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The Old Ideas on Saving & Investing Don't Work -- Here's What Does

Valuation-Informed Indexing #635: Economic Growth Is Gradual and Even, Big Jumps Should Make You Suspicious

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I’ve posted Entry #635 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Economic Growth Is Gradual and Even, Big Jumps Should Make You Suspicious.

Juicy Excerpt: Much of the economic upturns and downturns that we experience are just the product of the creation and disappearance of irrational exuberance. If we all were careful to adjust our stock allocation in response to valuation shifts, going with a lower stock allocation when the CAPE rose to a level that put our risk profile out of whack, stock prices would stabilize. We would no longer see runaway bull markets or scary bear markets.

Which means that the stock market would no longer be pumping pretend money into the economy to push it forward or taking pretend money out of the economy to hold it down. A more stable stock market would translate into a more stable economic system.

Comments

  1. What you fail to understand is that the top 10% are consolidating the ownership of stock and other assets. This is limiting the “supply” to those outside the top 10%. Ever play the game Monopoly? What happens to the bottom 90% of people when they own only a small percentage of the properties on the board? You have to decide if you are going to be an “owner” or a “consumer”. The top 10% have enough assets to ride out the ups and downs. In the end, they will win because they can keep buying assets, priced high or low. They are playing the long game. People with little to no assets can’t afford to play the game. They are just trying to survive.

  2. It’s an increased desire to buy that sends prices up. This is why market timing is so essential. When prices are insanely high, market timing pulls them back down to reasonable levels. When prices are too low, market timing pulls them up to reasonable levels. Market timing is the thing that permits the market to do its core job — get prices right. It is market timing that keeps the market functional. We would never have a CAPE value like the one that applies today if we all stressed the importance of market timing.

    Rob