letsgobobby wrote:Pe10 correctly signaled that large caps were a bad investment beginning in the mid 90 s. I didn't miss a darn thing but volatility while the buy and holder missed 7% annual gains in bonds. Ignoring the message pe10 was sending in 1995-96 cost an imvestor dearly.
Just because something is psychologically hard doesn't mean it doesn't work. If it is hard then few will do it meaning there may be an inefficiency to exploit.
The folks that got hurt are the ones that believed stocks were less risky and over committed to them. As in any period, greed is the problem, not failure to heed PE 10 signals—or any other timing mechanisms. A well-diversified, conservative portfolio (comprising 40% stocks and 60% Intermediate Treasuries) did just fine over a very long period, right through the 90s—and the two Bears that followed. Even something as boring as 40% TSM (Large Cap dominated) plus 60% IT Treasuries did fine— and coasted right through the '01-'02 Bear.
Here is how that simple mix did through the period you describe (and this assumes LC dominated equities—using just rebalancing):
Making something harder than it needs to be doesn't make it easier for anyone—especially those who believe they can spot and exploit inefficiencies. Even Shiller has been wishy-washy when asked in interviews about how he was investing at around the March lows—he said he was waiting for the PE to go even lower (like PE 10). Then, 2 years later, he said he was adding money back then. Sure.
Added: The period that continued through the "lost decade" was also fine for the above buy and hold strategy, even one that used TSM as the equities.
Sensible buy-and-hold portfolios that included some amounts of international, or slice/dice, did even better. All one needed was a reasonable plan and rebalancing for a successful, long ride. While a 60/40 portfolio had a bumpier ride, it also had a good run if held for the entire period.