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Current (Jan 2021) Equity Valuations

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mdkurtz12
Posts: 1
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(@mdkurtz12)
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Joined: 2 years ago

Hello all, 

I find the big ern blog very informative and useful and value your input on questions I have been pondering of late.  

With valuations at the second highest (34.5, see Shiller PE link below) in the past 100+ years (first being dotcom bubble), and the PE vs 10 year trailing return scatter plot big ern made in 2016 in the following link, it seems we can expect lower returns (0%-2% or potentially negative) over the coming decade.  What can we do to hedge against this?  He mentions one potential solution in the article:

"Equities rule when you’re looking at a 60-year horizon! Again: due to the long horizon, investing in equities is the way to go even if they are overvalued in the short-term. Bonds with a 2.6% long-term real return just threaten your long-term sustainability as we mentioned here. (Of course, one solution would be to have a higher bond share only until equities return to a CAPE<20 and then increase the equity share again. But we haven’t calculated that yet.)"

That solution being, perhaps to keep 10-20% in a bond fund while CAPE ratios are over 20 and convert this fund into stocks as the valuations come down.  This article is about 5 years old at this point. Does anyone know if they have since done a calculation to explore this approach?  If not, what are everyone's thoughts on this strategy?  Or are there any other strategies that hold water in this climate?

Further, with all the money printing going on, and more to come, it seems inflation may begin to tick higher.  I'd think we would want equities to counter this inflation.  Just another thing to keep in mind.

Thanks - I look forward to hearing your input!

https://www.multpl.com/shiller-pe

https://earlyretirementnow.com/2016/12/21/the-ultimate-guide-to-safe-withdrawal-rates-part-3-equity-valuation/

Current allocation: ~100% US equities in roughly a VTSAX distribution.  Perhaps a bit heavier on small and mid cap than VTSAX as I don't have access to VTSAX in my 401k.

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earlyretirementnow.com
Posts: 324
(@earlyretirementnowcom)
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100% equities is an all-right allocation on the path to retirement. In retirement that might still work if you want to maximize the probability of the 4% Rule succeeding, especially over long horizons. Unfortunately, through that added risk you also raise the probability of extremely bad outcomes. To maximize the failsafe withdrawal rate, it's best to stay around 70-80% in stocks.

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jorgeLcurioso
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Following on the points listed in the first post here, does a 100% equities portfolio still make sense if I am in the wealth accumulation phase with a 5-10 year horizon?

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earlyretirementnow.com
(@earlyretirementnowcom)
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Posts: 324

@jorgelcurioso Proponents of Target Date Funds will get a heart attack when I say this but if you're 3+ years from retirement you're probably OK with 100% equities. 🙂

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jorgeLcurioso
(@jorgelcurioso)
Joined: 2 years ago

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@earlyretirementnowcom Thank you for the reply! I appreciate your wisdom on the matter

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