2011 October 03

I’ve posted a Guest Blog Entry at the Free From Broke site called How to Change Your Stock Allocation in Response to Valuation Shifts.

Juicy Excerpt: Stock valuations do not jump randomly from super-low levels to super-high levels. They change gradually over a 30-year or 35-year time period. They start at super-low levels, move to fair-value levels, continue moving up until they reach insanely high levels, and then crash hard.

We are today at a P/E10 of 21, working our way down from a P/E10 of 44 to a P/E10 level somewhere in the neighborhood of 7. The Return Predictor tells us to expect an annualized 10-year return of 2.7 percent real. We likely will see returns far worse than that in the early years of the 10-year time-period (while stock valuations continue to drop) and much better than that in the later years of the 10-year time-period (after we achieve capitulation and begin on the path to economic recovery).

Please understand that you will not obtain the 2.7 percent return unless you hold any stocks you buy today for a full ten years. Unless you are certain that bone-crushing losses in the early years will not cause you to sell, you would be better off in some other asset class until the price for stocks improves a good bit more.