Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
I was wondering now with the PE 10 at 30 , would you wait out the market or buy in for 20% stocks. I have spent 3 weeks studying on your site, thank you very much for doing this it all makes sense, and I am the average middle income investor.
Thanks for stopping by, Max.
The value proposition for stocks is not strong at today’s prices. But my vote is for 20 percent stocks (unless you are in very unusual circumstances).
Please understand that the focus of Valuation-Informed Indexing is getting your emotions right. Yes, it is a numbers-based strategy. But the focus is not the numbers. The idea is to use the numbers to guide the emotions. It is the emotions that have been largely overlooked in this field. What Shiller really showed is that emotions matter more than we realized before he came along. Get the emotions right and the rest of stock investing is easy.
Stock prices could double over the next 12 months. That’s an extreme long shot. I very much doubt that that will happen. But the constant message of the historical return data is that you never know for sure. So you want to be covered for that possibility, as unlikely as it is. Say that prices fall 50 percent in a crash. If you go with 20 percent stocks, your portfolio will be down 10 percent. That is a worst case scenario and it is not too bad a case especially when you consider that you will have lots of money to move into stocks with prices down 50 percent from where they are today.
Please also understand that good arguments can be made the other way. A big factor is your personal profile. If you have studied the market for a long time and would be able to live through a doubling of prices and not be emotionally affected by it, going with a zero stock allocation at these prices might not be such a bad idea. For the typical investor, I think it is best to avoid extremes and a zero percent stock allocation is certainly extreme.
I hope that helps a small bit, my new friend.