I’ve posted Entry #88 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Taking Valuations Into Account When Setting Your Stock Allocation Reduces Risk by 80 Percent.
Juicy Excerpt: Actually, I think the full reality is a little better than that. If you buy stocks because the P/E10 value predicts a strong long-term return (or avoid stocks because the P/E10 value predicts a poor long-term return), you are concerned only with mispredictions in a downward direction (or in an upward direction). So in most cases only half of the unknown aspect of stock returns can do you harm. That is, only half of the unknown aspect of stock returns represents risk in a practical sense. So long-term returns are only 19 percent unknown for Valuation-Informed Indexers. Those who make the shift thereby reduce the risk of investing in stocks by roughly 80 percent.