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Global Investing and CAPE

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Goremanghast
Posts: 9
Topic starter
(@goremanghast)
Active Member
Joined: 1 year ago

Hi,

Thank you for the wonderful blog. 

Given the heady valuations of equities and bonds I have been pondering how to better manage Sequence of Returns.  I am an early retiree (51) and almost 100% equities (about 5% cash).  I am considering moving to 80/20 or a glide path. In addition and getting to the point, I have been thinking about using the CAPE-based Rule in the Google Sheet.  However my equity investment is in MSCI World (I am not US based and even if I was MSCI World reduces my dependence on US stability). 

 

So I am wondering if I should be using a World CAPE figure rather than the S&P 500 figure more commonly used to give me both an Earnings Yield and a SWR?  Are there pitfalls to this that I am not seeing? 

https://siblisresearch.com/data/world-cape-ratio/

I know Big ERN is an S&P investor and has argued against global diversification for US investors but I am quite happy with World investing as the future may be quite different from the past and I try to plan with perpetuity in mind due to inheritance plans.  Given this which CAPE measure will be effective?

 

Thank you,

Gormanghast

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3 Replies
earlyretirementnow.com
Posts: 324
(@earlyretirementnowcom)
Member
Joined: 7 years ago

Good questions. 

Yes, If you're in the MSCI World you'd want to use the MSCI World CAPE.

A 95/5 portfolio certainly seems a bit risky. But I can understand your aversion to bonds as they have a great potential for continued losses in this inflationary environment. But money market, short-term bonds, TIPS, etc. might be a good way to hedge against Sequence Risk right now.

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Goremanghast
(@goremanghast)
Joined: 1 year ago

Active Member
Posts: 9

@earlyretirementnowcom Thank you.  Unfortunately I am struggling to find a source for current MSCI World CAPE values.  The website I listed requires a subscription for live data and it's World index appears to be different. I will keep digging!

On the broader issue of bonds, I have been paralysed for some time and find the historic data of limited help as bonds and equities are both richly valued. I think it's a question of accepting probably negative but not catastrophic real returns in return for a portion of the portfolio avoiding a possible equity major crash/correction.

I don't remember the alternatives all having so much risk attached.  There seams to be a lot priced in to everything and the possibility of mispricing everywhere too (the one certainty with forecasting is error).  Cash ironically looks better than ever.  No liquidity issues and lots of optionality in return for accepting that inflation will erode value. 

However US bonds are interesting to me, not because they have higher yields than UK government gilts, nor because TIPS are better than Index Linked Gilts (which they are) but because the dollar's safe haven status means that there is a good argument for accepting currency volatility for improved negative correlation during market shocks.

I will continue to muse and hope I find the courage to buy a mixture of diversifying assets on equity strength/bond weakness before I regret my inaction 🤣 

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Chris B
(@chris-b)
Joined: 1 year ago

Trusted Member
Posts: 33

@goremanghast I'm not sure this this is possible for you, but could you maybe use options to protect your portfolio over the next couple of volatile years? For example, high volatility means highly priced call options which you could sell against your portfolio. As another example, have you heard of the collar strategy?

Basically no investment is going to do well in a rising-rates environment - not bonds and not stocks. But with options you can directly hedge instead of hoping your AA reduces the damage a little.

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