Entering text into the input field will update the search result below

Stock Investors Overstate Their Gains In The Heat Of Bull Markets

Oct. 05, 2021 10:31 AM ET2 Comments
ValueWalk profile picture


  • We buy more stocks when prices are high and long-term returns are low because stocks possess more emotional appeal at such times.
  • I advocate that investors increase their stock allocation to 90 percent at times of super-low valuations and decrease it to 30 percent at times of super-high valuations.
  • Investors who practice price discipline/market timing beat the average by investing more heavily in stocks at the times when their going-forward return is likely to be higher.

Business man trader investor analyst using mobile phone app analytics for cryptocurrency financial stock market analysis analyze graph trading data index investment growth chart on smartphone screen.

insta_photos/iStock via Getty Images

Original Post

By Rob Bennett

Most investors know the average long-term return for stocks. It is 6.5 percent real. That’s of course a very good return. That’s a high enough return to permit most middle-class people to finance

This article was written by

ValueWalk profile picture
Everything hedge funds and value investing NOTE we do not read comments or direct messages on SeekingAlpha- please contact us via email if this is important

Recommended For You

Comments (2)

BubbaJM profile picture
I'm pretty much in agreement with your strategy, and I practice one which is essentially similar. (With a few caveats). I don't personally call it market timing... but, a rose by any other name... (you know the rest), I like to refer to it as a sliding scale for "asset allocation". I based it on a 55 year comparison of different asset allocations from the inception of the S&P500 from it's beginning (in present format) in 1957, up until I started using it fully around 2012, and compared the results with my own sliding scale technique which initially varied from 37% to 87%.... (very close to your 30-90% scale that you suggest). I eventually did some mild "tweaking" which ended up adjusting my scale a bit more narrowly (50%-85%) and added a 10-year bond yield adjustment as well (which I doubt will be of significance in the near future). By the way, my "back testing" gave me a return of 9.2% CAGR using this strategy vs. about a 9.6% CAGR for 100% stocks, but with much less volatility. The reasons for raising my stock allocation at "market highs" which I label as anything above 35% greater than historical median PE's was because I realize during my analysis of market behavior that momentum of above (and below) average returns often tended to dominate returns more than I'd initially realized. For instance by my records, U.S. stocks became fairly valued sometime around 1992, and by 1996 Alan Greenspan had uttered the now famous words of "irrational exuberance". Had I dropped stock allocation to 30% at that time, one would have missed out on 4 years of stellar market returns before the 3 year bear, while holding 50% invested would prevent me from missing out as much, and still leave the bear market blues "manageable" being 50% invested as opposed to 70% - 90%. Similarly, It has helped give me better returns these past 4 years as well, where I consider the US markets well over 35% overvalued. Also, there is always some questions of "normal value" as my assessments of valuations can be (and often are) "imperfect". There are many ways we can value the overall markets, and even a simple measure such as using P/E (which is my personal choice), can be less than simple. We can use forward "operating" or "as reported" earnings, we can use trailing "operating" or "as reported" earnings, we could use "Shiller CAPE 10" ratios ... my own choice is one where I use the previous last "highest" trailing 12 month S&P500 earnings as the denominator and S&P500 present value as the numerator... which prevents me from adjusting my stock allocation downwards if earnings fall faster than stock price which could normally give me a higher PE despite a steep decline in Stock prices, (this prevents me from decreasing my stock allocation at a time when stock prices have fallen sharply.... 2008 being a great example). To complicate matters for myself..lol.. I also figure out my "fair value" for seven different stock market etf's including US large, US large cap value, US small cap value, US REITS, International Large cap, International Small cap, and Emerging markets. My overall allocation to stocks as of late September with S&P500 value of 4,433, was about 55% (with most US etf's at or slightly above 50%, and International etf's closer to 70-80% of what I would normally allocate to those stock positions if all were fairly valued and my fair value stock position was 70% stocks. As I said, I do take 10 year interest rates into account as well, since if we were to have a period again where bonds returned say 7%-12% interest (as they did in the mid 70's - early 80's), it would make sense to lower my risk with less stocks and guaranteed high dividend treasury yields.... but returning to this scenario any time soon, I suspect is highly unlikely. Thank you for your article!
Should one listen to an "advisor/columnist" when they say " we do not read comments". Dialogue has a significant place in the history of Western Civilization in ALL intellectual areas ...
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!
To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.