happen in a period of a few years? No, but over the long-term it's a pretty sure bet. There are numerous examples.
If you actually believe in valuations then you have to believe it both ways. If high valuations indicate poor returns in the short-term, then low valuations indicate good returns in the short-term. And if we get poor returns, then valuations will become lower and will predict good returns.
In the long-term it goes back and forth and you get a good decent AVERAGE return. That was my point above.
Valuations have not done a good job predicting returns since the day they were "discovered". Shiller came up with CAPE in 1988 looking at data from the past hundred years. Of course valuations and the predictions worked from 1900-1988 since that was the data CAPE was DERIVED from.
But since 1992, valuations have been high or very high or insanely high by 1900-1988 standards, and yet still returns have been decent or even good.
Valuations may be the "best" tool we have, but "best" doesn't mean good. It has been a TERRIBLE tool at predicting returns since it was discovered.
You put far too much value in it.
40% in bonds is how you handle SORR. Even 1% dividends from stocks and bonds helps. The bond money can last a long time.This is particularly important to note for a retiree. We are entering into a period that may be extremely dangerous from a SORR perspective should they only be investing in 60% US LC stocks and 40% bonds.
60/40 means one can easily handle a stock downturn that lasts 1-5 years, and even one that lasts 10-12 years.