John Bogle is the leader of the indexing revolution. He recently started a blog. He invited questions from readers and said that each month he will pick five questions from submitted e-mails and answer them.
Set forth below is the text of my e-mail to Bogle:
My name is Rob Bennett. I am a fan of your writings. I learned a lot from your explanations of how to determine rationally long-term stock returns.
I write on investing at my web site, PassionSaving.com. I advocate an approach that I call “Valuation-Informed Indexing.” The distinction from the conventional approach to indexing is that Valuation-Informed Indexers lower their stock allocations at times of extremely high valuations and increase them at times of extremely low valuations. I favor the use of P/E10 as a valuation-assessment tool.
My view is that the typical investor should go with a stock allocation of about 50 percent at times of moderate valuation, increase that to about 75 percent at times of low valuation, and lower it to about 25 percent at times of high valuation (like today).
I do not favor frequent changes in allocation levels. I do not favor short-term timing.
I believe that changes in valuation affect the long-term value proposition offered by a stock investment. If an investor determines that he should have a stock allocation of X at moderate valuation levels, he needs to lower his stock allocation at times of high valuation levels in order to maintain the same risk level.
I would be most grateful to hear any thoughts that you could share regarding this approach.