I recently posted a Guest Blog Entry at the Digerati Life blog. It’s called The No-Stock Portfolio: Zero Stocks for 15 Years and Doing Fine!
Juicy Excerpt: What if you were to take stock price into consideration when setting your stock allocation with the understanding that it might take as long as 10 years to see a payoff for doing so? In that case, you would be almost certain to see the payoff. Long-term timing always works. At least it always has (in the past).
It’s not hard to understand why. The U.S. economy has been sufficiently productive to support an average annual stock return of a little more than 6 percent real for as far back as we have records. If you pay fair price for the purchase of an index mutual fund, it’s reasonable to expect a long-term return of something in the neighborhood of 6 percent real.
But what if you pay two times the fair price of the stocks you buy? In that case, you would be paying $200 for every $100 of stocks paying 6 percent real. Your return would likely be something near 3 percent real. If you buy stocks when they were priced at three times fair value (as they were in 2000), you should reasonably expect a long-term return of something in the neighborhood of 2 percent real (you’d be paying $300 for each $6 of annual return).
That’s how things work, according to the academic research of the past 30 years. Stocks are like everything else put up for sale in this consumer wonderland of ours. Buy them at a good price and you’ll obtain an amazing value proposition. Buy them at a fair price and you’ll do fine. Buy them at an insanely inflated price (like the prices that have applied since 1996) and it’s unlikely that you’ll do better than those invested in super-safe asset classes.