I recently posted a Guest Blog Entry at the Budgeting in the Fun Stuff blog. It’s called The Last Days of Stock Investing Risk.
Juicy Excerpt: You can never eliminate risk entirely because short-term returns are not at all predictable. But there is now 33 years of peer-reviewed research showing that long-term returns are highly predictable for those who consider valuations. Risk is optional! Go with a high stock allocation when prices are low, a moderate stock allocation when prices are at fair-value levels, and a low stock allocation when prices are high and you cannot lose. That’s not just my opinion. That’s what the entire 140 years of U.S. stock market history available to us today tells us.
This new approach is called “Valuation-Informed Indexing.” It is rooted in the research of Yale Economics Professor Robert Shiller, who won a Nobel Prize last year for his work in this area. It is solid stuff. And it is a very simple strategy to implement. You need to check valuations once per year. And you need to change your stock allocation because of a big swing in valuations perhaps once every ten years. That’s it.
Making that one change in the conventional advice to stick with the same allocation at all times reduces risk by nearly 70 percent. That’s exciting. I think this is the future of stock investing.