Investing or waiting

Reaper

aldershot wrote: »

...and made money in 14 out of 29 years!! Who knows whether this year will be up or down. Trying to guess that is the way to analysis paralysis.

Normally, but as I say I don't feel particularly optimistic at the moment and the stats show I would be unlikely to miss out on much growth over the summer if I delay investing for a few months.

grey_gym_sock

jamesd wrote: »

What history says is that future returns are inversely correlated with the cyclically adjusted price/earnings ratio and that this applies for all major world stock markets. So it's a relatively bad time to be investing in the US market because the current PE10 implies a low negative return for the next fifteen or so years.

But there are other equity markets and other things to invest in so it's not a case of not investing but adjusting where you invest.

One thing that tends to correlate with crashes is claims that "this time it's different", at the moment it's the claim that PE10 isn't reliable due to changes in accounting rules. True there have been changes, false that it makes any difference to the big picture. Of course the producer of this has reduced his own US equity weightings, moving to places with more attractive PE10s.

the accounting changes do make a noticeable difference.

this article - http://www.etf.com/sections/index-investor-corner/swedroe-valuation-metrics-perspective?nopaging=1 (in the last section, "Ignore The 135-Year Mean") suggested an adjustment of 4 to allow for accounting changes, plus another 1 to allow for the effects of share buybacks. that totals 5.

it also argues - and there is more room to disagree with this bit - that the US market is very different now from in the early twentieth century - better diversified, lower trading costs, some regulation via the SEC, etc - so the "normal" valuation should be higher. so instead of the longer-term average PE10 of 16.6, perhaps use the average since 1960, of 20.

if you accepted all of those arguments, it would make the "normal" PE10 about 25. it's now about 29 (i think), about 20% above that norm.

or you reject the woollier argument about the market being different, but accept the technical adjustments for accounting changes and buybacks, then the "normal" valuation is about 22. making it about 30% above the norm.

or with no adjustments, it's about 70% above the norm.

that makes a big difference. 70% is pretty significant. 20% or 30%, much less so.

None of this tells us what the US market will do tomorrow, just that it's not the best of places to be looking at the moment and other places have a greater chance of producing higher returns. Since we aren't forced to buy things with lower expected returns we can react accordingly and shift some of our money to the better prospects.

Personally I've reduced my US weighting some time ago, have lots in Europe instead and have lots in P2P fixed interest. Still very heavily investing, just in places where the probabilities favour better results.

there is a big difference between switching from expensive-looking equities into something that usually gives a much lower return (cash or bonds), and switching into other comparably high-return assets (such as cheaper equity markets, or perhaps some kinds of P2P). the latter is much more likely to work than the former.

for instance, the earlier part of the article i linked to was about a study which compared the results of holding a fixed 60/40 equities/bonds portfolio with a dynamic portfolio in which the proportion of equities was increased when the PE10 was low, reduced when it was high. this dynamism didn't seem to be doing much for portfolio returns. and that is despite the PE10 level having some predictive value for future stock market returns.

now perhaps it would have been more interesting if the study had looked at what happened if you didn't buy more bonds when the PE10 was relatively high, but instead bought more of other equity markets, where the PE10 was relatively low.

more interesting, but it not that obvious that it would work. (ISTR that this is 1 of the methods that hussman, whose funds have extremely bad records, has tried. but perhaps his execution is flawed, rather than the theory.)

i would take the view there are much bigger economic problems in europe than in the US (mainly to do with how the eurozone is mis-managed). and therefore it is entirely reasonable for european markets to be on lower valuations than the US. but is the difference in valuations too great? perhaps.

Thrugelmir

Reaper wrote: »

Normally, but as I say I don't feel particularly optimistic at the moment and the stats show I would be unlikely to miss out on much growth over the summer if I delay investing for a few months.

If you are tracking individual shares. Then the summer offers an opportunity to purchase on price weakness. Sellers often are forced to sell. Timing is not of their choosing.

username12345678

This paper by a maths professor (and investor) about 'lump sum versus drip feed' is worth a read.

http://www.efficientfrontier.com/ef/997/dca.htm

The general thrust seems to be that as markets rise for longer than they fall then statistically you are better off being fully invested.

However, as an emotional crutch drip feeding doesn't give too much away in terms of returns unless you spread your investment blocks over a period of greater than 12 months.

aldershot

FTSE100 up 3.7% in May (plus a bit of divi).

I've no idea what will happen in June (especially with an election tomorrow) and nor have any of you. Don't try and time your investing, just go in, stay in, and stay for the long term.