Long-term investors and valuation-based asset allocation

Pfau, Wade Donald (2011): Long-term investors and valuation-based asset allocation.

Abstract

Valuation-based market timing demonstrates strong potential to improve risk-adjusted returns for conservative long-term investors. Such timing strategies based on the cyclically-adjusted price-earnings ratio provide comparable returns as a 100 percent stocks buy-and-hold strategy but with substantially less risk. Meanwhile, market timing provides comparable risks and the same average asset allocation as a 50/50 fixed allocation strategy, but with much higher returns. Also, it is important to consider less extreme timing strategies as well, as defining market timing as either all stocks or all cash does not provide a hedge against the possibility that valuations may depart from their historical averages for extended periods. Finally, comparing the strategies over shorter rolling sub-periods reveals that a valuation-based market timing approach fairly consistently provides risk-adjusted returns superior to a fixed asset allocation strategy.

• Item Type: MPRA Paper
• Language: English
• Keywords: market valuations; cyclically-adjusted price-earnings ratio; PE10; stock returns; market timing; long term; tactical asset allocation; buy and hold
• Subjects: G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; N - Economic History > N2 - Financial Markets and Institutions > N22 - U.S. ; Canada: 1913-; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C15 - Statistical Simulation Methods: General; N - Economic History > N2 - Financial Markets and Institutions > N21 - U.S. ; Canada: Pre-1913; D - Microeconomics > D1 - Household Behavior and Family Economics > D14 - Household Saving; Personal Finance

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