Pfau, Wade Donald (2011): Long-term investors and valuation-based asset allocation.
This is the latest version of this item.
Download (432kB) | Preview
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|
|Original Title:||Long-term investors and valuation-based asset allocation|
|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
|Depositing User:||Wade D. Pfau|
|Date Deposited:||25. Nov 2011 15:27|
|Last Modified:||23. Sep 2015 00:12|
Azar, S. A., 2006, Measuring relative risk aversion. Applied Financial Economics Letters 2, 341-345.
Campbell, J. Y., and R. J. Shiller, 1998, Valuation ratios and the long-run stock market outlook, Journal of Portfolio Management 24, 11-26.
Fisher, K. L., and M. Statman, 2006, Market timing in regression and reality, Journal of Financial Research 29, 293-304.
Goetzmann, W., J. Ingersoll, M. Spiegel, and I. Welch, 2007, Portfolio performance manipulation and manipulation-proof performance measures, Review of Financial Studies 20, 1503-46.
Graham, B., and D. Dodd, 1940, Security Analysis (The Classic 1940 Second Edition) (McGraw-Hill, New York, NY).
Jenkins, D., 1961, How to Profit From Formula Plans in the Stock Market (American Research Council, Larchmont, NY).
Lakonishok, J., A. Schleifer, and R. W. Vishny, 1994, Contrarian investment, extrapolation, and risk, The Journal of Finance 49, 1541-1578.
Pfau, W. D., 2010, Lifecycle funds and wealth accumulation for retirement: Evidence for a more conservative asset allocation as retirement approaches, Financial Services Review 19, 59-74.
Smithers, A., and S. Wright, 2000, Valuing Wall Street: Protecting Wealth in Turbulent Markets (McGraw-Hill, New York, NY).
Solow, K. R., M. E. Kitces, and S. Locatelli, 2011, Improving risk-adjusted returns using market-valuation-based tactical asset allocation strategies, Journal of Financial Planning 24, 38-49.
Stein, B., and P. DeMuth, 2003, Yes, You Can Time the Market (John Wiley and Sons, Hoboken, NJ).
Wilson, J. W. and C. P. Jones, An analysis of the S&P 500 index and Cowle's extensions: Price indexes and stock returns, 1870-1999, Journal of Business 75, 505-31.
Available Versions of this Item
Revisiting the Fisher and Statman Study on Market Timing. (deposited 09. Mar 2011 06:31)
- Long-term investors and valuation-based asset allocation. (deposited 25. Nov 2011 15:27) [Currently Displayed]