Long-Term Investors and Valuation-Based Asset Allocation

20 Pages Posted: 4 Jan 2015

See all articles by Wade D. Pfau

Wade D. Pfau

The American College for Financial Services; McLean Asset Management

Date Written: November 1, 2011


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.

Keywords: market valuations, cyclically-adjusted price-earnings ratio, PE10, stock returns, market timing, long term, tactical asset allocation, buy and hold

JEL Classification: C15, D14, G11, G14, G17, N21, N22

Suggested Citation

Pfau, Wade D., Long-Term Investors and Valuation-Based Asset Allocation (November 1, 2011). Available at SSRN: https://ssrn.com/abstract=2544636 or http://dx.doi.org/10.2139/ssrn.2544636

Wade D. Pfau (Contact Author)

The American College for Financial Services ( email )

630 Allendale Rd
King of Prussia, PA 19406
United States

HOME PAGE: http://www.retirementresearcher.com

McLean Asset Management ( email )

1900 Gallows Rd, Suite 350
# 1150
Vienna, VA 22182
United States

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