The Invest It Wisely blog last week posted an article that is exciting for two reasons. One, it advocates Valuation-Inforemd Indexing. Two, it was not written by Rob Bennett!
This is the sort of thing we need to see to get the ideas we have been talking about and developing in the Retire Early and Indexing discussion-board communities for nine years now into the mainstream. We are beginning to see signs of what I have long dreamed of — a “Normalization” of our discussions of the realities of stock investing.
The article is by Mathieu Bouville and is titled The CAPE: How to Beat Stocks with a 50/50 Portfolio. It’s super stuff.
Juicy Excerpt: Figure 1 shows the annualized real return over the next 20 years as a function of the current CAPE. When the CAPE was below 10, the return of the S&P 500 has never been below 5% p.a. over the next 20 years (i.e. one at least multiplied one’s purchasing power by 2.7). And it has never been above 3% when the CAPE was above 23. (This does not mean that this will never happen, just that it is quite unlikely.) With the 1999–2000 CAPE of more than 40, it is hard to see how one could dream of making money in the long run…. If the CAPE has some predictive power, it can be used to improve the efficiency of one’s asset allocation.